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, 1998
or
[ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from________________to_______________
Commission file no.: 0-21455
DECADE COMPANIES INCOME PROPERTIES - A LIMITED PARTNERSHIP
(Name of small business issuer in its charter)
Wisconsin 39-1518732
(State or (IRS Employer Identification No.)
other jurisdiction of
incorporation or organization)
250 Patrick Blvd., Suite 140
Brookfield, Wisconsin 53045-5864
(Address of (Zip Code)
principal executive offices)
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. $6,582,284
The aggregate market value of the Limited Partnership Interests ("Interests")
is indeterminable because there is no established or organized market for the
Interests.
<PAGE>ANNUAL REPORT ON FORM 10-KSB
INDEX
YEAR ENDED DECEMBER 31, 1998
DECADE COMPANIES INCOME PROPERTIES - A LIMITED PARTNERSHIP
BROOKFIELD, WISCONSIN
Part I Item Page
Description of Business 1 3
Description of Property 2 9
Legal Proceedings 3 22
Submission of Matters to a Vote of Security Holders 4 22
Part II
Market for Limited Partnership
Interests and Related Partner Matters 5 22
Management's Discussion and Analysis or Plan
of Operations 6 23
Financial Statements 7 40
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 8 41
Part III
Directors, Executive Officers, Promoters and 9 41
Control Persons; Compliance with Section 16(a)
of the Exchange Act
Executive Compensation 10 42
Security Ownership and Certain Beneficial Owners and
Management 11 43
Certain Relationships and Related Transactions 12 44
Exhibits and Reports on Form 8-K 13 45
Signatures 50
Audited Financial Statements 51
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 Apartments was independently appraised at an
estimated value of $9.2 million.
In May 1996, a $2.5 million mortgage loan on Town Place was refinanced with a
new $6.7 million mortgage loan.
In August 1996 Pelican Sound Apartments was independently appraised at an
estimated value of $14.25 million.
In September 1996 The Meadows II Apartments 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 increase 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, agreed 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 from certain Limited Partners pursuant to the
Settlement Agreement.
Subsequent to May 5, 1997, Jeffrey Keierleber continued to purchase Limited
Partner Interests. There were 738.50 Limited Partner Interests purchased from
75 Limited Partners from May 19, 1997 to March 25, 1999, at an average price
to the Limited Partner of $555 per Limited Partner Interest.
In August 1998 The Meadows II was independently appraised at an estimated
value of $12 million.
In August 1998 the Partnership received and accepted a loan commitment from
Associated Bank Milwaukee to refinance the two outstanding mortgage notes on
The Meadows II with a new loan in the amount of $9.15 million.
Effective October 1, 1998, the Partnership refinanced the two outstanding
mortgage loans that encumbered The Meadows II in the total amount of
approximately $6.44 million and replaced the old mortgage notes with a new
mortgage note in the amount of $9.15 million. Approximately $2.56 million of
the new mortgage financing was not disbursed at closing. Such amount may be
disbursed at the discretion of the General Partner.
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 and 1998, all containing conditions, with prices as
described below:
Pelican Sound - 1997: The Partnership received and rejected or countered 24
offers for Pelican Sound Apartments (or expressions of interests to such
effect) averaging $14.1 million.
Pelican Sound - 1998: The Partnership received and rejected or countered
16 offers for Pelican Sound Apartments (or expressions of interests to such
effect). Four of the offers were made for the purchase of Pelican Sound in
combination with Town Place and another property owned by an affiliate of the
General Partner. The proposed prices have ranged from a low of $14,000,000 to
a high of $17,750,000, with an average price of $15,815,000.
The Meadows II - 1997: The Partnership received and rejected or countered
eight offers for The Meadows II Apartments (or expressions of interests to
such effect). 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.
The Meadows II - 1998: The Partnership did not receive any offers.
Town Place - 1997: The Partnership received and rejected or countered 12
offers for Town Place Apartments (or expressions of interests to such effect)
averaging $8.92 million.
Town Place - 1998: The Partnership received and rejected or countered 10
offers for Town Place Apartments (or expressions of interests to such
effect). Four of the offers were made for the purchase of Town Place in
combination with Pelican Sound and another property owned by an affiliate of
the General Partner. The proposed prices have ranged from a low of $8,555,000
to a high of $9,750,000, with an average price of $9,358,000.
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 1999. 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 management 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 1998, 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, 1998, the Partnership's 13,400.27
Interests were held by 1,242 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
offices of Decade Companies and the Partnership are 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 $6.57 million. Town Place is pledged as collateral against a
mortgage encumbrance of $6.51 million. Pelican Sound is pledged as collateral
against a mortgage encumbrance of $9.67 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 the States of 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 Agreement of Limited Partnership permits the Partnership to participate in
joint venture investments with non-Affiliates provided that it acquires a
controlling interest therein. The Partnership is permitted to invest in a
joint venture arrangement with another joint venture formed by the General
Partner or Affiliates provided the Affiliate has identical investment
objectives, there are no duplicate property management or other fees, the
sponsor compensation is substantially identical in each real estate program,
the Partnership is granted the right of first refusal to purchase the real
property if the affiliated joint venturer wishes to sell the property, and the
investment of each of the real estate programs 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 apartment
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
the location 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 on the far northeast perimeter of the City of Madison
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. Neighborhood land uses are dominated by
single family homes with some multifamily residences interspersed, primarily
long main roads. The area around The Meadows II has experienced a great deal
of residential and commercial growth in the 1990's. Commercial growth has
been concentrated around the perimeter of East Towne Mall, a regional shopping
center located to the northeast of The Meadows II. Residential growth has
been concentrated in the areas to the east of East Washington Avenue, the west
of Interstate Highways 90 & 94, south of the East Towne Mall area, and north
of Highways 12 & 18, which includes The Meadows II. Overall, the General
Partner believes that vacant and improved real estate prices have been
increasing in such area since the early 1990's.
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 located on the south side of N. E. Coachman Road approximately
one mile northwest from the intersection of U.S. Highway 19 and Route 60.
The surrounding neighborhood primarily consists of well established, fully
developed, residential properties with supporting commercial facilities lining
the major thoroughfares. The improvements in the neighborhood contain a
mixture of commercial and residential uses. The main traffic arteries are
typically lined with commercial improvements, including offices, service
stations, convenience stores, restaurants, service shops, auto sales/repair
facilities, banks, and other commercial uses. The balance of the surrounding
areas are primarily developed with a mixture of single family and multiple
family development. 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.
Pelican The Town
Sound Meadows II Place
Current principal amount $9,671,474 $6,573,519 $6,509,249
Interest rate 7.625% 7.25% 8.25%
Amortization provisions 349 mo. 25 yr. 311 mo.
Prepayment provisions (1) (2) (3)
Maturity date 12/01/03 09/30/05 05/16/03
Balance due at maturity
assuming no prepayments $8,918,802 $5,737,026 $5,999,567
(1)Prepayment of principal without penalty is permitted in increments of
$100,000 upon 30 days prior written notice.
(2)Borrower may prepay the Loan, in whole or in part, provided Borrower
gives 15 days prior written notice to Lender of such prepayment. Unless the
Loan Amount and all accrued interest are paid in full, no such prepayment will
suspend required payments. Borrower may prepay any or all of the Loan without
premium or penalty if prepayment is made (a) contemporaneously with the bona
fide sale of the Property (as such term is defined in the Mortgage) to a buyer
unaffiliated with Borrower; or (b) within one year before the Maturity Date
(the "No Premium Period"). Otherwise, any prepayment must be accompanied by
an additional amount equal to 2.00% of the amount being prepaid (the
"Prepayment Premium") if made within four years after the Loan Date and 1% of
the amount being prepaid if made later. Following the occurrence of any
default by Borrower and acceleration of the maturity of this Note by Lender
other than during the No Premium Period, a tender of payment of the amount
necessary to satisfy the entire balance of principal will be deemed to
constitute an attempt by Borrower to evade paying the Prepayment Premium.
Therefore, such payment will be deemed to be a prepayment and must include the
Prepayment Premium.
(3)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 1998 1997
GPR OR GPR OR
All Units 935 $622 89% $597 95%
Pelican Sound 379 $633 89% $606 94%
The Meadows II 316 $609 87% $588 95%
Town Place 240 $623 89% $598 97%
The apartment mix and monthly asking rents at Pelican Sound Apartments is:
Number
of Square Asking Rent
Style Units Feet 12/98 12/97
One-bedroom/one bath 128 505 $530-585 $530-585
One bedroom/one bath 156 700 $615-675 $605-675
One-bedroom/one bath/den 27 830 $740-765 $695-705
Two-bedroom/two bath 68 910 $785-810 $745-820
379
The apartment mix and monthly asking rents at The Meadows II Apartments is:
Number
of Square Asking Rent
Style Units Feet 12/98 12/97
One-bedroom 88 625 $540-560 $510-520
One-bedroom/deluxe 12 744 $555-575 $515-530
Two-bedroom/one bath 192 875 $610-680 $585-630
Two-bedroom/1.5 bath/den 12 1,466 $850-900 $820-880
Three-bedroom 12 1,466 $850-900 $820-880
316
The apartment mix and monthly asking rents at Town Place Apartments is:
Number
of Square Asking Rent
Style Units Feet 12/98 12/97
One-bedroom/Suite 36 540 $525-535 $490-520
One bedroom/Garden 72 720 $575-605 $540-625
Two-bedroom/one bath 36 836 $650-670 $635-680
Two-bedroom/two bath 96 1,036 $700-815 $685-780
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 1999 budget includes $100,000 to install a gated
entry; $77,000 for repairs to the balconies and siding; $48,000 to install
individual water meters for each apartment unit so that utilities can be
billed directly to each resident; $42,000 for carpet replacement; $24,000 for
appliances; $20,000 to install a water reclamation system for irrigation;
$12,000 for tile and vinyl replacement; $12,000 for interior repairs to
apartment units; and $8,000 for air conditioners.
At The Meadows II the proposed 1999 budget includes $55,000 for exterior
painting; $49,000 for carpet replacement; $9,000 for appliances; $7,000 for
water heaters; and $6,000 for pool and tennis courts.
At Town Place the proposed 1999 budget includes $50,000 for wood repair to
building exterior; $24,000 for carpet replacement; $10,000 for tile and vinyl
replacement; and $9,000 for air conditioners; $8,000 for landscaping; and
$6,000 for office equipment and furniture.
All renovations are scheduled to be paid for by the Partnership's operating
cash flow.
(5) All three rental properties owned by the Partnership are located in
developed areas that include other multifamily properties. The number of
competitive multifamily properties in a particular area could have a material
effect on the Partnership's ability to lease units at the Properties and on
the rents charged. The Partnership may be competing with other entities that
have greater resources than the Partnership and whose managers have more
experience than that of the management of the General Partner. In addition,
other forms of multifamily properties, including multifamily properties
controlled by the General Partner and affiliates, and single-family housing,
provide housing alternatives to potential residents of multifamily properties.
(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:
Average for year
(i) Occupancy rate 1998 1997
All Apartments 92% 93%
Pelican Sound 93% 97%
The Meadows II 90% 89%
Town Place 93% 94%
(ii) Tenant information
No tenant occupies 10% 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 1998 1997
All Apartments 935 $6,627 $6,418
Pelican Sound 379 $6,877 $6,832
The Meadows II 316 $6,372 $5,900
Town Place 240 $6,568 $6,447
(v) Lease expirations
All leases are scheduled to expire in 1999.
(A) The approximate number of tenants whose leases will expire in 1999 are as
follows:
All Apartments 820
Pelican Sound 340
The Meadows II 280
Town Place 200
(B) The approximate total area in square feet covered by such leases that
will expire in 1999 are as follows:
All Apartments 637,000
Pelican Sound 232,000
The Meadows II 235,000
Town Place 170,000
(C) The approximate annual rental represented by such leases that will
expire in 1999 is as follows:
All Apartments $3,072,000
Pelican Sound $1,274,000
The Meadows II $1,020,000
Town Place $ 778,000
(D) The percentage of gross annual rental represented by such leases that
will expire in 1999 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 762 243 519
Buildings and Improvements 7,805 1,354 6,451
Personal Property 1,182 825 357
Total $12,262 $ 2,422 $ 9,840
Accumulated Tax
The Meadows II Cost Depreciation Basis
(in thousands)
Land $ 1,064 $ 0 $ 1,064
Land Improvements 100 4 96
Buildings and Improvements 8,591 3,020 5,571
Personal Property 870 692 178
Total $10,625 $ 3,716 $ 6,909
Accumulated Tax
Town Place Cost Depreciation Basis
(in thousands)
Land $ 1,190 $ 0 $ 1,190
Land Improvements 2 0 2
Buildings and Improvements 4,169 1,290 2,879
Personal Property 688 555 133
Total $ 6,049 $ 1,845 $ 4,204
(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 and 6.67% for Land Improvements.
(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 and 15
years for land improvements.
(vii) Real estate taxes
Realty Annual
Tax Realty
Rate Taxes
Pelican Sound $25.2282 per $100 $301,936 (1)
The Meadows II $26.6171 per $100 $266,105 (2)
Town Place $22.7830 per $100 $177,867 (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, 1999, there were 1,233 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.
Cash distributions declared to the Limited Partners for the two year period
ended December 31, 1998 were made as follows:
Period Date Amount Distributed
Ended Paid Total Per $1,000 Interest
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
03/31/98 04/24/98 $167,504 $12.50
06/30/98 07/25/98 $167,504 $12.50
09/30/98 10/23/98 $167,504 $12.50
12/31/98 01/22/99 $167,504 $12.50
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, 1998 and present the cash flow and results of operations for the
two years ended December 31, 1998.
Financial Condition
During 1998, cash and cash equivalents decreased by $303,000 from $2,171,000
at December 31, 1997 to $1,868,000 at December 31, 1998. During 1998,
approximately $1,104,000 was generated by operating activities, offset by
$534,000 used in investing activities, and approximately $873,000 used in
financing activities as shown herein on the Statements of Cash Flows.
Approximately $534,000 of fixed asset additions were capitalized during 1998
($274,000 at Pelican Sound, $166,000 at The Meadows II, and $94,000 at Town
Place).
Approximately $150,000 of financing costs were incurred during 1998 to obtain
the new mortgage financing on The Meadows II.
Total liabilities of approximately $27.4 million did not change during 1998.
The outstanding balance of the mortgage loan on Pelican Sound Apartments
averaged $9.78 million during the last two years. The outstanding balance of
the mortgage loans on the Meadows II Apartments averaged $6.57 million during
the last two years. The outstanding balance of the mortgage loans on Town
Place Apartments averaged $6.59 million during the last two years.
The use of leverage through borrowings 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
71.3% of the capitalized cost, compared to 73.0% at the end of 1997.
The use of mortgage financing creates unrelated business taxable income
("UBTI") for Qualified Plan investors. The UBTI for 1998 was approximately
$23 per $1,000 Limited Partner Interest.
Partners' Capital decreased by $755,000 during 1998. The decrease was
attributable to the net loss of $82,000 for financial reporting purposes
(after depreciation and amortization of $1,126,000) 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.
Revenues from 1998 rental operations increased $235,000 from the prior year.
The increase was comprised of increases at The Meadows II ($138,000), Pelican
Sound ($154,000) and Town Place ($43,000). A summary of total operating
revenue by apartment site follows:
Increase Increase
(Decrease) (Decrease)
1998 1997 Amount Percent
Pelican Sound $2,743,000 $2,689,000 $ 54,000 2.0%
The Meadows II 2,063,000 1,925,000 138,000 7.2%
Town Place 1,667,000 1,624,000 43,000 2.6%
Total $6,473,000 $6,238,000 $235,000 3.8%
The $138,000 increase at The Meadows II is attributed to a 3% increase in
asking rents and a 1% increase in average occupancy (from 89% to 90%). The
$54,000 increase at Pelican Sound is attributed to a 6% increase in asking
rents offset by a 4% decrease in average occupancy (from 97% to 93%). The
$43,000 increase at Town Place is attributed to a 3% increase in asking rents
offset by a 1% decrease in average occupancy (from 94% to 93%).
The average monthly gross potential rent per unit at the Apartments for the
two year period was:
Increase Increase
Number (Decrease)(Decrease)
of Units 1998 1997 Amount Percent
All Apartments 935 $611 $586 $25 4.3%
Pelican Sound 379 $622 $589 $33 5.6%
The Meadows II 316 $597 $580 $17 2.9%
Town Place 240 $609 $590 $19 3.2%
"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:
1998 1997
All Apartments 92% 93%
Pelican Sound 93% 97%
The Meadows II 90% 89%
Town Place 93% 94%
The range of occupancy levels at the Apartments for the years was:
1998 1997
All Apartments 88.0-95.2% 91.5-96.0%
Pelican Sound 89.4-97.0% 93.8-98.5%
The Meadows II 86.1-94.7% 83.0-96.1%
Town Place 86.0-97.9% 91.0-97.3%
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 decreased $110,000. The
decrease was comprised of decreases at Town Place ($66,000), The Meadows II
($26,000), and at Pelican Sound ($18,000). A summary of operating expenses
before depreciation and debt service by apartment site follows:
Increase Increase
(Decrease) (Decrease)
1998 1997 Amount Percent
Pelican Sound $1,491,000 $1,509,000 $ (18,000) (1.2%)
The Meadows II 1,076,000 1,102,000 (26,000) (2.4%)
Town Place 915,000 981,000 (66,000) (6.7%)
Total $3,482,000 $3,592,000 $(110,000) (3.1%)
The changes in rental expenses can be explained as follows:
Town Place The $66,000 decrease in expenses at Town Place is primarily
attributable to decrease in various expenses totaling $87,000, offset by
increases in other expenses totaling $21,000. The decreases of $87,000
consist of a $55,000 decrease in utilities; a $25,000 decrease in repairs and
maintenance (consisting of a $22,000 decrease in building exterior repairs,
and a $6,000 decrease in tile and vinyl replacements, offset by a $3,000
increase paving), a $4,000 decrease in property management fees, and a $3,000
decrease in insurance expense. The increases of $21,000 consist of a $13,000
increase in on-site personnel expenses; and an $8,000 increase in building
services (an increase in rubbish expense of $14,000 and fire extinguishers of
$1,000; offset by a decrease in pest control of $7,000).
The Meadows II The $26,000 decrease in expenses at The Meadows II is
primarily attributable to decreases in various expenses totaling $41,000,
offset by a $15,000 increase in on-site personnel expenses. The decreases of
$41,000 consist of a $16,000 decrease in outside contractors (consisting of an
$8,000 decrease in cleaning, a $7,000 decrease in turnover painting, and a
$1,000 decrease in interior painting); a $12,000 decrease in utilities; an
$8,000 decrease in advertising and marketing; and a $5,000 decrease in
grounds.
Pelican Sound The $18,000 decrease in expenses at Pelican Sound is
primarily attributable to decreases in various expenses totaling $56,000,
offset by increases in other expenses totaling $38,000. The decreases of
$56,000 consist of a $27,000 decrease in repairs and maintenance; a $20,000
decrease in utilities; and a $9,000 decrease in grounds expense. The
increases of $38,000 consist of a $14,000 increase in on-site personnel; a
$9,000 increase in supplies; a $4,000 increase in office expenses; a $3,000
increase in property taxes; a $3,000 increase in building services (primarily
pest control); and $5,000 increase in other miscellaneous categories.
The increase in operating revenue of $235,000, along with the decrease in
operating expenses of $110,000, resulted in an increase of $345,000 in net
operating income from property operations before depreciation and debt
service. The increase was comprised of increases at The Meadows II
($164,000), Town Place ($109,000) and Pelican Sound ($72,000). A summary of
operating income before depreciation and debt service by apartment site
follows:
Increase Increase
(Decrease) (Decrease)
1998 1997 Amount Percent
Pelican Sound $1,252,000 $1,180,000 $ 72,000 6.1%
The Meadows II 987,000 823,000 164,000 19.9%
Town Place 752,000 643,000 109,000 17.0%
Total $2,991,000 $2,646,000 $345,000 13.0%
Interest expense increased $52,000. The increase was comprised of an increase
for The Meadows II of $61,000 (resulting from the amortization of loan fees on
the old mortgage debt), offset by decreases for Town Place ($6,000) and
Pelican Sound ($3,000). The decreases for Pelican Sound and Town Place are
the result of interest charged on the decreasing principal balances of the
notes.
After considering the effect of interest expense, 1998 calendar year net
operating income before depreciation was $1,163,000. A summary of net
operating income before depreciation by apartment site follows:
Increase Increase
(Decrease) (Decrease)
1998 1997 Amount Percent
Pelican Sound $ 557,000 $ 481,000 $ 76,000 15.8%
The Meadows II 434,000 333,000 101,000 30.3%
Town Place 172,000 57,000 115,000 201.8%
Total $1,163,000 $ 871,000 $292,000 33.5%
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 decreased $24,000 from 1997 levels.
As a result of the foregoing, net income from investment properties operations
for 1998 was $103,000, compared to a net loss of $243,000 in 1997. 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, decreased approximately $226,000 from 1997
calender year levels. The decrease is attributable to a $123,000 decrease in
interest on payables to affiliates and a $121,000 decrease in administrative
expenses which is primarily attributed to non-recurring litigation costs
incurred during 1997 (the lawsuit was settled during 1997), offset by an
$18,000 decrease in interest income earned.
As a result of the foregoing, net loss for 1998 was $82,000, compared to a net
loss of $654,000 in 1997.
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:
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 for 1997 and $73,400 for 1998. These one-time
adjustments 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 incurred. The decrease in partnership
administration expenses of $121,000 is a direct result of expense this
event.
The Partnership does not expect to incur such litigation expense in the
future.
Liquidity
At December 31, 1998 there was approximately $1.9 million of cash and cash
equivalents and $125,000 of escrow deposits resulting in $2.0 million of
liquidity. The Partnership has a credit line established of approximately
$2.56 million from the undisbursed funds from The Meadows II refinancing to
provide additional liquidity. Liquidity averaged $2.2 million during the
year.
Cash decreased approximately $303,000 during 1998 as shown on the Statement of
Cash Flows. Escrow deposits decreased $60,000 from the prior year balance.
Cash flow of $1,104,000 was generated by operating activities during 1998 as
shown on the Statements of Cash Flows in the annual financial statements. The
1998 cash flow was used to make cash distributions to the partners of
$670,000, of which $124,000 (18.5%) was considered to be portfolio income
subject to income taxes. (Investment interest expense of $142,000 was
available in 1998 to offset all of the portfolio income for income tax
purposes.) The balance of the cash flow provided by operations was used to
pay $434,000 of the total $534,000 of additions to the properties. Cash
reserves were used to make net principal reductions on mortgage notes payable
of $145,000 (proceeds of the new mortgage loan of $6,589,000 less total paid
on mortgage notes of $6,734,000), to fund the $100,000 balance of additions to
investment properties, and to pay debt issue costs of $59,000.
The General Partner believes that the Partnership has the ability to generate
adequate amounts of cash to meet the Partnership's needs.
Short-term obligations total $4.1 million, consisting of $752,000 of current
liabilities, $312,000 of mortgage principal liabilities, and $3,037,000
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 1998 of $1,229,000 (before depreciation and amortization of
$1,126,000) compared to $906,000 in 1997.
The Partnership intends, but is not required, to continue to declare quarterly
cash distributions in 1999 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 1999. Through December 31, 1998 the
Partnership distributed approximately $12.5 million to the limited partners
since inception. Cumulative cash distributions range from $670 to $817 per
Interest of an original holder depending upon the date of purchasing the
Interest.
The long-term mortgage obligations of the Partnership require principal
reductions (excluding balloon payments) of $1.8 million over the next five
years. These obligations should be satisfied by cash generated from
operations. In the year 2003 two of the mortgage notes require balloon
payments that will total $14.9 million ($8.9 million for Pelican Sound and
$6.0 million for Town Place). It is anticipated that both properties will be
sold or refinanced prior to the maturity dates in 2003.
Approximately $3.8 million of deferred fees and deferred interest related
thereto has been earned by the General Partner and affiliates, of which
approximately $3.0 million is a short term obligation of the Partnership
currently due and payable. To date the Partnership has not paid the $3.0
million of deferred fees and deferred interest in order to preserve the
ability of the Partnership to acquire additional properties, if deemed
advisable. 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. The General Partner currently 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.
The mortgage notes on Pelican Sound and Town Place bear interest at 7.625% an
8.25% respectively. Both loans are due in five years in 2003. The
Partnership is exploring the possibility of refinancing both mortgage loans
during 1999 if lower interest rates are available. Additional proceeds from
the refinancings in excess of the existing mortgage debt would provide
additional liquidity.
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.
Capital Resources
At December 31, 1998 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.
Prospective Information - Safe Harbor Statement Under the Private Securities
Litigation Reform Act of 1995
Forward-looking statements in this report, including without limitation,
statements relating to the Partnership's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Investors are cautioned that such forwarded-looking statements involve
risks and uncertainties including without limitation the following: (i) the
Partnership's plans, strategies, objectives, expectations and intentions are
subject to change at any time at the discretion of the General Partner; (ii)
the Partnership's plans and results of operations will be affected by the
Partnership's ability to manage its growth (iii) other risks and uncertainties
indicated from time to time in the Partnership's filings with the Securities
and Exchange Commission.
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 on Form 10-KSB including Year 2000 issues.
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 provides for termination 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 low interest rates and favorable economic
conditions have contributed to a recovery in the real estate industry.
However the low interest rates have made single family homes more affordable
for apartment dwellers resulting in higher vacancies for multi-family
residential properties.
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.
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 further increase efforts during 1999 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 1998 for environmental
capital projects or for operation and maintenance of environmental protection
facilities. The Partnership estimates that during 1999 and 2000 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.
Impact of Year 2000 Compliance
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the computer
programs or hardware used by the General Partner and affiliates that have
date-sensitive software or embedded chips may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in 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.
Based on past assessments, the General Partner determined that it will be
required to modify or replace significant portions of hardware and software so
that those systems will properly utilize dates beyond December 31, 1999. The
General Partner presently believes that with modifications and replacement of
existing hardware and software, the Year 2000 Issue can be mitigated.
However, if such modifications and replacements are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Partnership.
The General Partner's plan to resolve the Year 2000 Issue involves the
following four phases: assessment, remediation, testing, and implementation.
To date the General Partner has fully completed its assessment of all systems
that could be significantly affected by the Year 2000. The completed
assessment indicated that most of the General Partner's significant
information technology systems could be affected, particularly general ledger
and billing. The General Partner has gathered information about the Year 2000
compliance status of its significant suppliers and continues to monitor their
compliance.
For its information technology exposures, to date the General Partner is 90%
complete on the remediation phase and expects to complete software
reprogramming and replacement no later than July 1, 1999. Once software is
reprogrammed and replaced for a system, the General Partner begins testing and
implementation. These phases run concurrently for different systems. To
date, the General Partner has completed 70% of its testing and has implemented
50% of its remediated systems. Completion of the testing phase for all
significant systems is expected by August 31, 1999, with all remediated
systems fully tested and implemented by September 30, 1999.
The General Partner's account payable system does not interface directly with
third party vendors and does not anticipate problems with third party vendors.
The General Partner has queried its important suppliers that do not share
information systems with the General Partner (external agents). To date, the
General Partner is not aware of any external agent Year 2000 issue that would
materially impact the Partnership's results of operations, liquidity, or
capital resources. However, the General Partner has no means of ensuring that
external agents will be Year 2000 ready. The inability of external agents to
complete their Year 2000 resolution process in a timely fashion could
materially impact the Partnership. The effect of non-compliance by external
agents is not determinable.
The General Partner will utilize both internal and external resources to
reprogram, or replace, test, and implement the software and operating
equipment for Year 2000 modifications. The Partnership's share of the total
cost of the Year 2000 project is estimated at $60,000 and is being funded
through operating cash flows. To date, the Partnership has incurred and
expensed approximately $45,000, related to all phases of the Year 2000
project. The total remaining project costs of approximately $15,000 relates
to repair of hardware and software and will be expenses as incurred.
The plans to complete the Year 2000 modifications are based on the General
Partner's current estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
and other factors. Estimates on the status of completion and the expected
completion dates are based on costs incurred to date compared to total
expected costs. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially form those plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes, and similar
uncertainties.
The information above contains forward-looking statements including, without
limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions, and adequate resources that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that forward-looking statements
about the Year 2000 should be read in conjunction with the Partnership's
disclosures under the heading: Safe Harbor Statement Under the Private
Securities Litigation Reform Act of 1995.
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 to its residents 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 $6.24
million in 1997 to $6.47 million in 1998 (a 3.7% increase). The increased
revenue is due to an increase in asking rents offset by a decrease in
occupancy. The gross potential rent increased from $6,575,000 in 1997 to
$6,850,000 in 1998, a 4.2% increase. Occupancy decreased from 93.4% in 1997
to 91.9% in 1998. The changes in gross potential rent and in occupancy at
each location follows:
Pelican Sound gross potential rent increased from $2,677,000 in 1997 to
$2,831,000 in 1998 (a 5.8% increase). Occupancy increased from 96.7% in 1997
to 93.1% in 1998.
The Meadows II gross potential rent increased from $2,198,000 in 1997 to
$2,265,000 in 1998 (a 3.0% increase). Occupancy increased from 89.2% in 1997
to 89.6% in 1998.
Town Place gross potential rent increased from $1,700,000 in 1997 to
$1,754,000 in 1998 (a 3.2% increase). Occupancy decreased from 93.6% in 1997
to 92.8% in 1998.
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 generally
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 25 years for buildings
and improvements as of December 31, 1998. 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 1998 and
1997.
Item 7. Financial Statements
The response to this Item is submitted in a separate section of this report
and is incorporated by reference herein.
Item 8. Changes in and Disagreements on Accounting and Financial Disclosure
There have been no disagreements with Virchow Krause & Co., 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 45), 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 privately held and 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 54), is a Certified Property Manager and has served as
Vice-President of Decade Properties, Inc. since 1989.
Mr. Michael G. Sweet (age 49), 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, 1998. In making these disclosures, the
Partnership has relied solely on 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 30, 1999 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 2,351.38 17.547%
Interests 240 Bayside Drive
Clearwater, FL 33767
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 (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 $118,091 in 1998 and $116,628 in 1997. Additional acquisition
fees of $97,150 were earned and recorded in 1997 and additional interest
earned on deferred acquisition fees of $73,402 in 1998 and $196,753 in 1997
were recorded.
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 $501,962 in 1998 and $490,418 in 1997,
reimbursed expenses of $879,964 in 1998 and $842,319 in 1997 including the
site property management staff, and interest on real estate sales commissions
of $28,588 in 1998 and $28,588 in 1997 (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. No distributions were paid to the General Partner during
1998 compared to $5,459 in 1997. Distributions to the General Partner were
accrued during 1998 of $3,201, compared to $2,730 in 1997.
When the Partnership sells or refinances Partnership property, the net sale
proceeds resulting there from 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 Articles of Incorporation and By-laws
(3.1)Certificate of Limited Partnership Agreement (previously filed with Form
8/A).
(3.2)Adoption of Section 8.6 Fair Price Provision (previously filed with
Schedule 14A proxy statement dated December 13, 1996).
Exhibit 10 Forms of Material Contracts
(10.1)Form of Acquisition Agreement (previously filed with
Form S-11 Registration Statement on August 28, 1985).
(10.2)Management Consulting Agreement (previously filed
with Form S-11 Registration Statement on August 28, 1985).
(10.3)Form of Property Management Agreement (previously
filed with Form S-11 Registration Statement on August 28, 1985).
(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 dated 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 dated 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 dated December 5, 1996).
(10.8)Loan Agreement between Republic Bank and the
Partnership, (previously filed with Amendment No. 1 to Form 10-K/A dated
December 5, 1996).
(10.9)Mortgage between Republic Bank and the Partnership
(previously filed with Amendment No. 1 to Form 10-K/A dated 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 dated 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 dated 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 dated December 5,
1996).
(10.13)Regulatory Agreement Concerning The Meadows loans
(previously filed with Amendment No. 1 to Form 10-K/A dated December 5, 1996).
(10.14)Mortgage Note between Partnership and Associated
Bank Milwaukee (previously filed with Form 8-K dated March 26, 1999).
(10.15)Mortgage, Security Agreement and Fixture Financing
Statement between Partnership and Associated Bank Milwaukee (previously filed
with Form 8-K dated March 26, 1999).
(10.16)Assignment of Leases and Rents between Partnership
and Associated Bank Milwaukee (previously filed with Form 8-K dated March 26,
1999).
(10.17)Collateral Assignment of Property Management
Contract between Partnership and Associated Bank Milwaukee (previously filed
with Form 8-K dated March 26, 1999).
(10.18)Reserve Fund Agreement between Partnership and
Associated Bank Milwaukee (previously filed with Form 8-K dated March 26,
1999).
(10.19)Payment Amount/Frequency Modification between
Partnership and Associated Bank Milwaukee (previously filed with Form 8-K
dated March 26, 1999).
Exhibit 16 Letter regarding change in certifying accountant.
Letter of Ernst & Young, LLP to the Securities and
Exchange Commission dated December 18, 1998 (previously filed with Form 8-K
dated December 17, 1998).
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 1998:
Form 8-K dated December 17, 1998
Item 4: Changes in Registrant's Certifying Accountants- Approved
engagement of Virchow Krause & Company, LLP as independent auditors for fiscal
year ending December 31, 1998 to replace firm of Ernst & Young LLP.
Item 7: Financial Statements and Exhibits - Exhibit 16 - letter of Ernst
& Young LLP to the Securities and Exchange Commission dated December 18, 1998.
<PAGE>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 31, 1999 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 31, 1999 By/s/ Jeffrey L. Keierleber
Dated Jeffrey L. Keierleber, Principal
Executive Officer and Principal Financial and
Accounting Officer of the Registrant
<PAGE>
ANNUAL REPORT ON FORM 10-KSB
ITEM 7
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,992,568
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,141,779
<PP&E> 31,915,670
<DEPRECIATION> 8,662,288
<TOTAL-ASSETS> 25,676,245
<CURRENT-LIABILITIES> 4,101,134
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> (1,684,211)
<TOTAL-LIABILITY-AND-EQUITY> 25,676,245
<SALES> 6,472,825
<TOTAL-REVENUES> 6,582,284
<CGS> 0
<TOTAL-COSTS> 4,542,687
<OTHER-EXPENSES> 191,911
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,929,221
<INCOME-PRETAX> (81,535)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (81,535)
<EPS-PRIMARY> (6.02)
<EPS-DILUTED> (6.02)
</TABLE>
DECADE COMPANIES INCOME PROPERTIES - A LIMITED PARTNERSHIP
Brookfield, Wisconsin
FINANCIAL STATEMENTS
Including Independent Auditors' Reports
December 31, 1998 and 1997
DECADE COMPANIES INCOME PROPERTIES - A LIMITED PARTNERSHIP
TABLE OF CONTENTS
December 31, 1998 and 1997
Independent Auditors' Report 1
Report of Independent Auditors - 1997 2
Balance Sheet 3
Statements of Operations 4
Statements of Partners' Capital (Deficit) 5
Statements of Cash Flows 6
Notes to Financial Statements 7 - 15
INDEPENDENT AUDITORS' REPORT
The Partners of Decade Companies Income Properties - A Limited Partnership
Brookfield, Wisconsin
We have audited the accompanying balance sheet of Decade Companies Income
Properties - A Limited Partnership (the Partnership) as of December 31, 1998,
and the related statements of operations, partners' capital (deficit) and cash
flows for the year then ended. 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 audit.
We conducted our audit 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 bases, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used an significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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 - A Limited Partnership as of December 31, 1998, and the results of
its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The financial statements of Decade Companies Income Properties - A Limited
Partnership for the year ended December 31, 1997 were audited and reported on
separately by other independent auditors.
VIRCHOW, KRAUSE & COMPANY, LLP
Brookfield, Wisconsin
January 29, 1999
REPORT OF INDEPENDENT AUDITORS - 1997
The Partners
Decade Companies Income Properties - A Limited Partnership
We have audited the accompanying statement of operations of Decade Companies
Income Properties - A Limited Partnership (the Partnership) and the related
statements of partners' capital (deficit) and cash flows for the year 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 audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations of Decade Companies Income
Properties - A Limited Partnership and its cash flows for the year ended
December 31, 1997, in conformity with generally accepted accounting
principles.
\s\ Ernst & Young LLP
Chicago, Illinois
January 27, 1998
DECADE COMPANIES INCOME PROPERTIES - A LIMITED PARTNERSHIP
<PAGE><TABLE>
BALANCE SHEET
<S> <C>
December 31, 1998
ASSETS
Cash and cash equivalents 1867814
Prepaid expenses and other assets 149211
Escrow deposits 124754
Investment properties, at cost
Land 5305536
Buildings and improvements 23741781
Equipment 2868353
31915670
Less: Accumulated depreciation -8662288
23253382
Deferred financing costs, net of accumulated amortization of 281084
TOTAL ASSETS 25676245
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Tenant security deposits 119002
Accounts payable 135401
Accrued real estate taxes 266105
Accrued interest payable 60598
Distributions payable 170705
Payables to affiliates 3854403
Mortgage notes payable 22754242
Total Liabilities 27360456
PARTNERS' CAPITAL (DEFICIT)
General Partner -88085
Limited Partners (Interest authorized - 18,000;
Interests outstanding - 13,400.27) -1596126
Total Partners' Capital (Deficit) -1684211
TOTAL LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) 25676245
See accompanying notes to financial statements.
</TABLE>
DECADE COMPANIES INCOME PROPERTIES - A LIMITED PARTNERSHIP
<TABLE>
STATEMENTS OF OPERATIONS
<S> <C>
<C>
Years Ended December 31, 1998 and 1997
1998
1997
OPERATING REVENUE ASSOCIATED WITH INVESTMENT PROPERTIES
Rentals 6196035
6001015
Other 276790
237469
Total Operating Revenue Associated with Investment Properties 6472825
6238484
OPERATING EXPENSES ASSOCIATED WITH INVESTMENT PROPERTIES
Operating
2474158 2589010
Administration
273181 291793
Depreciation
1060439 1114581
Interest, including amortization of financing costs 1827231
1774830
Real estate taxes 734909
711650
Total Operating Expenses Associated with Investment Properties
6369918 6481864
Income (Loss) from Operations of Investment Properties 102907
- - -243380
OTHER PARTNERSHIP INCOME (EXPENSES)
Interest income 109459
127609
Interest on payables to affiliates -101990
- - -225341
Administrative expenses -191911
- - -312656
Net Other Partnership Expenses -184442
- - -410388
NET LOSS -81535
- - -653768
Net loss attributable to General Partner (1%)
- - -815 -6538
Net loss attributable to Limited Partners (99%) -80720
- - -647230
-81535
- - -653768
Weighted average Limited Partnership Interests outstanding 13400.27
13400.27
Net loss per weighted average Limited Partnership Interest -6.02
- - -48.30
See accompanying notes to financial
statements. Page 4
</TABLE>
DECADE COMPANIES INCOME PROPERTIES - A LIMITED
PARTNERSHIP
<TABLE>
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
<S> <C> <C>
<C> <C>
Years Ended December 31, 1998 and 1997
General
Limited
Limited Partners'
Partners'
Partnership Capital
Capital
Interests (Deficit)
(Deficit) Total
Balances at January 1, 1997 13,400.27 -74,801
472,061 397,260
Distributions to Partners -0- -2,730
- - -670,018 -672,748
Tender offer costs -0-
- - -0- -203 -203
Net loss for the year -0- -6,538
- - -647,230 -653,768
Balances at December 31, 1997 13,400.27 -84,069
- - -845,390 -929,459
Distributions to Partners -0- -3,201
- - -670,016 -673,217
Net loss for the year -0- -815
- - -80,720 -81,535
Balances at December 31, 1998 13,400.27 -88,085
- - -1,596,126 -1,684,211
</TABLE>
DECADE COMPANIES INCOME PROPERTIES - A LIMITED PARTNERSHIP
<TABLE>
STATEMENTS OF CASH FLOWS
<S> <C>
<C>
Years Ended December 31, 1998 and 1997
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
- - -81,535 -653,768
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 1,060,437
1,114,581
Amortization of deferred financing costs 65,352
34,942
Changes in operating assets and liabilities
Prepaid expense and other assets
- - -64,342 50,705
Escrow deposits 59,623
- - -6,476
Tenant security deposits
- - -28,047 -27,079
Accounts payable
79,073 -55,236
Unearned rent
- - -38,810 38,810
Accrued real estate taxes 18,649
12,275
Accrued interest payable
23,381 -281
Payables to affiliates
10,146 185,446
Net Cash Flows Provided by Operating Activities
1,103,927 693,919
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to investment properties
- - -534,262 -181,061
Net Cash Flows Used in Investing Activities
- - -534,262 -181,061
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of tender offer costs
- - -0- -203
Proceeds from mortgage note payable
6,589,201 -0-
Additions to debt issue costs
- - -58,692 -0-
Payments on mortgage notes payable
- - -6,733,846 -286,099
Distributions paid to Limited Partners
- - -670,016 -670,018
Distributions paid to General Partner
- - -0- -5,459
Net Cash Flows Used in Financing Activities
- - -873,353 -961,779
Decrease in Cash and Cash Equivalents
- - -303,688 -448,921
CASH AND CASH EQUIVALENTS - Beginning of Year 2,171,502
2,620,423
CASH AND CASH EQUIVALENTS - END OF YEAR
1,867,814 2,171,502
</TABLE>
<PAGE>
DECADE COMPANIES INCOME PROPERTIES - A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
NOTE 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, as amended, 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 1,242 Limited Partners at December 31,
1998.
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 1998:
NOTE 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 buildings, 15 years for 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 4) 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
Agreement and prospectus. The General Partner has earned the maximum amount
of such fees as of December 31, 1998 (see Note 6).
The Partnership Agreement provides for acquisition fees, mortgage placement
and mortgage brokerage fees, property management fees and real estate sales
commissions 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 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.
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 of 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 an all prior
years, any losses from the sale of 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 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
the Partnership properties will be allocated 99% to the Limited Partners and
1% to the General Partner.
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; (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
Interest outstanding during the year.
NOTE 3 - INVESTMENT PROPERTIES
Investment properties owned at December 31, 1998 are as follows:
<PAGE><TABLE>
<S> <C> <C> <C> <C> <C> <C>
Costs Capitalized
Initial Cost to Partnership Subsequent to
Acquisition
BuildingsBuildings
andand
DescriptionEncumbrancesLandImprovementsEquipment Improvements Equipment
(In Thousands)
Meadows II Apartments
Madison, WI 6,574 1,144 9,227 442 107 459
Town Place Apartments
Clearwater, FL 6,509 1,518 5,270 252 39
490
Pelican Sound Apartments
St. Petersburg, FL 9,671 2,644 8,801 861 298
364
Total 22,754 5,306 23,298 1,555 444
1,313
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
<C>
Gross Amount at Which Carried
Buildings
and Accumulated
Description LandImprovementsEquipmentTotal Depreciation
(In Thousands)
Meadows II Apartments
Madison, WI 1,144 9,334 901 11,379 3,809
Town Place Apartments
Clearwater, FL 1,518 5,309 742 7,569
2,191
Pelican Sound Apartments
St. Petersburg, FL 2,644 9,099 1,225 12,968
2,662
Total 5,306 23,742 2,868 31,916
8,662
</TABLE>
<TABLE>
<S> <C> <C>
Description Date of Construction Date
Acquired
Meadows II Apartments, Madison WI In phases from 1977 through 1980 January
1989
Town Place Apartments, Clearwater, FL 1985 February
1990
Pelican Sound Apartments, St. Petersburg, FL 1987 November
1993
</TABLE>
<PAGE>
A reconciliation of the cost and accumulated depreciation of the investment
properties at December 31, 1998 follows:
(in Thousands)
Cost
Balance at beginning of year 31,382
Additions to investment properties 534
Balance at end of year 31,916
Accumulated depreciation
Balance at beginning of year 7,602
Provision for the year 1,060
Balance at end of year 8,662
The aggregate cost of the investment properties for federal income tax
purposes is $28,936,811 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 $7,984,285 at December 31, 1998.
NOTE 4 - MORTGAGE NOTES PAYABLE
Mortgage notes payable consist of the following at December 31, 1998:
Mortgage note payable in monthly installments
of $52,894 including interest at 7.25%, with
final payment due September 30, 2005. 6,573,519
Mortgage note payable in monthly installments
of $52,286, including interest at 8.25%, with
final payment due May 16, 2003. 6,509,249
Mortgage note payable in monthly installments
of $67,184, including interest at 7.625%, with
final payment due December 1, 2003. 9,671,474
22,754,242
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 $1,738,496 and $1,740,169 in 1998 and 1997,
respectively. During 1998, the Meadows II mortgage was refinanced totaling
$9,150,000; as of December 31, 1998, $2,560,799 of the proceeds remains
undrawn and available. Aggregate annual maturities of the mortgage notes
payable for the five years subsequent to December 31, 1998, are as follows:
1999 312,000
2000 338,000
2001 365,000
2002 394,000
2003 426,160
15,340,657
16,749,657
NOTE 5 - 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.
1998 1997
Net loss as reported for financial
reporting purposes (81,535) (653,768)
Add:
Depreciation 124,250 178,228
Accrual basis adjustments 101,646 185,446
Net income (loss) reported for
federal income tax purposes 144,361 (290,094)
NOTE 6 - 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 Partnership Agreement and
prospectus, the General Partner reviewed the calculations of front end fees
allowed under the Limited Partnership Agreement during 1998 and calculated
additional interest on acquisition fees of $73,402 payable to the General
Partner. The additional interest expense representing amounts incurred for
1998 has been included with interest expense in the financial statements.
Acquisition fees of $2,243,785 are payable to Decade Companies at December 31,
1998. Such fees were capitalized as part of the cost of the investment
properties. Accrued interest on these fees was $667,826 at December 31, 1998.
In addition, mortgage placement fees of $90,246 are payable to Decade
Companies at December 31, 1998.
Decade Properties, Inc.
Decade Properties, Inc. (Decade Properties) earned the following amounts from
the Partnership: property management fees ($501,962 - 1998; $490,418 - 1997);
and interest on real estate sales commissions ($28,588 - 1998; $28,588 -
1997).
Real estate sales commissions of $440,700 are payable to Decade Properties at
December 31, 1998. Accrued interest on these fees was $376,380 at December
31, 1998. 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 $35,467 at December 31,
1998.
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 earned on
certain deferred fees is subject to the limitations of the Limited Partnership
Agreement.
Reimbursed expenses paid to the General Partner or affiliates of the General
Partner on behalf of the Partnership were as follow: Decade Companies
($118,091 - 1998; $116,628 - 1997); and Decade Properties ($879,964 - 1998;
$842,319 - 1997).
NOTE 7 - 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 carrying amount reported in the balance sheet for mortgage notes payable
approximates its fair value.
