U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from________________to_______________
Commission file no.: 0-21455
DECADE COMPANIES INCOME PROPERTIES - A LIMITED PARTNERSHIP
(Name of small business issuer in its charter)
Wisconsin 39-1518732
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
250 Patrick Blvd., Suite 140
Brookfield, Wisconsin 53045-5864
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 414-792-9200
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Limited Partnership Interests
(Title of Class)
Check whether the registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not 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.
$6,366,093
The aggregate market value of the Limited Partnership Interests
("Interests") is indeterminable because there is no established
or organized market for the Interests.
ANNUAL REPORT ON FORM 10-KSB
INDEX
YEAR ENDED DECEMBER 31, 1997
DECADE COMPANIES INCOME PROPERTIES - A LIMITED PARTNERSHIP
BROOKFIELD, WISCONSIN
Part I Item Page
Description of Business 1 3
Description of Property 2 7
Legal Proceedings 3 18
Submission of Matters to a Vote of Security Holders 4 18
Part II
Market for Limited Partnership
Interests and Related Partner Matters 5 18
Management's Discussion and Analysis or Plan
of Operations 6 20
Financial Statements 7 35
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 8 35
Part III
Directors, Executive Officers, Promoters and 9 35
Control Persons; Compliance with Section 16(a)
of the Exchange Act
Executive Compensation 10 36
Security Ownership and Certain Beneficial Owners and
Management 11 37
Certain Relationships and Related Transactions 12 37
Exhibits and Reports on Form 8-K 13 38
Signatures 41
Audited Financial Statements 42
PART I
Item 1. Description of Business
(a) Business Development
Decade Companies Income Properties - A Limited Partnership (the
"Partnership") is a limited partnership formed in 1985 under the
Uniform Limited Partnership Act of the State of Wisconsin. A
brief summary of the development of the Partnership during the
last three years follows:
During the last three years the Partnership owned and operated
three residential apartment complexes consisting of 935 rental
apartment units located in Florida and Wisconsin.
In April 1996 Town Place was independently appraised at an
estimated value of $9.2 million.
In May 1996, a $2.5 million mortgage loan on Town Place
Apartments was refinanced with a new $6.7 million mortgage loan.
In August 1996 Pelican Sound was independently appraised at an
estimated value of $14.25 million.
In September 1996 The Meadows II was independently appraised at
an estimated value of $11.1 million.
In October 1996 the Partnership offered to purchase Limited
Partner Interests ("Interests") for cash consideration of $402
per Interest. The quarterly cash distribution for the third
quarter of 1996 was suspended in October during the tender offer
to set aside cash reserves to repurchase Limited Partner
Interests.
In November 1996 the Partnership purchased and retired 4,066.036
Limited Partner Interests. This repurchase represented 23% of
the outstanding Limited Partnership Interests.
In December 1996 the Partnership commenced a civil action in U.S.
District Court for the Eastern District of Wisconsin against
Arnold K. Leas, Wellington Management Corporation, and WMC
Realty, Inc. ("Defendants") alleging violations of the securities
laws for certain actions taken concerning the tender offer, and
the Defendants counterclaimed against the Partnership and the
General Partner.
In January 1997 two matters were submitted to vote of the Limited
Partners:
1)On January 4, 1997 a proxy statement and consent was mailed by
the General Partner to all Limited Partners in connection with a
proposed amendment to the Limited Partnership Agreement to adopt
a new Section 8.6 encaptioned the "Fair Price Provision". The
proxy period expired on February 4, 1997. The Fair Price
Provision was adopted by a majority of 7,255 Interests
(approximately 54% of the outstanding Interests).
2)A proxy statement dated January 27, 1997 and consent was
mailed by Arnold K. Leas (a limited partner of the Partnership)
to all Limited Partners in connection with a proposal to remove
Decade Companies as the general partner of the Partnership and
concurrently therewith appoint Wellington Management Corporation
(his affiliate) as the new general partner. The proxy period
expired on March 1, 1997. To the best of the General Partner's
knowledge, approximately 84% of the limited partners did not vote
for the Leas proposal. As a result, the proposal was not
adopted.
In January 1997, quarterly cash distributions to the Limited
Partners were resumed with the payment of a cash distribution for
the fourth quarter of 1996.
An offer and Settlement Agreement was executed effective March
13, 1997, between the parties to resolve the litigation.
Pursuant to the settlement agreement, certain Wellington clients
including Arnold K. Leas were required to sell their shares in
the Partnership. Additionally Arnold K. Leas and the other
Wellington defendants agreed that Jeffrey Keierleber, an
individual who is a general partner in Decade Companies (the
General Partner of the Partnership) would purchase certain
Limited Partnership Interests for a net price to the Limited
Partner of $550 per Limited Partner Interest until May 5, 1997,
(plus commissions ranging from $42.50 to $55.00 per Interest paid
to an affiliate of the Defendants), provided that the Limited
Partnership Interests are acquired by isolated transactions that
do not give rise to general solicitation or a tender offer.
On March 20, 1997, the Eastern District of Wisconsin federal
court dismissed, pursuant to the stipulation of the parties,
Decade Companies Income Properties--A Limited Partnership and
Decade Companies, the general partner, lawsuit against Arnold
Leas, Wellington Management Corporation, and WMC Realty Inc. (and
the Defendants counterclaims against the Partnership and Decade
Companies) pending in the Eastern District of Wisconsin.
Between March 31, 1997 and May 5, 1997, Jeffrey Keierleber
purchased 1,411.84 Limited Partner Interests pursuant to the
Settlement Agreement.
Subsequent to May 5, 1997, Jeffrey Keierleber continued to
purchase Limited Partner Interests at a price to the Limited
Partner of $550 per Limited Partner Interest. There were 240.99
Limited Partner Interests purchased from 22 Limited Partners from
May 19, 1997 to March 20, 1998.
In its ordinary course of operations, the Partnership has
received offers on the sale of its properties. The Partnership
has received numerous oral and written offers during 1997, all
containing conditions, with prices as described below:
Pelican Sound - The Partnership received and rejected or
countered 24 offers for Pelican Sound Apartments averaging $14.1
million.
The Meadows II - The Partnership received and rejected or
countered eight offers for The Meadows II Apartments. All of the
offers included The Meadows I Apartments which is owned by an
affiliated partnership. The average offer was for $13.99 million
for both properties, resulting in a prorated amount of $10.94
million for The Meadows II.
Town Place - The Partnership received and rejected or countered
12 offers for Town Place Apartments averaging $8.92 million.
The General Partner will continue to consider offers for sale of
its properties, but cannot assure Limited Partners that any of
the properties will be sold during 1998. The General Partner is
seeking to obtain offers with no or minimal contingencies that
allow the Partnership the time and ability to conclude a tax
deferred exchange for any or all of the properties.
(b) Business of Issuer
The Partnership is engaged solely in the business of owning and
operating residential apartments. In January 1989 the
Partnership acquired The Meadows II Apartments, a 316-unit
apartment complex located in Madison, Wisconsin. In February
1990 the Partnership acquired Town Place Apartments, a 240-unit
apartment complex located in Clearwater, Florida. In November
1993, the Partnership acquired Pelican Sound Apartments, a 379-
unit apartment complex located in St. Petersburg, Florida. The
Apartment complexes owned by the Partnership are collectively
referred to as "the Apartments" throughout this report.
The real estate investment business is highly competitive. The
Apartments are in competition for residents with numerous other
alternative sources of housing, including, but not limited to,
apartment complexes owned by affiliates of the General Partner.
Many of these competitors may have greater resources than those
of the Partnership or may be associated with individuals with
broader experience than that of the General Partner. Additional
residential rental projects may be built which may compete
directly with the Partnership's properties.
In addition, demand by purchasers for investment properties of
the type owned by the Partnership may increase or decrease. This
competition is primarily based on property location, condition,
and asking rent. These factors may increase or decrease the
price of potential property acquisitions/sales.
The Partnership is not dependent upon any single tenant or small
groups of tenants for its operating success. The loss of any one
of or a small group of tenants would not have a material adverse
effect. The Partnership does not foresee any events or market
trends which would have a materially adverse effect upon the
Partnership's revenues, except for increased competition for
residents.
The real estate operation of the Partnership, including the value
of its real estate holdings, may be affected by many factors over
which the Partnership has limited or no control, among them,
changes in general and local economic conditions, interest rate
levels, availability and terms of financing, changes in tax laws
and fluctuations in operating costs. The principal factors
affecting rental rates and occupancy levels include location,
ease of access, amenities, and the quality of property
management. The Partnership has diversified its investments
geographically and competes in several markets including Madison,
Wisconsin and Clearwater and St. Petersburg, Florida.
During 1997, the Partnership did not directly employ any
individuals. In order to effectively manage the personnel
function of operating the Apartments and the Partnership and to
control the costs of compensation (including wages, worker's
compensation, unemployment, payroll taxes, health care, and
401(k) profit sharing plans), the employees who work for the
Partnership and the Apartments are employed by the General
Partner or its affiliate, Decade Properties, Inc. The costs of
these employee services are reimbursed by the Partnership based
upon the records of such employees in performing such services
multiplied by a rate established to cover overhead and expenses
incurred to perform such duties. The Apartments are managed by
Decade Properties, Inc., an affiliate of the General Partner.
Employees of the General Partner and affiliates perform the
on-site management services required to operate and maintain the
Apartments and render partnership management services to the
Partnership including maintaining investor communications,
compliance with tax laws and other governmental regulations, and
cash management.
At the close of business on December 31, 1997, the Partnership's
13,400.27 Interests were held by 1,297 Limited Partners. The
General Partner of the Partnership is Decade Companies - A
General Partnership (of which Jeffrey Keierleber and Decade 80,
Inc. are the general partners). The principal office of Decade
Companies is located at 250 Patrick Blvd. Suite 140, Brookfield,
Wisconsin 53045-5864, Telephone (414) 792-9200.
Item 2. Description of Property
(a) Location
The residential apartment complexes which are owned and operated
by the Partnership are:
Rental
Name Location Units
Pelican Sound St. Petersburg, Florida 379
The Meadows II Madison, Wisconsin 316
Town Place Clearwater, Florida 240
935
The Meadows II is pledged as collateral against mortgage
encumbrances of approximately $6.5 million. Town Place is
pledged as collateral against a mortgage encumbrance of $6.6
million. Pelican Sound is pledged as collateral against a
mortgage encumbrance of $9.8 million.
(b) Investment policies
(1) Investments in real estate or interests in real estate.
The investment policy of the Partnership is to primarily invest
in real estate located in the state of Florida, although real
estate situated anywhere in the continental United States may be
acquired. Although there is no restriction on the type of real
estate in which the Partnership may invest, the Partnership has
concentrated its real estate holdings to residential apartment
complexes located in Florida and Wisconsin.
The method or proposed method of financing properties is set
forth as follows: (1) the aggregate amount of mortgage
indebtedness (other than short-term financing) which may be
incurred in connection with the acquisition of Properties shall
not exceed 20% of their fair market value (determined by
appraisals prepared by independent appraisers) on a combined
basis; (2) the aggregate amount of such mortgage indebtedness
incurred in connection with financing or refinancing Properties
subsequent to their acquisition shall not exceed 75% of their
aggregate independently appraised value; and (3) further, a
creditor who makes a nonrecourse loan to the Partnership shall
not and must not acquire, at any time, as a result of making the
loan, any direct or indirect interest in the profits, capital or
property of the Partnership other than as a secured creditor.
The Partnership Agreement does not prohibit either unsecured or
secured financing. The General Partner has complete discretion
to finance or refinance the Partnership's properties, on a
secured, or unsecured basis, at any time it determines that such
financing or refinancing is advantageous to the Partnership.
There is no limitation on the number of mortgages which may be
placed on any one piece of property.
There is no limitation on the percentage of assets which may be
invested in any one investment, or type of investment. The
selection of investment properties is solely the discretion of
the General Partner; a vote of the limited partners is not
required and under appropriate circumstances the General Partner
would consider the exchange and/or purchase of additional
properties.
It is the Partnership's policy to acquire assets primarily to
generate income and provide the partners with quarterly cash
distributions. Capital appreciation through increases in the
value of the Partnership's real property assets is a secondary
objective.
(2) Investments in real estate mortgages
The Limited Partnership Agreement also authorizes the Partnership
to invest in real estate mortgages. The Partnership did make
real estate mortgages totaling approximately $5.5 million from
1986 to 1989 but has not done so since then. None of the
mortgage loan investments remain outstanding. It is not likely
that the Partnership will invest in another real estate mortgage
loan.
(3) Securities of or interests in persons primarily engaged in
real estate activities.
The Partnership has not invested in any securities such as common
stocks, interests in real estate investment trusts, or
partnership interests.
The Agreement of Limited Partnership permits the Partnership to
enter into joint ventures or general partnerships and other
participations with real estate developers, owners, and others
for the purpose of owning a particular property or properties in
accordance with the Partnership's investment policies. In some
joint ventures, the Partnership may be entitled to a preferential
claim to a specified rate of return on the investment before a
joint venturer is entitled to any share of such return. In
connection with some joint ventures or general partnerships, the
seller of a property may obtain an interest in the joint venture
or general partnership holding title to a property, in exchange
for which the seller in some cases may not be required to make a
capital contribution to such partnership or joint venture.
The Partnership will not participate in any joint venture
investment with non-Affiliates unless it acquires a controlling
interest therein. The Partnership will not invest in a joint
venture arrangement with another partnership formed by the
General Partner or Affiliates unless the partnerships have
identical investment objectives, there are no duplicate property
management or other fees, the sponsor compensation is
substantially identical in each partnership, the Partnership has
the right of first refusal to buy if another joint venturer
wishes to sell property held by the joint venture, and the
investment of each of the partnerships is otherwise on
substantially the same terms and conditions.
(c) Description of Real Estate and Operating Data
(1) The general character and location of each of the three
properties owned by the Partnership are separately described
below. Each of the properties is a residential garden-style
apartment complex. In the opinion of the general partner the
properties are suitable and adequate for such use.
Pelican Sound Apartments
10200 Gandy Boulevard
St. Petersburg, Florida 33702
The apartments were built in 1988 and consist of 379 one and two
bedroom air conditioned living units with individual washers and
dryers. The units range in size from 505 square feet to 910
square feet. The complex consists of 13 two and three-story
wooden frame with brick veneer garden apartment buildings plus a
1,961 square foot clubhouse/leasing office on approximately 21.59
acres. The complex includes a swimming pool with jacuzzi, two
tennis courts, 569 parking spaces, and an exercise room available
for all residents.
The complex is located in the "Gateway" region of St. Petersburg,
on Gandy Boulevard approximately one mile west of the Gandy
Bridge. The location provides easy access to both Pinellas and
Hillsborough business districts and is considered by the General
Partner to be a positive growth area for both commercial and
residential developments.
The Meadows II Apartments (Phases II, III, IV)
201-417 N. Thompson Drive
Madison, Wisconsin 53714
The Meadows Apartments consists of 404 apartment units in 32
two-story buildings covering approximately 24 acres of land. The
property was developed in four phases; construction began in late
1976 and was completed in September 1980. On January 17, 1989
the Partnership acquired three of the four phases comprising 316
of the 404 rental units. The other 88 rental units were acquired
by an affiliated limited partnership (Decade's Monthly Income &
Appreciation Fund). The apartments in Phases II, III, and IV
were completed between 1977 and 1980 and consist of one, two, and
three-bedroom units in twenty-four buildings. The entire complex
has a total of 720 parking spaces for a 1.78:1 ratio of stalls
per unit. In addition to the apartment units, the three phases
owned by the Partnership have one swimming pool, one lighted
tennis court and a play area. Laundry room areas and storage
lockers are located in the basement of each building.
The Meadows is located at the southeast corner of the
intersection of I-90/94 and Highway 30. The property is situated
in a growing residential neighborhood five miles northeast of
Madison's Capitol Square. The primary access route is Highway 30
on the north which meets East Washington Avenue. North-south
linkages are provided by I-90/94 and Highway 51. Most of the
single family homes in the area are newer and range in value from
$75,000 to $95,000. Schenk Elementary School is about one-half
mile southwest of the property. Public bus transportation is
convenient with two bus stops servicing the property's residents.
The expansion of commercial development on major arterials west
of the neighborhood is believed to increase the desirability of
the property's location.
Town Place Apartments
2545 N.E. Coachman Road
Clearwater, Florida 33575
The apartments were built in 1985 and consist of 240 one and two
bedroom units. The units range in size from 540 square feet to
1,036 square feet. The complex consists of 24 buildings plus an
office on approximately 25.7 acres. The complex includes a
swimming pool with jacuzzi, two tennis courts, volleyball court,
a 6.7 acre lake, clubhouse, 365 parking spaces, and a laundromat
for all residents.
The property is on the southside of N. E. Coachman Road
approximately one mile from the intersection of U.S. Highway 19
and Route 60. A Wal-Mart retail store is located directly across
the street. The area is mostly residential with no industry or
factories in the immediate area. Clearwater Beach is seven miles
from the property.
(2) The Partnership holds title to each of the properties. The
nature and amount of all material mortgages, liens or
encumbrances are separately described below, including the
current principal amount of each material encumbrance, interest
and amortization provisions, prepayment provisions, maturity
date, and the balance due at maturity assuming no prepayments.
<PAGE>
<TABLE>
<CAPTION>
Pelican The The Town
Sound Meadows II Meadows II Place
<S> <C> <C> <C> <C>
Current principal amount $9,787,219 $2,928,463 $3,594,533 $6,588,672
Interest rate 7.0% 7.5% 7.421%(1) 8.25%
Amortization provisions 349 mo. 40 yr. 30 yr. 311 mo.
Prepayment provisions (2) (3) (4) (4)
Maturity date 12/01/98 12/01/21 12/10/04 05/16/03
Balance due at maturity
assuming no prepayments $9,680,647 $ 21,816 $3,002,407 $5,999,567
</TABLE>
<PAGE>
(1) Interest accrues at 2.48% over the monthly weighted average
cost of funds of the bank, adjusted monthly, with maximum and
minimum rates of 14.75% and 6.75%, respectively (7.421% at
December 31, 1997).
(2) Prepayment of principal without penalty is permitted in
increments of $100,000 upon 30 days prior written notice.
(3) Prepayment of principal during any one calendar year of up
to $500,370 (15% of the original principal amount of
$3,335,800) is permitted without penalty. Prepayments in excess
of $500,370 will incur a premium or charge equal to 3% of
the amount of such excess, less one eighth of one percent
(0.125%) for each 12 month period which has elapsed since the
date of the note (10/29/79). The prepayment penalty at
December 31, 1997 would be approximately $18,200 (0.75% of
$2,428,093) if the entire outstanding balance were prepaid.
(4) Prepayment of principal without penalty is permitted in
whole or in part without penalty.
(3) The Partnership does not lease any properties from others.
There are no options or contracts to purchase or sell any of the
properties.
The leases with tenants of the Apartments are generally for
periods of one year. The rent for each apartment unit varies
according to its size and amenities.
The average monthly gross potential rent ("GPR") per unit at the
Apartments for the month of December of each of the last two
years and the related occupancy rate ("OR") for December of each
year is set forth below:
Number December December
of Units 1997 1996
GPR OR GPR OR
All Units 935 $597 95% $576 94%
Pelican Sound 379 $606 94% $576 96%
The Meadows II 316 $588 95% $569 91%
Town Place 240 $598 97% $585 95%
The apartment mix and monthly asking rents at Pelican Sound
Apartments is:
Number
of Square Asking Rent
Style Units Feet 12/97 12/96
One-bedroom/one bath 128 505 $530-585 $495-510
One bedroom/one bath 156 700 $605-675 $575-595
One-bedroom/one bath/den 27 830 $695-705 $660-685
Two-bedroom/two bath 68 910 $745-820 $715-740
379
The apartment mix and monthly asking rents at The Meadows II
Apartments is:
Number
of Square Asking Rent
Style Units Feet 12/97 12/96
One-bedroom 88 625 $510-520 $510-520
One-bedroom/deluxe 12 744 $515-530 $510-525
Two-bedroom/one bath 192 875 $585-630 $585-600
Two-bedroom/1.5 bath/den 12 1,466 $820-880 $800-850
Three-bedroom 12 1,466 $820-880 $800-850
316
The apartment mix and monthly asking rents at Town Place
Apartments is:
Number
of Square Asking Rent
Style Units Feet 12/97 12/96
One-bedroom/Suite 36 540 $490-520 $480
One bedroom/Garden 72 720 $540-625 $530-570
Two-bedroom/one bath 36 836 $635-680 $635-650
Two-bedroom/two bath 96 1,036 $685-780 $665-700
240
(4) Any proposed program for the renovation, improvement or
development of the properties, including the estimated cost
thereof and the method of financing to be used, is set forth
below.
At Pelican Sound the proposed 1998 budget includes $102,000 for
repairs to the building exterior; $48,000 for carpet replacement;
$12,000 for tile and vinyl replacement; $12,000 for interior
repairs to apartment units; and $10,000 for appliance replacement
or repair. In addition, plans are underway for 1998 to install
individual water meters for each apartment unit so that utilities
can be billed directly to each resident. A gated entry may also
be installed during 1998. No cost estimate is currently
available for either the water conversion project or the gated
entry project.
At The Meadows II the proposed 1998 budget includes $43,000 for
carpet replacement; $20,000 for exterior painting; and $12,000
for paving.
At Town Place the proposed 1998 budget includes $34,000 for
carpet replacement; and $12,000 for tile and vinyl replacement.
In addition the exterior of the buildings may be repainted and no
cost estimate is currently available.
All renovations are scheduled to be paid for by operating cash
flow.
(5) All three rental properties owned by the Partnership are in
competition for tenants from similar properties in the vicinity.
The general competitive conditions to which the properties are or
may be subject are set forth below.
Pelican Sound - There are numerous garden-style apartment
complexes which directly compete with Pelican Sound. The
competing apartment complexes which have similar amenities to
Pelican Sound include:
Number Year
Name of Units Built
Waterford Apartments 384 1989
Sandpiper Apartments 276 1985
Summit Gateway Apartments 212 1986
Mallard Point Apartments 304 1983-85
West Port Colony 324 1989
Bridgewater Place Apartments 260 1988
Lincoln Shores Apartments 600 1984
Thunderbay Apartments 464 1987-89
Post Bay Apartments 312 1989
Windjammer Apartments 248 1987
Promenade at Carillon 334 1994
The Meadows II - There are numerous garden style apartment
complexes which compete directly with The Meadows II. The
competing apartment complexes which have similar amenities to The
Meadows II include:
Number Year
Name of Units Built
The Meadows I 88 1976
Stonewood Village 240 1988
Holiday Gardens 224 1968
Village Green East 240 1978
Briarwood 160 1974
Camelot 154 1975
Village Square 128 1965
Town Place - There are numerous garden-style apartment complexes
which directly compete with Town Place. The competing apartment
complexes which have similar amenities to Town Place include:
Number Year
Name of Units Built
Coachman Crossing 218 1985
Cameron Lakes 207 1986
Coachman Club 72 1985
Country Place Village 188 1984-85
Coral Cove 200 1985
Cambridge Apartments 200 1973
Chesapeake 354 1985
Sunchase of Clearwater 461 1985
(6) In the opinion of the General Partner, the properties are
adequately covered by insurance.
(7) With respect to each property the following additional
information is provided:
(i) Occupancy rate 1997 1996
All Apartments 93% 93%
Pelican Sound 97% 95%
The Meadows II 89% 90%
Town Place 94% 93%
(ii) Tenant information
No tenant occupies ten percent or more of the rentable square
footage of each property. Each tenant occupies the property as a
personal residence. The principal provisions of each of their
leases are essentially the same except for the negotiated amount
of monthly rent. All leases require the timely monthly payment
of rent, and require a security deposit for damages. Most leases
are written for the term of one year, although terms of six
months, or month-to-month also exist.
(iii) Principal business use
Each of the properties are used for residential purposes and are
not used to conduct commercial business, occupations or
professions.
(iv) Annual rental information
The average effective annual rental per unit is as follows:
Number
of Units 1997 1996
All Apartments 935 $6,418 $6,245
Pelican Sound 379 $6,832 $6,428
The Meadows II 316 $5,900 $5,971
Town Place 240 $6,447 $6,315
(v) Lease expirations
All leases are scheduled to expire in 1998.
(A) The approximate number of tenants whose leases will expire in
1998 are as follows:
All Apartments 890
Pelican Sound 360
The Meadows II 300
Town Place 230
(B) The approximate total area in square feet covered by such
leases that will expire in 1998 are as follows:
All Apartments 691,000
Pelican Sound 242,000
The Meadows II 255,000
Town Place 194,000
(C) The approximate annual rental represented by such leases
that will expire in 1998 is as follows:
All Apartments $3,200,000
Pelican Sound $1,300,000
The Meadows II $1,100,000
Town Place $ 800,000
(D) The percentage of gross annual rental represented by such
leases that will expire in 1998 is 100% for each property.
(vi) Depreciation information
(A) Federal tax basis
The federal tax basis for each of the properties is set forth
below:
Accumulated Tax
Pelican Sound Cost Depreciation Basis
(in thousands)
Land $ 2,513 $ 0 $ 2,513
Land Improvements 674 198 476
Buildings 7,695 1,097 6,598
Personal Property 1,106 702 404
Total $11,988 $ 1,997 $ 9,991
Accumulated Tax
The Meadows II Cost Depreciation Basis
(in thousands)
Land $ 1,064 $ 0 $ 1,064
Buildings and Improvements 8,591 2,737 5,854
Personal Property 804 643 161
Total $10,459 $ 3,380 $ 7,079
Accumulated Tax
Town Place Cost Depreciation Basis
(in thousands)
Land $ 1,190 $ 0 $ 1,190
Buildings and Improvements 4,133 1,153 2,980
Personal Property 633 518 115
Total $ 5,956 $ 1,671 $ 4,285
(B) Rate
The applicable rate used for computing depreciation for financial
statement purposes is 3.33% per year for buildings and
improvements, and 20% per year for personal property.
(C) Method
The applicable depreciation method used for computing
depreciation for financial statement purposes is the straight
line method.
(D) Life claimed
The life used to depreciate assets for financial statement
purposes is 30 years for buildings and improvements and 5 years
for personal property.
(vii) Realty taxes
Realty Annual
Tax Realty
Rate Taxes
Pelican Sound $25.4849 per $100 $297,266 (1)
The Meadows II $27.4151 per $100 $247,456 (2)
Town Place $22.8256 per $100 $176,031 (1)
(1) A discount of up to 4% (1% per month) is available for early
payment of the tax due on March 31.
(2) Approximately 50% of the tax is due by January 31, with the
remaining balance due by July 31.
Item 3. Legal Proceedings
The Partnership is not subject to any material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No items were submitted to a vote of the security holders during
the fourth quarter.
PART II
Item 5. Market for Limited Partnership Interests and Related
Partner Matters
a) Market Information
There has not been an organized public trading market and it is
not anticipated that a public market for Limited Partnership
Interests in the Partnership will develop. Although there is no
established public trading market, in November 1996 the
Partnership through a tender offer acquired 4,066.036 Limited
Partner Interests at a price of $402 per Interest.
The Agreement of Limited Partnership provides that the General
Partner may in its sole discretion utilize up to 2% of the gross
proceeds of the offering ($360,000) to repurchase Interests
tendered to the Partnership by Limited Partners who offer for
repurchase fewer than 100 Interests in the aggregate.
Accordingly the Partnership repurchased Interests from Limited
Partners from 1989 through 1992 until 2% of the gross proceeds of
the offering were expended. This repurchase arrangement was
intended only to provide a potential for liquidity as to a
limited number of Interests and was not intended to provide a
market for the Interests in general.
b) Security Holders
As of February 28, 1998, there were 1,297 Interest holders of
record on the Partnership's books and records.
c) Dividends or Similar Distributions
During the last two years, quarterly cash distributions to
Limited Partners were declared at the rate of 5% per annum on the
original capital investment (except for the third quarter of 1996
which was suspended). Cash distributions declared to the Limited
Partners for the two year period ended December 31, 1997 were
made as follows:
Period Date Amount Distributed
Ended Paid Total Per $1,000 Interest
03/31/96 04/26/96 $218,330 $12.50
06/30/96 07/26/96 $218,330 $12.50
12/31/96 01/22/97 $167,503 $12.50
03/31/97 04/25/97 $167,503 $12.50
06/30/97 07/25/97 $167,503 $12.50
09/30/97 10/24/97 $167,503 $12.50
12/31/97 01/23/98 $167,503 $12.50
The cash distribution for the third quarter of 1996 was suspended
in October during the tender offer to set aside cash reserves
that may have been required to repurchase Limited Partner
Interests. This step was necessary in order to reduce the amount
of borrowing that might have been required to repurchase
Interests if more than 8,944 Interests were tendered. Once the
tender offer was completed in November, the General Partner
determined that cash distributions could be resumed beginning
with the fourth quarter of 1996.
The Agreement of Limited Partnership provides that the
Partnership will make quarterly distributions to all partners of
Cash Available for Distribution whereby 99% of all distributable
cash, as defined in the Agreement of Limited Partnership, will be
distributed to the Limited Partners and 1% to the General
Partner.
The actual amount and frequency of future cash distributions will
depend upon future cash flows generated by operations, capital
requirements, debt service requirements, financial condition, and
working capital requirements.
Item 6. Management's Discussion and Analysis or Plan of
Operation.
The financial statements included in Item 7 present the balance
sheet as of December 31, 1997 and present the cash flow and
results of operations for the two years ended December 31, 1997
and 1996.
Financial Condition
During 1997, cash and cash equivalents decreased by $449,000 from
$2,620,000 at December 31, 1996 to $2,171,000 at December 31,
1997. During 1997, approximately $694,000 was generated by
operating activities, offset by $181,000 used in investing
activities, and approximately $962,000 used in financing
activities as shown herein on the Statements of Cash Flows.
Approximately $278,000 of fixed asset additions were capitalized
during 1997. Capitalized furniture and equipment totaled
$181,000 ($71,000 at The Meadows II, $64,000 at Pelican Sound,
and $46,000 at Town Place). An additional $97,000 of deferred
acquisition fees was capitalized upon review of the calculations
of front-end fees allowed under the Limited Partnership
Agreement. The additional acquisition fee was not paid and was
recorded on the balance sheet as an additional liability payable
to the General Partner.
Total liabilities of $27.3 million did not change during 1997.
The outstanding balance of the mortgage loan on Pelican Sound
Apartments averaged $9.89 million during the last two years. The
outstanding balance of the mortgage loans on the Meadows II
Apartments averaged $6.29 million during the last two years. The
outstanding balance of the mortgage loans on Town Place
Apartments averaged $5.25 million during the last two years. A
$2.5 million loan on Town Place Apartments was refinanced in May
1996 with a $6.7 million loan.
The use of leverage is intended to assist the Partnership in
meeting its investment objective of achieving capital
appreciation for the Limited Partners. The total leverage on the
three properties at year end is 73.0% of the capitalized cost,
compared to 74.5% at the end of 1996.
The use of mortgage financing creates unrelated business taxable
income ("UBTI") for Qualified Plan investors. However, the UBTI
for 1997 was a loss of approximately $6 per $1,000 Limited
Partner Interest.
Partners' Capital decreased by $1,327,000 during 1997. The
decrease was attributable to the net loss of $654,000 for
financial reporting purposes (after depreciation and amortization
of $1,150,000) and $673,000 of distributions declared to the
Partners.
Results of Operations
The Statements of Operations present a two-year comparison of
operations divided into two separate categories: investment
property operations and other partnership income (expenses).
The comparative presentation of operations reflects the operation
of 935 apartment units during each period.
The comparative presentation of other income reflects the yield
on portfolios that were not of equal size. In May 1996 the net
proceeds of approximately $4.2 million from the Town Place
refinancing were invested in short-term instruments until
approximately $1.6 million was used at the end of November 1996
to repurchase limited partners Interests.
Revenues from 1997 rental operations increased $155,000 from the
prior year. The increase was comprised of increases at Pelican
Sound ($156,000) and Town Place ($28,000), offset by a decrease
at The Meadows II of $29,000. A summary of total operating
revenue by apartment site follows:
Increase Increase
(Decrease)(Decrease)
1997 1996 Amount Percent
Pelican Sound $2,689,000 $2,533,000 $156,000 6.2%
The Meadows II 1,925,000 1,954,000 (29,000) (1.5%)
Town Place 1,624,000 1,596,000 28,000 1.8%
Total $6,238,000 $6,083,000 $155,000 2.5%
The $156,000 increase at Pelican Sound is attributed to a 3.3%
increase in asking rents and a 2% increase in average occupancy
(from 94% to 96%). The $28,000 increase at Town Place is
attributable to a 2.9% increase in asking rents and a 1% increase
in average occupancy (from 93% to 94%). The $29,000 decrease at
The Meadows II is attributable to a 1% decrease in average
occupancy (from 90% to 89%) which was driven by a 2.9% increase
in asking rents.
The average monthly gross potential rent per unit at the
Apartments for the two year period was:
Increase Increase
Number (Decrease)(Decrease)
of Units 1997 1996 Amount Percent
All Apartments 935 $586 $569 $17 3.0%
Pelican Sound 379 $589 $570 $19 3.3%
The Meadows II 316 $580 $563 $17 3.0%
Town Place 240 $590 $574 $16 2.8%
"Gross potential rent" represents the asking rent established by
the Partnership for a vacant apartment plus the rent in effect
for occupied apartments. As a general rule the asking rents are
the same as the actual rents eventually established by the rental
agreements and are comparable with existing market conditions.
The average occupancy level at the Apartments for the two year
period was:
1997 1996
All Apartments 93% 93%
Pelican Sound 97% 95%
The Meadows II 89% 90%
Town Place 94% 93%
The range of occupancy levels at the Apartments for the years
was:
1997 1996
All Apartments 91.5-96.0% 91.5-94.8%
Pelican Sound 93.8-98.5% 91.5-99.0%
The Meadows II 83.0-96.1% 85.0-92.4%
Town Place 91.0-97.3% 86.5-95.0%
The differences in occupancy levels were primarily related to the
Partnership's asking rents compared to other competitors in the
market place.
Rental expenses before depreciation and debt service increased
$72,000. The increase was comprised of increases at Town Place
($71,000) and The Meadows II ($17,000), offset by a decrease at
Pelican Sound ($16,000). A summary of operating expenses before
depreciation and debt service by apartment site follows:
Increase Increase
(Decrease) (Decrease)
1997 1996 Amount Percent
Pelican Sound $1,509,000 $1,525,000 $(16,000) (1.0%)
The Meadows II 1,102,000 1,085,000 17,000 1.6%
Town Place 981,000 910,000 71,000 7.8%
Total $3,592,000 $3,520,000 $ 72,000 2.0%
The changes in rental expenses can be explained as follows:
Town Place The $71,000 increase in expenses at Town Place is
primarily attributable to a $23,000 increase in repairs and
maintenance (consisting of a $17,000 increase in building
exterior repairs, a $5,000 increase in tile and vinyl
replacements, and a $1,000 increase in water heater repairs), a
$12,000 increase in insurance expense, an $11,000 increase in
property management fees (resulting from increased rent
collections), a $6,000 increase in office expenses, a $6,000
increase in outside contractors (primarily consisting of a $3,000
increase in turnover painting, a $1,000 increase in carpet
shampooing, and a $1,000 increase in drywall and carpentry
repairs), a $3,000 increase in maintenance supplies, a $3,000
increase in legal fees, a $2,000 increase in ground equipment
parts and service, and increases in other categories totaling
$5,000.
The Meadows II The $17,000 increase in expenses at The Meadows II
is primarily attributable to increases in various expense
categories totaling $47,000, offset by a $30,000 decrease in
personnel expenses. The increases of $47,000 consist of a
$12,000 increase in property taxes, a $5,000 increase in
insurance, an $11,000 increase in grounds (consisting of a $6,000
increase in the lawn mowing contract, a $3,000 increase in
fertilizer and mulch, and a $3,000 increase in trees, shrubs and
flowers, offset by a $1,000 decrease sidewalks, curbs and
drives), an $8,000 increase in repairs and maintenance
(consisting of a $10,000 increase in building exterior repairs, a
$4,000 increase in paving, a $1,000 increase in tile and vinyl
replacement, and a $1,000 increase in apartment interior repairs,
offset by a $5,000 decrease in water heater repairs), a $6,000
increase in advertising and marketing, and a $5,000 increase in
outside contractors (consisting of a $4,000 increase in turnover
painting, a $3,000 increase in cleaning, a $2,000 increase in
carpet shampooing, and a $2,000 increase in painting interior,
offset by a $3,000 decrease in plumbing, a $1,000 decrease in
windows and screens, and a $2,000 decrease in painting exterior).
The $30,000 decrease in personnel consists of a $17,000 decrease
in maintenance, a $6,000 decrease in apartment cleaning, a $5,000
decrease in on-site management, and a $2,000 decrease in grounds
and snow.
Pelican Sound The $16,000 decrease in expenses at Pelican Sound
is primarily attributable to a $78,000 decrease in repairs and
maintenance items, and a $3,000 decrease in advertising and
marketing, offset by increases in other expenses categories
totaling $65,000. The $78,000 decrease in repairs and
maintenance is primarily attributable to a $71,000 decrease in
building exterior repairs, a $9,000 decrease in paving, a $5,000
decrease in landscaping, a $1,000 decrease in title and vinyl
replacements, and a $2,000 decrease in miscellaneous repairs,
offset by a $10,000 increase in pool and tennis court repairs.
The expense categories that increased $65,000 in total consist of
an increase in insurance of $17,000, an increase in property
management fees of $11,000 (resulting from increases in rent
collections), an increase in personnel expense of $8,000, an
increase in office expenses of $8,000, an increase in grounds
expenses of $5,000 (equipment parts and service), an increase in
utilities of $5,000, an increase in building services of $3,000,
an increase in outside contractors of $3,000, an increase in
maintenance supplies of $2,000, and a $3,000 increase in
miscellaneous categories.
The increase in operating revenue of $155,000, offset by the
increase in operating expenses of $72,000, resulted in an $83,000
increase in net operating income from property operations before
depreciation and debt service. The increase was comprised of an
increase at Pelican Sound ($172,000), offset by decreases at The
Meadows II ($46,000) and Town Place ($43,000). A summary of
operating income before depreciation and debt service by
apartment site follows:
Increase Increase
(Decrease) (Decrease)
1997 1996 Amount Percent
Pelican Sound $1,180,000 $1,008,000 $172,000 17.1%
The Meadows II 823,000 869,000 (46,000) (5.3%)
Town Place 643,000 686,000 (43,000) (6.3%)
Total $2,646,000 $2,563,000 $ 83,000 3.2%
Interest expense increased $115,000. The increase was comprised
of an increase for Town Place of $133,000 (resulting from the
increased mortgage debt), offset by decreases for Pelican Sound
($8,000) and The Meadows II ($10,000). The decreases for Pelican
Sound and The Meadows II are the result of interest charged on
the decreasing principal balances of the notes.
After considering the effect of interest expense, net operating
income before depreciation was $871,000. A summary of net
operating income before depreciation by apartment site follows:
Increase Increase
(Decrease) (Decrease)
1997 1996 Amount Percent
Pelican Sound $ 481,000 $ 301,000 $180,000 59.8%
The Meadows II 333,000 367,000 (34,000) (9.3%)
Town Place 57,000 235,000 (178,000) (75.7%)
Total $ 871,000 $ 903,000 $(32,000) (3.5%)
The net income from real estate activities is partially sheltered
by deductions for depreciation and amortization which did not
affect cash flow. Depreciation and amortization increased
$21,000.
As a result of the foregoing, net loss from investment properties
operations for 1997 was $243,000, compared to a net loss of
$190,000 in 1996. During both years all three properties
generated positive cash flow. General Partner anticipates that
all three properties will continue to positively cash flow in
1998.
Other expense, net of other income, increased approximately
$312,000. The increase is attributable to a $197,000 increase in
interest on payables to affiliates (resulting from the review of
the calculation of front-end fees allowed under the Limited
Partnership Agreement), a $90,000 increase in administrative
expenses which is primarily attributed to litigation costs. (The
lawsuit was settled during 1997), and a $25,000 decrease in
interest income earned.
As a result of the foregoing, net loss for 1997 was $654,000,
compared to a net loss of $289,000 in 1996.
There are certain events that could cause the reported financial
information to not be indicative of future operating results or
future financial condition, as follows:
In May 1996 the Partnership refinanced the $2.5 million mortgage
loan on Town Place Apartments with a new mortgage loan of $6.7
million. The debt service requirements of such loan are
reflected in the financial statements for eight months in 1996
and 12 months in 1997 and will continue to have an impact on
future operations.
During 1996 the General Partner decided to commit the net
proceeds from refinancing the Town Place mortgage to repurchase
Interests from the Limited Partners who desired to sell those
Interests, while offering other Limited Partners the option of
holding their Interests subject to the potential of future gain
or loss. Accordingly, in October 1996 the Partnership made an
Offer to purchase Limited Partner Interests at a price of $402
per Interest. This course of action permitted the Limited
Partners either to sell their Interests, or to continue holding
their Interests subject to the potential of future gain or loss.
Limited Partners who chose to tender their Interests, in effect,
exchanged the certainty and liquidity of a current sale for the
potentially higher return (or risk of loss) of continued
ownership of their Interests. The repurchase and retirement of
4,066.036 Interests (approximately 23% of the outstanding
Interests) was completed in November 1996 using $1.6 million of
cash reserves which will impact future operations by reducing the
portfolio available to generate investment income.
During 1997 a review of the calculations of front-end fees
allowed under the Limited Partnership Agreement resulted in
additional interest of $197,000 calculated on deferred
acquisition fees. This is a one-time adjustment that will not
have an impact on future operations.
The settlement in March 1997 of the litigation will impact future
operations by eliminating the litigation expenses as included in
the increase in administrative expenses for 1996 and 1997.
Liquidity
At December 31, 1997 there was approximately $2.2 million of cash
and cash equivalents and $184,000 of escrow deposits resulting in
$2.4 million of liquidity. The Partnership does not have a
credit line established to provide additional liquidity.
Liquidity averaged $2.6 million during the year.
Cash decreased approximately $449,000 during 1997 as shown on the
Statement of Cash Flows. Escrow deposits increased $6,000 over
the prior year balance.
Cash flow of $694,000 was generated by operating activities
during 1997 as shown on the Statements of Cash Flows in the
annual financial statements. The 1997 cash flow was used to make
cash distributions to the partners of $675,000, of which $140,000
(21%) was considered to be portfolio income subject to income
taxes. (Investment interest expense of $184,000 was available in
1997 to offset all of the portfolio income for income tax
purposes). Cash reserves were used to make principal reductions
on mortgage notes payable of $286,000 and to make additions to
investment properties of $181,000.
The General Partner believes that the Partnership has the ability
to generate adequate amounts of cash to meet the Partnership's
needs for cash.
Short-term obligations total $4.0 million, consisting of $694,000
of current liabilities, $308,000 of mortgage liabilities, and
$2,964,000 payable to the General Partner and affiliates.
On a short-term basis, rental operations are expected to provide
a stream of cash flow to pay day-to-day operating expenses and to
fund quarterly cash distributions to the partners. Investment
property operations generated a profit in 1997 of $906,000
(before depreciation and amortization of $1,150,000) compared to
$927,000 in 1996.
The Partnership intends, but is not required, to continue to
declare quarterly cash distributions in 1998 to the Limited
Partners at the rate of $12.50 per Interest (5.0% per annum on
the original capital investment of $1,000 per Interest). This
intention will require cash distributions to the limited partners
of approximately $670,000 during 1998. Through December 31, 1997
the Partnership distributed approximately $11.9 million to the
limited partners since inception. Cumulative cash distributions
range from $616 to $767 per Interest of an original holder
depending upon the date of purchasing the Interest.
Scheduled mortgage debt principal reductions are approximately
$308,000 in 1998, excluding the balloon payment of $9.7 million
due on the Pelican Sound mortgage loan. The Pelican Sound
mortgage note includes an option to extend the term of the note
for an additional five years. The option will be exercised if
the note is not refinanced.
There is a possibility that the $2.9 million mortgage loan
secured by a portion of The Meadows II could be declared in
default during 1998 and subject to repayment upon demand. This
mortgage loan is subject to the terms of a Regulatory Agreement
dated December 12, 1988 with the Department of Housing and Urban
Development ("HUD"). One of the requirements of the Regulatory
Agreement is to provide a complete annual financial report to the
Secretary of HUD for the portion of the property (Phase IV) which
secures the HUD mortgage loan. In September 1997 the Partnership
received a letter from HUD returning, for purported
noncompliance, the 1995 and 1996 financial reports. Similar
financial reports for the years 1989 to 1994 were submitted to,
and accepted by, HUD. HUD is requesting that separate books and
records be maintained to segregate the operation of Phase IV as
if it were a separate property. The Partnership has not resolved
this matter with HUD, and HUD has not taken any further action.
The Partnership is initiating steps to refinance this loan as a
means to resolving this dispute. As one of its remedies, HUD may
attempt to declare the mortgage note to be in default and
consequently the mortgage note may become due upon demand. Upon
such event, the Partnership would seek replacement financing
during the foreclosure period.
Approximately $3.8 million of deferred fees and deferred interest
related thereto has been earned by the General Partner and
affiliates, of which approximately $2.9 million is currently due
and payable. Consequently, this amount of deferred fees is a
short term obligation of the Partnership. The actual timing of
the payment of deferred fees and related interest will take into
account the amount of cash reserves to be set aside that the
General Partner deems necessary or appropriate for the operation
and protection of the Partnership.
Other than the payments described above, there are no long-term
material capital expenditures, obligations, or other demands or
commitments that might impair the liquidity of the Partnership.
During 1997 the Partnership incurred costs of litigation that are
nonrecurring. The settlement of the litigation should result in
an increase in cash generated by operations in future periods.
To date the Partnership has not paid the $2.9 million of deferred
fees and deferred interest in order to preserve the ability of
the Partnership to acquire additional properties, if deemed
advisable. Nonpayment of the $2.9 million of deferred fees does
not cause additional expense to the Partnership because the
amount of deferred fees and interest related thereto is limited
to a maximum amount as defined in the Partnership Agreement. The
General Partner intends to make payment only after it is
determined that the liquidity is not required to purchase
additional properties, either directly or by means of an
exchange.
Capital Resources
At December 31, 1997 no material commitments existed to acquire
additional property or to make capital expenditures.
Pursuant to the terms of the Limited Partnership Agreement no
Limited Partner shall be subject to assessment nor shall any
Limited Partner be personally liable for any debts of the Limited
Partnership. The Partnership completed its $18 million offering
of Limited Partner Interests in 1988. There are no plans to
raise additional capital by selling additional Limited Partner
Interests. Such action would require the approval of the Limited
Partners.
The reported earnings per Limited Partner Interest in 1997 and
1996 reflects a change in the number of Limited Partner Interests
outstanding which occurred in November 1996 by the repurchase of
4,066.036 Limited Partner Interests.
Prospective Information
Information contained in this Annual Report on Form 10-KSB
contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, which can be
identified by the use of forward-looking terminology such as
"may," "will," "expect, "anticipate," "estimate" or "continue" or
the negative thereof or other variations thereon or comparable
terminology. There are number of important factors with respect
to such forward looking statements, including certain risks and
uncertainties, that could cause actual results to differ
materially from those contemplated in such forward-looking
statements. Such factors, which could adversely effect the
Partnership's ability to obtain these results, include, among
other things, (i) the volume of transactions and prices for real
estate in the real estate markets generally, (ii) a general or
regional economic downturn which could create a recession in the
real estate markets, (iii) the Partnership's debt level and its
ability to make interest and principal payments, (iv) an increase
in expenses related to new initiatives, investments in people and
technology, and service improvements, (v) the success of the new
initiatives and investments and (vi) other factors described
elsewhere in this Annual Report.
The General Partner believes that continued ownership by the
Partnership of its properties is in the long-term best interests
of the Limited Partners. In order for the Partnership to meet
its investment objectives, the General Partner believes that a
sale of any of the properties at this time and a distribution of
the proceeds to the Partners could reduce the opportunity that
the Partnership would be able to fully meet its investment
objectives. While there can be no assurance that the
Partnership's properties will appreciate in value from their
present level, the General Partner, based on its experience in
the real estate industry, believes that the current value of the
Partnership's properties is more likely than not to increase in
the future. There can, of course, be no assurance that such
appreciation will occur, or if it does occur, that it will result
in any specific level of return to the Partners.
The Partnership Agreement sets termination of the Partnership at
December 31, 2005. However, at the time of originating the
Partnership, the General Partner anticipated that the Partnership
would dispose of its properties and complete liquidation within
seven to nine years after the Partnership's acquisition of its
investment properties. The three properties owned by the
Partnership were acquired between January 1989 and November 1993.
The General Partner believes that the Partnership may be required
to retain the properties for an additional period in order to
maximize the potential profit on sale. Therefore, the
Partnership may continue to operate its existing three Apartments
and possibly exchange for another property. Accordingly,
liquidation of the Partnership is not anticipated to begin before
1999.
While the General Partner believes the Partnership will be best
served by waiting to liquidate the Partnership's properties until
the emerging increase in rental rates matures, the General
Partner's position is that the properties are always open for
offers and that any reasonable offer will be seriously
considered. This is not a change in policy and merely reflects
the General Partner's striving to meet the investment objectives
of the Partnership. The General Partner consistently tests the
market to determine if a buyer can be found at a price that will
be sufficient to meet the investment goals of the Partnership.
The General Partner has and will continue to explore liquidation
possibilities and will seriously consider any offer for a
property which meets the investment objectives of the
Partnership.
As a result of suggestions recently received from limited
partners, however, the General Partner will increase efforts
during 1998 to attract a reasonable offer for any or all of the
properties subject to the availability of a suitable exchange and
shall report to the Limited Partners on the results of those
exchange efforts.
Environmental Matters
The Partnership is subject to various laws and governmental
regulations concerning environmental matters and employee safety
and health in the United States. U.S. federal environmental
legislation having particular impact on the Partnership includes
the Toxic Substances Control Act; the Resources Conservation and
Recovery Act; the Clean Air Act; the Clean Water Act; the Safe
Drinking Water Act; and the Comprehensive Environmental Response,
Compensation and Liability Act (also known as Superfund). The
Partnership also is subject to the Occupational Safety and Health
Administration (OSHA) concerning employee safety and health
matters. The United States Environmental Protection Agency
(EPA), OSHA, and other federal agencies have the authority to
promulgate regulations that have an impact on the Partnership's
operations.
In addition to these federal activities, various states have been
delegated certain authority under the aforementioned federal
statutes. Many state and local governments have adopted
environmental and employee safety and health laws and
regulations, some of which are similar to federal requirements.
State and federal authorities may seek fines and penalties for
violation of these laws and regulations. As part of its
continuing environmental program, the Partnership has been able
to comply with such proceedings and orders without any materially
adverse effect on its business.
The Partnership is committed to a long-term environmental
protection program that reduces emissions of hazardous materials
into the environment, as well as to the remediation of identified
existing environmental concerns.
The Partnership did not have any expenditures in 1997 for
environmental capital projects or for operation and maintenance
of environmental protection facilities. The Partnership
estimates that during 1998 and 1999 no material amount will be
spent on capital projects for environmental protection.
The General Partner is not aware of any hidden or unapparent
conditions of the property, subsoil or structural conditions
which would render the Apartments more or less valuable. The
General Partner is not aware of the existence of potentially
hazardous materials used in the construction or maintenance of
the buildings, such as the presence of urea-formaldehyde foam
insulation, and/or the existence of toxic waste, which may or may
not be present at the Apartments. The General Partner is not
aware of any groundwater contamination, underground methane gas
or radon gas. The General Partner believes that the Apartments
do not produce air emissions or waste water of environmental
concern. The General Partner is not aware of any underground
storage tanks. The General Partner is not aware of any incidents
of spills, dumping or discharges at the property/or the presence
of hazardous substances. A Phase I Environmental Site Assessment
has been performed at Pelican Sound and Town Place but has not
been performed at The Meadows II.
In 1996 the Partnership engaged an environmental services firm to
inspect and test The Meadows II Apartments in Madison, Wisconsin
for the presence of lead-based paint. Federal law became
effective in 1996 to require that notification be given to
renters, contractors, and purchasers of an interest in
residential real property on which a residential dwelling was
built prior to 1978 (such as The Meadows II Apartments) that such
property may present exposure to lead from lead-based paint that
may place young children at risk of developing lead poisoning. A
letter report dated September 30, 1996 was obtained from the
environmental services firm regarding the results of testing for
lead-based paint at The Meadows II along with a Certificate of No
Indication of Lead-Based Paint under EPA Regulations. The
Partnership paid $2,585 for the lead-based paint inspection
project.
Impact of Year 2000
Some of the older computer programs used by the General Partner
and affiliates were written using two digits rather than four to
define the applicable year. As a result, those computer programs
have time-sensitive software that recognize a date using "00" as
the year 1900 rather than the year 2000. This could cause a
system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar
normal business activities. This is commonly known as the "Year
2000 Problem."
The General Partner and affiliates are taking steps that they
believe are reasonably designed to address the Year 2000 problem
with respect to computer systems that they use. The General
Partner and affiliates will have to modify or replace portions of
its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total
Year 2000 project cost is estimated to be immaterial including
the purchase of new software that will be either capitalized or
expensed as incurred. To date, the Partnership has not incurred
and expensed any amounts for assessment of the Year 2000 issue
and the development of a modification plan and purchase of new
software.
The project is estimated to be completed not later than June 30,
1999, which is prior to any anticipated impact on its operating
systems. The General Partner believes that with modifications to
existing software and conversions to new software, the Year 2000
Problem will not pose significant operational problems for its
computer systems.
The costs of the project and the date on which the General
Partner believes it will complete the Year 2000 modifications are
based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the
continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material
differences include, but are not limited tom the availability and
cost of personnel trained in this area, the ability to locate and
correct all relevant computer codes, and similar uncertainties.
Impact of Inflation
Although inflation has slowed in recent years, it is still a
factor in the economy and the Partnership continues to seek ways
to mitigate its impact. To the extent permitted by competition,
in general the Partnership passes increased costs on by
increasing asking rents over time. Operating revenue associated
with rental properties reported in the Partnership's financial
statements have increased in the last year from $6.08 million in
1996 to $6.24 million in 1997 (a 2.6% decrease). The increased
revenue is due to increases in both asking rents and in
occupancy. The gross potential rent increased from $6,380,000 in
1996 to $6,575,000 in 1997, a 3.1% increase. Occupancy increased
from 92.9% in 1996 to 93.4% in 1997. The changes in gross
potential rent and in occupancy at each location follows:
Pelican Sound gross potential rent increased from $2,592,000 in
1996 to $2,677,000 in 1997 (a 3.3% increase). Occupancy
increased from 94.7% in 1996 to 96.7% in 1997.
The Meadows II gross potential rent increased from $2,136,000 in
1996 to $2,198,000 in 1997 (a 2.9% increase). Occupancy
decreased from 90.2% in 1996 to 89.2% in 1997.
Town Place gross potential rent increased from $1,653,000 in 1996
to $1,700,000 in 1997 (a 2.8% increase). Occupancy was
relatively flat, increasing from 93.4% in 1996 to 93.6% in 1997.
The Partnership attempts to pass most cost increases through to
the residents by adjusting the asking rents for apartments. The
General Partner believes that the ability to increase rental
rates on apartment units should offset any adverse effects from
inflation on the Partnership's cost of operations. The General
Partner anticipates that demand for residential rental units in
the Clearwater and St. Petersburg, Florida areas will remain
stable to high and will hopefully improve in Madison, Wisconsin.
Real estate held for production is accounted for the same way as
productive assets are accounted for in other industries. Such
assets are normally carried at historical cost less accumulated
depreciation. However, real estate is generally considered to be
a hedge against inflation by typically increasing in value rather
than depreciating. Appreciation results from both inflation and
supply and demand factors. The charges to operations for
depreciation represent the allocation of historical costs
incurred over past years and are significantly less than if they
were based on the current cost of replacing the property. Three
types of depreciation affect the economic value of the real
estate: physical depreciation such as wear and tear, functional
depreciation or obsolescence, such as outmoded or poor design,
layout or fixtures, and economic depreciation or obsolescence,
caused by factors outside the property itself, such as a
declining neighborhood. Depreciation for financial statement
purposes is the systematic allocation of the cost of a property
to separate fiscal periods. Such write-off does not necessarily
relate to an actual decline in the value of a property.
The Partnership's investment in the Apartments currently owned
was made between January 1989 and November 1993. The various
Apartments were constructed over a period of time ranging from
1975 to 1987. The Apartments have an estimated remaining useful
life ranging up to 26 years for buildings and improvements as of
December 31, 1997. Carpeting, appliances, and other furnishings
and equipment are depreciated over five years for financial
statement purposes. Capitalized additions acquired in prior
years will, of course, be replaced at higher costs but this will
take place over many years. These new assets will result in
higher depreciation charges; but in many cases, due to
technological improvements, there should be operating cost
savings as well. It is not the intention of the Partnership to
hold the investment properties until fully depreciated
economically. The Partnership considers these matters in setting
its pricing policies with respect to asking rents.
The value of the Partnership's Apartments can be affected by
inflation in a number of ways. To the extent that general
inflation in the economy has the effect of increasing the general
level of interest rates, the value of the Partnership's property
could be adversely affected, inasmuch as prospective purchasers
of the Apartments may be unable to secure suitable financing for
their purchase. Also, higher interest rates could affect the
ability of the Partnership to secure suitable financing for a
replacement property should any Apartments be exchanged.
Conversely, inflation which results in higher real estate values
could serve to enhance the Partnership's revenues, particularly
to the extent that when the Partnership elects to sell the
Apartments it is thereby able to do so at higher prices.
Inflation had no material effect on the results of operations in
1997 and 1996.
Item 7. Financial Statements
The response to this Item is submitted in a separate section of
this report.
Item 8. Changes in and Disagreements on Accounting and Financial
Disclosure
There have been no disagreements with Ernst & Young LLP, the
Partnership's independent auditors, on any matter of accounting
principles or practices, financial statement disclosure, or
auditing scope or procedure.
Part III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
(a) Directors and Executive Officers.
Neither the Partnership nor Decade Companies, its General
Partner, has a Board of Directors.
The names, ages and business experience of the general partners
of Decade Companies are as follows:
Mr. Jeffrey Keierleber (age 44), is a licensed real estate broker
and securities agent. He is the sole Director of the Corporate
General Partner for various limited partnerships and serves as a
co-General Partner in the public limited partnerships sponsored
by Affiliates of Decade Companies, and he is a General Partner in
all of the non-public limited partnerships sponsored by
Affiliates of Decade Companies. Mr. Keierleber is a shareholder,
officer, and director of a number of affiliated corporations.
Decade 80, Inc., a corporation wholly owned by Mr. Keierleber,
was admitted as a general partner of the General Partner in
December 1992. Mr. Keierleber is to sole director and President
of Decade 80, Inc. and Mr. Michael G. Sweet is its Secretary.
(b) Significant employees.
The names, ages and business experience of significant employees
of the General Partner and its affiliates are as follows:
Mr. Steven Cooper (age 53), is a Certified Property Manager and
has served as Vice-President of Decade Properties, Inc. since
1989.
Mr. Michael G. Sweet (age 48), is a Certified Public Accountant
and has served as the Controller of Decade Companies and
Partnership Manager of the Decade-sponsored partnerships since
1982, and as an officer and/or director of various affiliated
entities since 1988.
(c) Family relationships.
There is no family relationship between any of the foregoing
individuals.
(d) Involvement in certain legal proceedings. None.
(e) Compliance with Section 16(a) of the Exchange Act
Under the securities laws of the United States, the Partnership's
directors, its executive officers, and any persons holding more
than 10% of the Partnership's Interests are required to report
their initial ownership of the Partnership's Interests and any
subsequent changes in that ownership to the SEC. Specific due
dates for these reports have been established, and the
Partnership is required to disclose any failure to file by those
dates. The Partnership believes that all of these filing
requirements were satisfied during the year ended December 31,
1997. In making these disclosures, the Partnership has relied
solely on written representations of those persons it knows to be
subject to the reporting requirements and copies of the reports
that they have filed with the SEC.
Item 10. Executive Compensation
(a) Cash compensation
(1)The Partnership does not have a chief executive officer
("CEO"). Jeffrey Keierleber is the individual general partner of
the General Partner and serves in the capacity of CEO.
(2)Entities controlled by or affiliated with Jeffrey Keierleber
receive other compensation for services as set forth in Item 12
herein.
(b) Summary Compensation Table: N/A. No cash or non-cash
compensation has been paid or distributed during the last fiscal
year to the general partners of Decade Companies.
(c) Option/SAR Grants Table: No options or stock appreciation
rights have been granted.
(d) Aggregated Option/SAR Exercises and Fiscal Year-End
Option/SAR Value Table: No options or stock appreciation rights
have been granted.
(e) Long-Term Incentive Plan Awards Table: None.
(f) Compensation of Directors: None.
(g) Employment contracts and termination of employment and
change-in-control arrangements: None.
(h) Report on repricing of options/SAR's: None.
Item 11. Security Ownership and Certain Beneficial Owners and
Management
(a) Security ownership of certain beneficial owners.
Persons who are the beneficial owners of more than five percent
of the voting securities as of March 20, 1998 are:
(1) (2) (3) (4)
Title of Class Name and Amount and Percent of Class
Address of Nature of
Beneficial Beneficial
Owner Owner
Limited Partner Jeffrey Keierleber 1,845.870 13.775%
Interests 240 Bayside Drive
Clearwater, FL 34630
Relatives and affiliates of the General Partner own 35.69
additional Interests and Decade Properties, Inc., a corporation
wholly owned by Mr. Keierleber, owns 8.0 Interests (not included
above).
(b) Security ownership of management: See response to item (a).
(c) Changes in control. None.
Item 12. Certain Relationships and Related Transactions
Decade Companies, the General Partner of the Partnership, was
reimbursed for expenses of $116,628 in 1997 and $93,929 in 1996.
Additional acquisition fees of $97,150 and interest earned of
$196,753 on deferred acquisition fees were recorded in 1997.
Decade Properties, Inc., wholly-owned by Jeffrey Keierleber, the
Managing General Partner of Decade Companies, the General Partner
of the Partnership, manages the Apartments. During the last two
years Decade Properties, Inc. earned property management fees of
$490,418 in 1997 and $471,576 in 1996, reimbursed expenses of
$842,319 in 1997 and $906,474 in 1996 including the site property
management staff, and interest on real estate sales commissions
of $28,588 in 1997 and $28,588 in 1996 (earned but not paid, and
payment is subordinated as set forth in the Partnership
Agreement).
The Partnership is required to pay a distributive share of cash
flow to the General Partner. When and as quarterly cash
distributions are made to the Limited Partners, 99% of all
distributable cash, as defined in the Agreement of Limited
Partnership, will be distributed to the Limited Partners and 1%
to the General Partner. Distributions of $5,459 were paid to the
General Partner during 1997 compared to $2,824 in 1996.
When the Partnership sells or refinances Partnership property,
the net sale proceeds resulting therefrom after repayment of any
General Partner's loan and payment of deferred fees, will be
distributed to Limited Partners until such time as they have
received a return of their capital investment plus any deficiency
in their 6% cumulative priority return. The remaining sale or
refinancing proceeds available for distribution will be
distributed 88% to the Limited Partners and if, after the
foregoing distributions of net sale proceeds, the Limited
Partners have not received their capital investment plus a
cumulative preference of 10% per annum on their capital
investment, they will receive an amount equal to the amount of
such deficiency in such return and any balance remaining, not to
exceed 12% of the net sale proceeds, will be distributed to the
General Partner. To date, no amounts have been paid.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits and Index of Exhibits and
(b) Description of Exhibits
Description
Exhibit 3 Certificate of Limited Partnership Agreement,
previously filed with Form 8A.
Exhibit 10 Forms of Material Contracts
(10.1) Form of Acquisition Agreement, previously filed with
Registration Statement on August 28, 1985.
(10.2) Management Consulting Agreement, previously filed with
Registration Statement on August 28, 1985.
(10.3) Form of Property Management Agreement. (filed
herewith).
(10.4) Security Agreement between Partnership and Home Savings
of America, F.A., previously filed with Amendment No. 1
to Form 10-K/A on December 5, 1996.
(10.5) Mortgage for Adjustable Interest Rate Loan between
Partnership and Home Savings of America, F.A.,
previously filed with Amendment No. 1 to Form 10-K/A on
December 5, 1996.
(10.6) Mortgage Modification Agreement between Pelican Sound
Apartments, Inc., Fengar Investment Corporation, and
River Bank America, previously filed with Amendment No.
1 to Form 10-K/A on December 5, 1996.
(10.7) Term Loan Agreement between River Bank America, Pelican
Sound Apartments, Inc. and Fengar Investment
Corporation, previously filed with Amendment No. 1 to
Form 10-K/A on December 5, 1996.
(10.8) Loan Agreement between Republic Bank and the
Partnership, previously filed with Amendment No. 1 to
Form 10-K/A on December 5, 1996.
(10.9) Mortgage between Republic Bank and the Partnership,
previously filed with Amendment No. 1 to Form 10-K/A on
December 5, 1996.
(10.10) Nonrecourse Agreement between Home Savings of America
and the Partnership, previously filed with Amendment
No. 1 to Form 10-K/A on December 5, 1996.
(10.11) Mortgage Consolidation and Modification Agreement
between Pelican Sound Limited Partnership and River
Bank America, previously filed with Amendment No. 1 to
Form 10-K/A on December 5, 1996.
(10.12) Fee Agreement For Purchase and Sale of Pelican Sound,
previously filed with Amendment No. 1 to Form 10-K/A on
December 5, 1996.
(10.13) Regulatory Agreement Concerning The Meadows loans,
previously filed with Amendment No. 1 to Form 10-K/A on
December 5, 1996.
Exhibit 27 Financial Data Schedule (filed herewith) *
* copy available to Limited Partners upon request.
(c) Financial Data Schedule.
A Financial Data Schedule was submitted in the electronic format
prescribed by the EDGAR Filer Manual setting forth the financial
information specified in the applicable table in the Appendixes
to this item.
(d) Reports on Form 8-K filed in the fourth quarter of 1997.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Decade Companies Income Properties
(Registrant)
Decade Companies
General Partner
March 26, 1998 By /s/ Jeffrey L. Keierleber
Dated Jeffrey L. Keierleber, General Partner of Decade
Companies
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed in the capacities and on the
dates indicated.
March 26, 1998 By /s/ Jeffrey L. Keierleber
Dated Jeffrey L. Keierleber, Principal Executive
Officer and Principal Financial and Accounting
Officer of the Registrant
ANNUAL REPORT ON FORM 10-KSB
ITEM 7
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
DECADE COMPANIES INCOME PROPERTIES - A LIMITED PARTNERSHIP
BROOKFIELD, WISCONSIN
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,355,879
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,440,748
<PP&E> 31,381,408
<DEPRECIATION> 7,601,850
<TOTAL-ASSETS> 26,416,550
<CURRENT-LIABILITIES> 4,198,766
<BONDS> 23,184,986
<COMMON> 0
0
0
<OTHER-SE> 397,260
<TOTAL-LIABILITY-AND-EQUITY> 26,416,550
<SALES> 6,238,484
<TOTAL-REVENUES> 6,366,093
<CGS> 0
<TOTAL-COSTS> 4,707,034
<OTHER-EXPENSES> 312,656
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,000,171
<INCOME-PRETAX> (653,768)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (653,768)
<EPS-PRIMARY> (48.30)
<EPS-DILUTED> (48.30)
</TABLE>
Financial Statements
Decade Companies Income Properties
Years ended December 31, 1997 and 1996
with Report of Independent Auditors
Decade Companies Income Properties 31, 1997 and 1996
CONTENTS
Report of Independent Auditors 1
Financial Statements
Balance Sheet 2
Statements of Operations 3
Statements of Partners' Capital (Deficit) 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Report of Independent Auditors
The Partners
Decade Companies Income Properties 31, 1997, and the related
statements of operations, partners' capital (deficit) and
cash flows for each of the two years in the period ended
December 31, 1997. These financial statements are the
responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
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 Decade Companies Income Properties 31, 1997,
and the results of its
operations and its cash flows for each of the two years in
the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
January 27, 1998
Chicago, Illinois
Decade Companies Income Properties
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash and cash equivalents $ 2,171,502
Prepaid expenses and other assets 84,869
Escrow deposits 184,377
Investment properties, at cost:
Land 5,305,536
Buildings and improvements 23,405,877
Equipment 2,669,995
31,381,408
Less accumulated depreciation (7,601,850)
23,779,558
Deferred financing costs, net
of accumulated amortization of $81,290 196,244
$26,416,550
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities:
Tenant security deposits $ 147,050
Accounts payable 56,328
Unearned rent 38,810
Accrued real estate taxes 247,456
Accrued interest payable 37,217
Distributions payable 167,504
Payables to affiliates 3,752,757
Mortgage notes payable 22,898,887
27,346,009
Partners' capital (deficit):
General Partner (84,069)
Limited Partners (Interests
authorized -- 18,000; Interests
outstanding -- 13,400.27) (845,390)
(929,459)
$26,416,550
</TABLE>
See accompanying notes.
<PAGE>
Decade Companies Income Properties
Year ended
December 31
1997 1996
Operating revenue associated
with investment properties:
Rentals $6,001,015 $5,838,844
Other 237,469 244,275
6,238,484 6,083,119
Operating expenses associated
with investment properties:
Operating 2,589,010 2,563,565
Administrative 291,793 256,871
Depreciation 1,114,581 1,093,732
Interest, including
amortization of financing
costs 1,774,830 1,659,554
Real estate taxes 711,650 699,785
6,481,864 6,273,507
Loss from operations of
investment properties (243,380) (190,388)
Other Partnership income (expenses)
Interest income 127,609 152,515
Interest on payables
to affiliates (225,341) (28,588)
Administrative expenses (312,656) (222,160)
(410,388) (98,233)
Net loss $ (653,768) $(288,621)
Net loss attributable to
General Partner (1%) $ (6,538) $ (2,886)
Net loss attributable to
Limited Partners (99%) (647,230) (285,735)
$ (653,768) $(288,621)
Weighted average Limited
Partnership Interests
Outstanding 13,400.27 17,127.97
Net loss per weighted average
Limited Partnership Interest $ (48.30) $ (16.68)
See accompanying notes.
Decade Companies Income Properties
<PAGE>
<TABLE>
<CAPTION>
General Limited
Limited Partner's Partners'
Partnership Capital Capital
Interests (Deficit) (Deficit) Total
<S> <C> <C> <C> <C>
Balances at January 1, 1996 17,466.31 $(69,185) $3,110,465 $3,041,280
Distributions to Partners -- (2,730) (604,163) (606,893)
Repurchase of Limited Partners'
Interests (4,066.04) -- (1,634,546) (1,634,546)
Tender offer costs -- -- (113,960) (113,960)
Net loss for the year -- (2,886) (285,735) (288,621)
Balances at December 31, 1996 13,400.27 (74,801) 472,061 397,260
Distributions to Partners -- (2,730) (670,018) (672,748)
Tender offer costs -- -- (203) (203)
Net loss for year -- (6,538) (647,230) (653,768)
Balances at December 31, 1997 13,400.27 $(84,069) $(845,390) $(929,459)
</TABLE>
See accompanying notes.
<PAGE>
Decade Companies Income Properties
Year ended December 31,
1997 1996
Operating activities
Net loss for the year $(653,768) $(288,621)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation 1,114,581 1,093,732
Amortization of deferred
financing costs 34,942 23,261
Changes in operating assets
and liabilities:
Prepaid expenses and other
assets 50,705 2,246
Escrow deposits (6,476) 8,802
Tenant security deposits (27,079) 4,760
Accounts payable (55,236) 30,210
Unearned Rent 38,810 --
Accrued real estate taxes 12,275 (34,187)
Accrued interest payable (281) (473)
Payables to affiliates 185,446 60,823
Net cash provided by
operating activities 693,919 900,553
Investing activities
Withdrawal from Like-Kind
Exchange Escrow Trust -- 497,390
Net additions to
investment properties (181,061) (175,960)
Net cash (used in)
provided by investing
activities (181,061) 321,430
Financing activities
Repurchase of Limited
Partners' Interests -- (1,634,546)
Payment of tender offer
costs (203) (113,960)
Net proceeds from issuance
of mortgage note payable -- 6,700,000
Proceeds from note payable
to bank -- --
Payments on note payable
to bank -- --
Additions to debt issue
costs -- (208,009)
Payments on mortgage notes
payable (286,099) (2,743,547)
Distributions paid to
Limited Partners (670,018) (654,990)
Distributions paid to
General Partner (5,459) (2,824)
Net cash (used in)
provided by financing
activities (961,779) 1,342,124
(Decrease) increase in
cash and cash equivalents (448,921) 2,564,107
Cash and cash equivalents
at beginning of year 2,620,423 56,316
Cash and cash equivalents
at end of year $2,171,502 $2,620,423
See accompanying notes.
Decade Companies Income Properties
1. ORGANIZATION AND BASIS OF ACCOUNTING
ORGANIZATION
Decade Companies Income Properties -- A Limited Partnership
(the Partnership) was organized as a limited partnership
under the laws of the State of Wisconsin pursuant to a
Certificate and an Agreement (the Agreement) of Limited
Partnership dated June 6, 1985, for the purpose of investing
primarily in residential and commercial real property. The
Agreement terminates on or before December 31, 2005. The
Partnership began operations June 9, 1986. The Partnership
operates three residential apartment complexes located in
Madison, Wisconsin, Clearwater, Florida, and St. Petersburg,
Florida.
The Partnership consists of a General Partner, Decade
Companies -- A General Partnership (Decade Companies), of which
Jeffrey Keierleber and Decade 80, Inc. are the general
partners, and 1,297 Limited Partners at December 31, 1997.
BASIS OF ACCOUNTING
The accompanying financial statements, which have been
prepared in accordance with generally accepted accounting
principles (GAAP), will differ from the income tax returns
due to the different treatment of various items as specified
by the Internal Revenue Code. The net effect of these
accounting differences is as follows for 1997:
GAAP Tax
Basis Basis
(In Thousands)
Total assets $26,416 $26,281
Partners' capital (deficit):
General Partner (84) (72)
Limited Partners (845) 4,636
Net loss:
General Partner (7) (3)
Limited Partners (647) (287)
Decade Companies Income Properties
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH EQUIVALENTS
The Partnership considers all highly liquid investments with
a maturity of three months or less when purchased to be cash
equivalents.
DEPRECIATION
Depreciation is computed by the straight-line method using
estimated useful lives of 30 years for the buildings and
improvements and 5 years for related equipment.
INVESTMENT PROPERTY
The Partnership evaluates investment properties periodically
for indication of impairment, including recurring operating
losses and other significant adverse changes in the business
climate that affect the recovery of the recorded asset
value. If investment property is considered impaired, a
loss is provided to reduce the net carrying value of the
asset to its estimated fair value. Management is not aware
of any indicator that would result in any significant
impairment loss.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized using the straight-
line method over the term of the agreement (see Note 5) and
are included as a component of interest expense in the
financial statements.
FEES TO AFFILIATES
Fees related to the offering, organizational and acquisition
stages of the Partnership paid to the General Partner or
affiliates, and deferred interest related thereto, are
limited to a maximum amount as defined in the Partnership
prospectus. The Partnership is considered at the maximum
amount of fees as of December 31, 1997 (see Note 7).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Acquisition fees, mortgage placement and mortgage brokerage
fees, property management fees and real estate sales
commissions are payable to the General Partner or affiliates
of the General Partner. These fees are capitalized or
charged to expense as follows:
Acquisition Fees
Acquisition fees designated for selection, negotiation and
purchase of Partnership properties have been capitalized as
investment property and allocated to land, buildings and
improvements and equipment based on appraised values. The
portions allocated to buildings, improvements and equipment
are being depreciated over the respective lives of the
buildings, improvements and equipment.
Mortgage Placement and Mortgage Brokerage Fees
Fees for services rendered in locating potential borrowers
and investigating their credit-worthiness for placement of
mortgage loans are payable by the Partnership to the extent
not paid by the mortgagor. Any fees paid by the Partnership
will be charged to expense over the terms of the mortgage
loans.
Property Management Fees
Fees for property management and rental services are being
charged to expenses over the period property management
services are being performed. The fee is defined in the
partnership agreement.
Real Estate Sales Commissions
Fees may be earned for services rendered related to the sale
of Partnership property, as defined in the Partnership
prospectus. Payment of such fees to an affiliate of the
General Partner shall be subordinated to a return to the
Limited Partners equal to their original capital
contribution plus a 6% per annum cumulative return.
EXPENSES OF OFFERINGS
Sales commissions, underwriting fees and reimbursed
syndication costs paid to the General Partner or affiliates
of the General Partner in connection with the capital
offering have been recorded as a charge to Limited Partners'
capital, as well as certain costs associated with tender
offer purchases of Limited Partner Interests.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REIMBURSED EXPENSES
The Partnership reimburses the General Partner and
affiliates of the General Partner for the actual cost of
goods and materials used by or for the Partnership in the
course of performing the general functions of the
Partnership. These general functions include accounting,
investor communications, investor documentation, legal
services, tax services, computer services, risk management,
and any other related operational and administrative
expenses necessary for the prudent organization and
operation of the Partnership.
ALLOCATIONS AND DISTRIBUTIONS
Pursuant to the Agreement, net income and losses from
operations (exclusive of those from the sale or disposition
of Partnership properties) are to be allocated 99% to the
Limited Partners and 1% to the General Partner. In computing
net income and losses from operations, depreciation expense
is allocated differently to taxable and nontaxable entities.
Any gains from the sale or disposition of Partnership
properties will be allocated: 1) 99% to the Limited Partners
and 1% to the General Partner until the cumulative gains are
equal to any losses from the sale or disposition of
Partnership property for all prior periods; 2) to the
Limited Partners until their cumulative gains equal the sum
of all sales commissions, underwriting fees, and reimbursed
syndication costs for the current year and all prior years,
any losses from the sale or disposition of Partnership
property for the current year and all prior years, and an
amount equal to 6% per annum, cumulative and noncompounded,
on the Limited Partners' capital investment minus prior
distributions of cash available for distribution or to the
extent that prior distributions of sales proceeds exceed the
Limited Partners' original capital investment ("priority
return") from the inception of the Partnership to the end of
the current year; 3) to the General Partner an amount equal
to the distributions made to the General Partner under
(iii)(b) below; 4) to the General Partner an amount equal to
the distributions made to the General Partner pursuant to
(iv) below; 5) to the Limited Partners until cumulative
gains allocated to them are equal to (v) below; 6) to the
Limited Partners until cumulative gains allocated to them
are equal to (vi) below; and 7) to the General Partner until
cumulative gains allocated to the General Partner are equal
to (vii) below. Any losses from the sale or disposition of
Partnership properties will be allocated 99% to the Limited
Partners and 1% to the General Partner.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash available for distribution, as defined in the
Agreement, will be distributed 99% to the Limited Partners
and 1% to the General Partner. Proceeds from the sale or
disposition of Partnership properties, if any, remaining
after repayment of any General Partner's loan and payment of
deferred fees, will be distributed as follows: (i) to the
Limited Partners, an amount equal to 100% of their original
capital contribution minus any prior distributions of sales
proceeds; (ii) to the Limited Partners, an amount to provide
their priority return; (iii) to the General Partner an
amount equal to the greater of the excess of (a) its capital
contribution over the sum of all prior distributions of
sales proceeds or (b) 1% of such sales proceeds; (iv) in the
case of the sale of any property in which brokerage services
are actually performed by the General Partner or an
affiliate, to the General Partner or an affiliate, an amount
equal to its subordinated real estate commission(generally
up to 3% of the aggregated selling price of all properties);
(v) of the remaining proceeds, 88% to the Limited Partners;
(vi) then, to the Limited Partners, the deficiency, if any,
in return of capital plus a cumulative preference of 10% per
annum on their capital investment; and (vii) to the General
Partner, the remaining balance (not to exceed 12% of the
proceeds remaining after the distributions in accordance
with (i) through (iv) above).
NET LOSS PER LIMITED PARTNERSHIP INTEREST
Net loss per Limited Partnership Interest is based on 99% of
net loss as allocated to the Limited Partners divided by the
weighted average number of Interests outstanding during the
year.
3. REPURCHASE OF LIMITED PARTNERS' INTERESTS
On November 29, 1996, the Partnership repurchased and
retired 4,066.036 Limited Partnership Interests for $402 per
Interest. The Partnership paid $1,634,546 to these Limited
Partners prior to December 31, 1996. Costs related to the
tender offer amounted to approximately $113,960 in 1996 and
$203 in 1997, and were charged against Limited Partners'
capital.
4. INVESTMENT PROPERTIES
Investment properties owned at December 31, 1997, are as
follows:
<PAGE>
<TABLE>
<CAPTION>
Costs Capitalized
Initial Cost to Partnership Subsequent to Acquisition
Buildings and Buildings and
Description Encumbrances Land Improvements Equipment Improvements Equipment
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Meadows II Apartments
Madison, Wisconsin $ 6,523 $1,144 $ 9,227 $ 44 $ 7 $ 393
Town Place Apartments
Clearwater, Florida 6,589 1,518 5,270 252 -- 434
Pelican Sound Apartments
St. Petersburg, Florida 9,787 2,644 8,801 861 101 287
$22,899 $5,306 $23,298 $1,555 $108 $1,114
</TABLE>
<TABLE>
<CAPTION>
Gross Amount at Which Carried
Buildings and Accumulated
Description Land Improvements Equipment Total Depreciation
(In Thousands)
<S> <C> <C> <C> <C> <C>
Meadows II Apartments
Madison, Wisconsin $1,144 $ 9,234 $ 835 $11,213 $3,443
Town Place Apartments
Clearwater, Florida 1,518 5,270 686 7,474 1,973
Pelican Sound Apartments
St. Petersburg, Florida 2,644 8,902 1,148 12,694 2,186
$5,306 $23,406 $2,669 $31,381 $7,602
</TABLE>
<TABLE>
<CAPTION>
Description Date of Construction Date Acquired
<S> <C> <C>
Meadows II Apartments,
Madison, Wisconsin In phases through 1980 January 1989
Town Place Apartments,
Clearwater, Florida 1985 February 1990
Pelican Sound Apartments,
St. Petersburg, Florida 1987 November 1993
</TABLE>
<PAGE>
4. INVESTMENT PROPERTIES (CONTINUED)
A reconciliation of the cost and accumulated depreciation of
the investment properties at December 31, 1997 follows (in
thousands):
Cost:
Balance at beginning of year $31,104
Additions to investment properties 278
Balance at end of year $31,382
Accumulated depreciation:
Balance at beginning of year $ 6,487
Provision for the year 1,115
Balance at end of year $ 7,602
The aggregate cost of the investment properties for federal
income tax purposes is $28,402,550 because the acquisition
fees and sales commission payable to the General Partner are
capitalizable for financial reporting purposes only. The
accumulated depreciation for federal income tax purposes was
$7,048,100 at December 31, 1997.
5. MORTGAGE NOTES PAYABLE
Mortgage notes payable consist of the following at December
31, 1997:
Mortgage note payable in monthly
installments of $21,952, including
interest at 7.5%, with final payment
due December 1, 2021. $ 2,928,463
Mortgage note payable with interest
accruing at 2.48% over the monthly
weighted average cost of funds of
the bank, adjusted monthly, with
maximum and minimum rates of 14.75%
and 6.75%, respectively (7.421% at
December 31, 1997). Monthly payments
of principal and interest are computed
annually ($27,698 commencing
January 10, 1998). The final payment is
due December 10, 2004. 3,594,533
Mortgage note payable in monthly
installments of $52,286, including
interest at 8.25%, with final payment
due May 16, 2003. 6,588,672
Mortgage note payable with monthly
interest installments at 7.0% for two
years. Monthly installments of $67,184,
including interest at 7.0%, thereafter,
with final payment due December 1, 1998,
unless the term is extended for an
additional five years as described in the
mortgage note agreement. 9,787,219
$22,898,887
The 7.5% mortgage note is insured under the National Housing
Act and, as a result, the operation of the rental property
is subject to the terms of the Regulatory Agreement between
the Partnership and the Department of Housing and Urban
Development (HUD). The mortgage is secured by the Meadows II
property. Under the terms of the Regulatory Agreements,
certain actions, including the payment of any distributions
to the Partners from surplus cash generated by the Project,
require the approval of The Federal Housing Administration
as an agent for HUD.
Among other requirements, the Regulatory Agreement between
the Partnership and HUD requires a complete annual financial
report to be provided to the Secretary of HUD for the
portion of the property (Phase IV) which secures the HUD
mortgage loan. During 1997 HUD rejected, for purported
noncompliance, the Partnership's financial reports for 1995
and 1996. Similar financial reports for the years 1989 to
1994 were submitted to, and accepted by, HUD. HUD is
requesting that separate books and records be maintained to
segregate the operation of Phase IV as if it were a separate
property.
5. MORTGAGE NOTES PAYABLE (CONTINUED)
The Partnership has not resolved this matter with HUD, and
HUD has not taken any further action. As one of its
remedies, HUD may attempt to declare the mortgage note to be
in default and consequently the mortgage note may become
due upon demand. Upon such event the Partnership has not
decided which course of action will be taken. The
Partnership more likely than not would seek to refinance the
debt with another lender during the foreclosure period.
However, the Partnership would not consider the possibility
of reverting the property to the mortgage lender, in which
case the Partnership would sustain a loss. As of December
31, 1997, the carrying amount of the affected real estate
pledged as collateral was $3,489,344 and related outstanding
debt was $2,928,463. No provision for gain or loss, if any,
has been made in the financial statements.
The Meadows II, Town Place and Pelican Sound Apartments
investment properties and all associated operating revenues
are pledged as collateral for the mortgage notes payable.
Interest paid with respect to the mortgage notes and other
indebtedness was $1,740,169, and $1,636,766 in 1997 and
1996, respectively. Aggregate annual maturities of the
mortgage notes payable for the five years subsequent to
December 31, 1997, are as follows: $9,970,000 -- 1998;
$198,000 -- 1999; $214,000 -- 2000; $232,000 -- 2001 and
$251,000 -- 2002.
6. INCOME TAXES
The Partnership pays no income taxes. Partnership losses or
income and taxes attributable thereto will be the
responsibility of the various Partners.
Differences between the net loss as reported herein and net
loss reported for federal income tax purposes arise from
temporary differences related to depreciation, disposition
of investment property and accrual-basis adjustments. The
following is a reconciliation of reported net loss and net
loss reported for federal income tax purposes:
YEAR ENDED DECEMBER 31,
1997 1996
Net loss as reported
for financial reporting
purposes $(653,768) $(288,621)
Add:
Depreciation 178,228 124,096
Accrual basis adjustments 185,446 60,824
Net loss reported for
federal income tax
purposes $(290,094) $(103,701)
7. TRANSACTIONS WITH RELATED PARTIES
Decade Companies and its general partners are general
partners for other limited partnerships which have invested
in real estate. The Partnership also shares certain
management and accounting employees and other expenses with
entities that are controlled by Decade Companies and its
general partner. The Partnership has executed certain
contracts providing for the following fees payable to the
General Partner or to affiliates of the General Partner:
Decade Companies
In accordance with restrictions set forth in the prospectus,
the General Partner reviewed the calculations of front end
fees allowed under the Limited Partnership Agreement during
1997 and calculated additional acquisition fees of $97,150
and interest on acquisition fees of $196,753 payable to the
General Partner. The additional acquisition fee was
capitalized to the basis of the property and the interest
expense representing amounts incurred for 1997 has been
included with interest expense in the financial statements.
Accordingly, acquisition fees of $2,243,785 are payable to
Decade Companies at December 31, 1997. Such fees were
capitalized as part of the cost of the investment
properties. Accrued interest on these fees were $594,424 at
December 31, 1997.
In addition, mortgage placement fees of $90,246 are payable
to Decade Companies at December 31, 1997.
Decade Properties, Inc.
Decade Properties, Inc. (Decade Properties) earned the
following amounts from the Partnership: property management
fees ($490,418 -- 1997; $471,576 -- 1996) interest on real estate
sales commissions ($28,588 -- 1997; $28,588 -- 1996).
Real estate sales commissions of $440,700 are payable to
Decade Properties at December 31, 1997. Accrued interest on
these fees was $347,792 at December 31, 1997. The payment
of these fees is subordinated to the Limited Partners as
detailed in the Partnership Prospectus.
In addition, other miscellaneous amounts are payable
including payroll reimbursement and property management fees
totaling $35,810 and $75,705 at December 31, 1997 and 1996,
respectively.
7. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
Deferred fees payable to affiliates bear interest at the
minimum rate required under the Internal Revenue Code (the
Code) to avoid imputed interest under the Code and is
payable only from sales proceeds, Partnership operations or
cash reserves. However, as described above and in Note 2,
interest has not been earned on certain deferred fees for
1996.
Reimbursed expenses paid by the General Partner or
affiliates of the General Partner on behalf of the
Partnership were as follows: Decade Companies
($116,628 -- 1997; $93,929 -- 1996) and Decade Properties
($842,319 -- 1997; $906,474 -- 1996).
8. Fair Values of Financial Instruments
Cash and Cash Equivalents
The carrying amount reported in the balance sheet for cash
and cash equivalents approximates its fair value.
Long-Term Debt
The fair value of the Partnership's borrowings under its
variable rate agreement approximates its carrying value, and
the fair value of the mortgage note payable due December 1,
1998, approximates its carrying value due to its short term
nature. The fair value of the Partnership's fixed rate
mortgage notes payable is estimated using a discounted cash
flow analysis, based on the borrowing rates for similar
types of borrowing arrangements. The fair value based on
this analysis is approximately $23,230,000 for all mortgages
at December 31, 1997.
