United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from to
Commission file number 0-21455.
Decade Companies Income Properties - A Limited Partnership
(Exact name of small business issuer as specified in its charter)
State of Wisconsin 39-1518732
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
N19 W24130 Riverwood Drive, Suite 100, Waukesha, Wisconsin 53188
(Address of principal executive offices)
(262) 522-8990
(Issuer's telephone number)
250 Patrick Blvd., Suite 140, Brookfield, Wisconsin 53045-5864
(Former name, former address and former fiscal year, if changed
since last report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by
court. Yes No .
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: .
Transitional Small Business Disclosure Format (check one): Yes
No X .
Decade Companies Income Properties - A Limited Partnership
Form 10-QSB
INDEX
September 30, 2002
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements (unaudited)
Balance Sheet at September 30, 2002 3
Statements of Operations for the three
and nine month periods ended September 30, 2002
and 2001 4
Statements of Partners' Capital
for the nine months ended September 30, 2002
and the year ended December 31, 2001. 5
Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001. 6
Notes to Financial Statements. 7
Item 2. Management's Discussion and Analysis or Plan
of Operations 17-37
Item 3. Controls and Procedures 37
PART II. OTHER INFORMATION
Item 1 - 5 Not applicable 37
Item 6. Exhibits and Reports on Form 8-K. 38
SIGNATURES 38
Certification 39
Exhibit Index 41
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEET
September 30, 2002
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 704,619
Escrow funds 215,894
Accounts receivable 10,000
Prepaid expenses and other assets 194,365
Total Current Assets 1,124,878
INVESTMENT PROPERTIES, AT COST: 32,185,480
Less: accumulated depreciation (7,328,851)
Net Investment Property 24,856,629
OTHER ASSETS:
Investment - DMLP LLC 4,200,000
Utility deposits 44,762
Debt issue costs, net of accumulated
amortization 564,666
Total Other Assets 4,809,428
Total Assets $30,790,935
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Current Liabilities
Current portion of mortgages notes
payable $ 6,422,518
Accounts payable and accrued taxes 866,835
Payables to affiliates 74,779
Unearned rent collections 56,001
Tenant security deposits 85,145
Distributions payable 2,000
Accrued interest payable 83,680
Total current liabilities 7,590,958
Long-term Liabilities
Payables to affiliates 1,410,641
Mortgage notes payable 20,901,378
Total long-term Liabilities 22,312,019
Total Liabilities 29,902,977
PARTNERS' CAPITAL:
General Partner Capital (19,867)
Limited Partners (authorized--18,000 Interests;
outstanding--10,261.51 Interests at 09/30/02) 907,825
Total Partners' Capital 887,958
Total Liabilities and Partners' Capital $30,790,935
See Notes to Unaudited Financial Statements.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
9/30/02 9/30/01 9/30/02 9/30/01
Operating revenue:
Rental income $ 1,414,328 $1,212,123 $3,712,645 $3,546,783
Operating expenses 697,932 549,051 1,867,562 1,603,847
Real estate taxes 176,063 124,497 426,863 373,491
Interest expense 494,886 293,758 1,205,932 1,110,071
Depreciation 205,574 168,900 541,429 494,900
Amortization 22,963 22,561 68,889 68,483
Total operating
expenses 1,597,418 1,158,767 4,110,675 3,650,792
Net income (loss) from
investment property (183,090) 53,356 (398,030) (104,009)
Other income (expenses):
Interest income 19,167 28,688 89,380 120,610
Partnership managmnt (32,371) (30,415) (210,971) (153,793)
(13,204) (1,727) (121,591) (33,183)
Net income (loss)
from continuing
operations $(196,294)$ 51,629 $ (519,621) $ (137,192)
Discontinued
operations, net (1,380) 25,137 8,299,052 101,130
NET INCOME (LOSS) (197,674) 76,766 7,779,431 (36,062)
Net income (loss)
attributable to General
Partner(1%) $ (1,977)$ 768 $ 77,794 $ (361)
Net income (loss)
attributable to Limited
Partners (99%) (195,697) 75,998 7,701,637 (35,701)
$ (197,674) $ 76,766 $ 7,779,431 $ (36,062)
Net income (loss) per Limited
Partner Interest $ (19.07) $ 5.67 $ 662.51 $ (2.66)
See Notes to Unaudited Financial Statements.
STATEMENTS OF PARTNERS' CAPITAL
(Unaudited as to the Nine Months Ended September 30, 2002)
Limited General Limited
Partnership Partner Partners'
Interests Capital Capital Total
Balances at 12/31/00 13,400.27 $(95,827) $(2,957,885) $(3,053,712)
Distributions to Partners --- -- (669,922) (669,922)
Net income for the period --- 166 16,454 16,620
Redemption of Interests (3.00) -- (1,800) (1,800)
Balance at 12/31/01 13,397.27 ($95,661) $(3,613,153) $(3,708,814)
Distributions to Partners --- (2,000) (294,039) (296,039)
Net income for the period --- 77,794 7,701,637 7,779,431
Redemption of Interests (3,135.76) --- (2,806,505) (2,806,505)
Tender Offer expenses --- (80,115) (80,115)
Balance at 9/30/02 10,261.51 $ (19,867) $ 907,825 $ 887,958
STATEMENTS OF CASH FLOWS - (UNAUDITED)
For the Nine Months Ended September 30,
2002 2001
CASH PROVIDED BY OPERATIONS $ 872,756 $ 708,588
INVESTING ACTIVITIES:
Investment in DMLP (4,200,000) 0
Proceeds from sale of property 6,662,575 0
Deposits to escrow (215,394) 0
Additions to investment property (395,889) (377,177)
NET CASH(USED)IN INVESTING ACTIVITIES 1,851,292 (377,177)
FINANCING ACTIVITIES:
Principal payments on mortgage notes (1,552,250) (323,333)
Distributions paid to limited partners (461,506) (502,512)
Distributions paid to general partner 0 (3,547)
Increases in debt issue cost (302,372) 0
Redemption of Interests (2,806,505) (1,800)
Tender Offer expenses (80,115) 0
Payment to General Partner on
deferred fees 0 (2,334,031)
NET CASH (USED) IN FINANCING ACTIVITIES(5,202,748) (3,165,223)
INCREASE (DECREASE) IN CASH & CASH
EQUIVALENTS (2,478,700) (2,833,812)
CASH & CASH EQUIVALENTS AT THE BEGINNING
OF PERIOD 3,183,319 4,251,384
CASH & CASH EQUIVALENTS
AT THE END OF PERIOD $ 704,619 $1,417,572
Supplementary disclosure of cash flow information:
Interest paid $ 1,495,292 $1,435,768
Income taxes paid 0 0
Noncash investing and financial activities
Mortgage note paid off through sale of
property $ 8,801,837 0
Mortgage payable on property acquired $10,079,064 0
See Notes to Unaudited Financial Statements.
Note A Business
Decade Companies Income Properties, a Limited Partnership (the
"Partnership"), formed in 1986, is a real estate partnership
engaged in the acquisition and ownership of multifamily properties
and office properties.
As of September 30, 2002, the Partnership owned a portfolio of two
multifamily properties (the "Apartments") containing 619 apartment
units and two office properties (the "Office Buildings") comprising
approximately 166,000 rentable square feet of office space. The
Apartments and the Office Buildings are together referred to as the
"Properties". The Properties are located in the state of Florida.
Note B--Basis of Presentation
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-QSB and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and nine month
periods ended September 30, 2002 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2002.
For further information, refer to the financial statements and
footnotes thereto included in the Partnership's annual report on
Form 10-KSB for the year ended December 31, 2001.
Note C - Sale of The Meadows II Apartments
On January 31, 2002, the Partnership sold The Meadows II Apartments
for $15,956,436, subject to customary closing costs, adjustments,
prorations, fees, and commissions totaling approximately $491,000.
At closing, the proceeds from the sale were used to pay off the
first mortgage loan of approximately $8,802,000. The net proceeds
of approximately $6,663,000 were placed into an exchange escrow
with a bank acting as the qualified intermediary. The Partnership
structured this transaction as a deferred exchange, whereby the net
proceeds were paid to a Qualified Intermediary to be used for the
acquisition of a replacement property. On July 30, 2002, two
replacement properties were purchased. See Note F for a full
disclosure.
Note D - Redemption of Interests
During the first quarter, the Partnership redeemed 135.76 Limited
Partnership Interests ("Interests"). Subsequently, the Partnership
and Jeffrey Keierleber, an affiliate of the General Partner,
commenced an Offer to Purchase up to 7,700 Interests for cash
consideration of $895 per Interest. The Offer expired on May 10,
2002. Approximately 5,809 Interests were tendered, of which the
Partnership purchased and retired 3,000 Interests. As a result of
the redemption of 3,135.76 Interests for $2,806,505 during the
nine-month period ended September 30, 2002, there are now 10,261.51
Interests outstanding. As a result of the purchase of Interests by
Mr. Keierleber (an affiliate of the General Partner), Mr.
Keierleber owns (directly and beneficially) 6,597.067 Interests
(64.3% of the Interests outstanding) as of November 19, 2002. Mr.
Keierleber used his personal funds to purchase the Interests.
Note E - Proxy Solicitation
On May 4, 2002, the Partnership solicited a consent from all
Limited Partners of the Partnership. An amendment to the limited
partnership agreement was proposed and adopted on May 14. The
amendment grants the Partnership the right to purchase Interests
on terms and conditions no less favorable than those offered by
third parties in exchange for Interests, including a right of first
refusal over any Interests subject to a third party tender offer.
Note F - Purchase of Office Buildings
On July 30, 2002, the Partnership purchased two office buildings,
consisting of approximately 166,000 (total combined) rentable
square feet, located in Florida.
The Spectrum Building ("Spectrum") is located at 900 Winderly Place
in the Maitland Center office park in Maitland, Orange County,
Florida. Spectrum is a two-story, 125,098 square foot (with
approximately 113,000 rentable square feet) atrium-style office
building, built in 1986. The land area is approximately 9.28 acres
and consists of approximately 409 grade level parking spaces. The
Maitland Center office park is adjacent to Interstate 4. Occupancy
was approximately 41% on the date of closing, and varies from time
to time.
Plymouth Plaza ("Plymouth") is located at 26750 U.S. 19 North in
the North Pinellas office submarket in Clearwater, Pinellas County,
Florida. Plymouth is a five-story, approximately 54,000 rentable
square foot office building. The building includes a 354-car, five
level parking garage and 47 surface spaces. The property has
access from Countryside Boulevard and U.S. 19 service road.
Occupancy was approximately 79% on the date of closing, and varies
from time to time. The former owner of Plymouth retained
approximately 4.5 acres of vacant land adjacent to Plymouth. The
Partnership entered into an easement agreement with the owner of
the vacant parcel for parking privileges in the parking garage
owned by the Partnership.
Spectrum and Plymouth are hereinafter collectively referred to as
the "Office Buildings."
The purchase price of the Properties was approximately $10.3
million, including a real estate commission paid to an unaffiliated
broker in the amount of $150,000, and other closing costs. Both
Office Buildings were encumbered by a nonrecourse first mortgage
loan of approximately $10,079,000 (the "Note"). At closing, the
Partnership purchased the Office Buildings subject to the Note.
Spectrum was purchased from ABR Spectrum, Ltd. ("ABR Spectrum"),
a Florida limited partnership, an unaffiliated party. Plymouth was
purchased from ABR Plymouth Plaza, Ltd. ("ABR Plymouth"), a Florida
limited partnership, an unaffiliated party. ABR Spectrum and ABR
Plymouth are hereinafter collectively referred to as the "Sellers."
There is no material relationship between the Sellers and the
Partnership or any of the Partnership's affiliates, any general
partner, director or officer of the Partnership, or any associate
of any such general partner, director or officer.
On August 29, 2002, the Partnership reduced the balance of the Note
from approximately $10.1 million to approximately $8.8 in exchange
for certain lender concessions. See Note H.
The Partnership requested Lender approval prior to closing but was
unable to obtain approval due to the Lender's time constraints.
The Lender however did indicate a willingness to work with the
Partnership and affiliates of the Partnership to achieve a
satisfactory result. Those negotiations resulted in the sale of
the Note on August 29, 2002 by the Lender to Decade Mortgage Loan
Partners, LLC ("DMLP"), a newly formed Wisconsin limited liability
company that was created to purchase the Note. The Partnership is
a member of DMLP, along with other affiliated entities, as
hereafter described in Note G.
Note G - Investment in Decade Mortgage Loan Partners, LLC
Prior to its purchase of the Office Buildings, the Partnership
requested Lender approval but was unable to obtain approval due to
the Lender's time constraints as described in Note F.
The outstanding principal balance of the Note was approximately
$10,079,000 as of closing on July 30, 2002. For income tax
considerations related to preserving the benefits of the Section
1031 Exchange to the extent possible, the Partnership was able to
reduce the balance of the Note from approximately $10.1 million to
approximately $8.8 million, as more fully described in Note G.
Accordingly, the Partnership earmarked approximately $1.3 million
to be paid down on the mortgage. This amount was committed to the
Lender on July 22, 2002. Therefore, the new limited liability
company (DMLP) needed approximately $8.8 million of capital to
provide the funds necessary to purchase the Note from the Lender.
On August 27, 2002, the Partnership used cash reserves of $4.2
million to purchase 4,200 Units (the "DMLP Units") (approximately
47.7% of the 8,805 DMLP Units issued and outstanding) of DMLP.
The other members of DMLP consist of three corporations, which are
wholly owned by Mr. Keierleber, and two limited partnerships, of
which Mr. Keierleber owns a majority of the outstanding limited
partnership units. The three wholly owned corporations
collectively own 3,130 DMLP Units (approximately 35.5% of the 8,805
DMLP Units issued and outstanding). The three wholly owned
corporations are Decade Properties, Inc. with 1,330 DMLP Units
(approximately 15.1% of the 8,805 DMLP Units issued and
outstanding), DIC Corp. with 1,100 DMLP Units (approximately 12.5%
of the 8,805 DMLP Units issued and outstanding), and Decade
Securities Corp. with 700 DMLP Units (approximately 7.9% of the
8,805 DMLP Units issued and outstanding). The two other limited
partnerships that own DMLP Units are Decade 80-IV, a Limited
Partnership ("Decade 80-IV"), and Decade Companies Preferred
Placement VIII - Springtree Crossing, a Limited Partnership ("DCPP
VIII"). Decade 80-IV owns 985 DMLP Units (approximately 11.2% of
the 8,805 DMLP Units issued and outstanding). Mr. Keierleber owns
5,507 Decade 80-IV limited partnership units (approximately 81.9%
of the 6,725 Decade 80-IV Units issued and outstanding). DCPP VIII
owns 490 DMLP Units (approximately 5.6% of the 8,805 DMLP Units
issued and outstanding). Mr. Keierleber owns 730 DCPP VIII limited
partnership units (approximately 88.0% of the 830 DCPP VIII Units
issued and outstanding).
As of September 30, 2002, Mr. Keierleber beneficially owned
approximately 80.0% of the 8,805 issued and outstanding DMLP Units.
The Partnership's source of funds used in this transaction
consisted of cash reserves held by the Partnership. These funds
were obtained from the Exchange Escrow which had held the proceeds
from the sale of The Meadows II Apartments on January 31, 2002.
Note H - Mortgage Loan Payable to Decade Mortgage Loan Partners,
LLC
On August 29, 2002, DMLP purchased the Note for $8,801,838 from the
Teachers Insurance and Annuity Association of America ("TIAA"). In
conjunction with the transfer of the Note from TIAA to DMLP, the
Partnership paid TIAA approximately $1,724,000 to (1) reduce the
outstanding principal balance of the Note by $1,277,226 (from
$10,079,064 to $8,801,838), (2) pay a prepayment penalty of
$302,372 (the "Prepayment Premium") computed at 3% of the
outstanding principal balance of the Note payable to TIAA, (3) pay
accrued interest of $139,746 (the "Interest Payment"), and (4) pay
a late fee of $4,354 (the "Late Fee") computed at five cents for
each dollar (5% of $87,074.87) of delinquent payment payable to
TIAA. The Late Fee was subsequently reimbursed to the Partnership
by the Seller of Spectrum and Plymouth. The Interest Payment
included $68,689 of prorated interest for July which was received
by the Partnership as a closing credit from the Seller.
The Note bears interest on the outstanding principal balance from
July 1, 1997 (the "Date of Loan") through and including August 1,
2007 (the "Maturity Date") at a fixed rate of 8.46% per annum. The
Note provided for monthly payments of principal and interest of
$87,074.87. DMLP modified the terms of the Note to require
payments of interest only until October 1, 2002, and then monthly
payments of principal and interest of $70,637.68 beginning on
November 1, 2002. The revised Note requires the amortization of
the principal balance over a 25-year period. At the date of
closing the Note provided that it could be prepaid in full, but not
in part, on the first day of any calendar month, upon 90 days prior
notice to Lender and upon payment in full of all amounts payable
under the loan documents (which would include a prepayment
penalty). The Prepayment Premium consists of the greater of (1) 2%
of the outstanding loan principal balance, or (2) an amount
computed under a yield maintenance formula defined in the Note
(which was computed to be approximately $2.1 million at the date of
the closing).
In consideration for the Partnership's payment of the Prepayment
Premium, DMLP agreed to modify certain terms of the Note to permit
the Partnership to prepay the Note in whole or in part and to
release collateral upon the sale of either Spectrum or Plymouth.
In addition, DMLP will modify the yield maintenance formula under
certain conditions for the benefit of the Partnership.
DMLP's source of the funds used in this transaction consisted of
cash generated from the sale of the DMLP Units on August 27, 2002.
Note I. Discontinued Operations
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which is effective for
fiscal years beginning after December 15, 2001. The Partnership
adopted the standard effective January 1, 2002, which did not have
a material effect on the Partnership's financial condition and
results of operations.
Under the provisions of SFAS No. 144, for long-lived assets to be
held and used, the Partnership first determines whether any
indicators of impairment exist. If indicators exist, the
Partnership compares the expected future undiscounted cash flows
for the long-lived asset against the carrying amount of that asset.
If the sum of the estimated undiscounted cash flows is less than
the carrying amount of the asset, an impairment loss would be
recorded for the difference between the estimated fair value and
the carrying amount of the asset.
For long-lived assets to be disposed of, an impairment loss is
recognized when the estimated fair value of the asset, less the
estimated cost to sell, is less than the carrying amount of the
asset measured at the time that the Partnership has determined it
will sell the asset. Long-lived assets held for disposition are
reported at the lower of their carrying amounts or their estimated
fair values, less their costs to sell.
On January 31, 2002, the Partnership sold The Meadows II Apartments
for approximately $16.0 million and received net proceeds of
approximately $6.7 million. A gain on sale of approximately $8.6
million was recognized.
The components of discontinued operations for the three-month and
nine-month periods ended September 30, 2002 and 2001, respectively,
are outlined below and include the results of operations through
the date of the respective sale for the three-month and nine-month
periods ended September 30, 2002, and a full three months and nine
months of operations for the three-month and nine-month periods
ended September 30, 2001:
Three Months Ended Nine Months Ended
09/30/02 09/30/01 09/30/02 09/30/01
REVENUES
Operating revenue
Rental income $ 0 $ 567,982 $ 184,525 $1,711,279
EXPENSES
Operating expenses 1,380 260,382 302,458 763,223
Real estate taxes 0 66,000 21,922 198,000
Interest expense 0 114,099 53,178 343,834
Depreciation 0 97,000 6,575 289,000
Amortization 0 5,364 80,460 16,092
Total operating
expenses 1,380 542,845 464,593 1,610,149
Net income (loss)
from investment
property (1,380) 25,137 (280,068) 101,130
Gain on sale of
property 0 0 8,579,120 0
Discontinued
operations, net $(1,380) $ 25,133 $8,299,052 $ 101,130
Note J - COMMITMENTS AND CONTINGENCIES
Concentration of Credit Risk
The Partnership maintains its cash and cash equivalents at
financial institutions. The combined account balances at each
institution typically exceed FDIC insurance coverage and, as a
result, there is a concentration of credit risk related to amounts
on deposit in excess of FDIC insurance coverage. The General
Partner of the Partnership believes that the risk is not
significant.
Environmental
The Partnership, as an owner of real estate, is subject to various
environmental laws of federal and local governments. Compliance
by the Partnership with existing laws has not had a material
adverse effect on the Partnership's financial condition and results
of operations, and the General Partner does not believe compliance
will have such an impact in the future. However, the Partnership
cannot predict the impact of unforeseen environmental contingencies
or new or changed laws or regulations on its current Properties or
on properties that it may acquire in the future.
Litigation
The Partnership is not presently subject to material litigation
nor, to the Partnership's knowledge, is any litigation threatened
against the Partnership, other than routine actions for negligence
and other claims and administrative proceedings arising in the
ordinary course of business, some of which are expected to be
covered by liability insurance and all of which collectively are
not expected to have a material adverse effect on the liquidity,
results of operations, or business or financial condition of the
Partnership.
Insurance
The Partnership has deductible amounts on insurance policies
related to property damage and general liability losses that may be
incurred at the Properties. The Partnership has deductible amounts
on insurance policies related to business interruption that may be
incurred at the Office Buildings (but not at the Apartments). The
Properties are insured through third-party carriers for losses in
excess of the deductible amounts subject to certain limits. Should
an uninsured or under insured loss occur, the Partnership could
lose its investments in, and anticipated income and cash flows
from, one or more of the Properties. In addition, there can be no
assurance that third party insurers will be able to maintain
reinsurance sufficient to cover any losses that may be incurred.
Note K - Operations by Industry Segment
Description of Products and Services by Segment
The Partnership has two reportable segments: Apartments and Office
Buildings. The Partnership's Apartment division consists of two
apartment complexes that are operated as individual operating
segments and the Partnership has aggregated these operating
segments into a single operating segment for financial reporting
purposes due to the fact that the individual operating segments
have similar economic characteristics.
The Partnership's Office Buildings division consists of two Office
Buildings that are operated as individual operating segments and
the Partnership has aggregated these operating segments into a
single operating segment for financial reporting purposes due to
the fact that the individual operating segments have similar
economic characteristics.
Measurement of Segment Profit or Loss and Segment Assets
The Partnership evaluates performance and allocates resources based
on profit or loss from operations before interest, and gains and
losses on the Partnership's investment portfolio. The accounting
policies of the reportable segments are the same as those described
in the summary of significant accounting policies.
Factors Management Used to Identify the Enterprise's Reportable
Segments
The Partnership's reportable segments are business units that
consist of different types of real estate. The reportable segments
are each managed separately because they rent space to different
types of customers (the Apartments rent residential space to
individuals, while the Office Buildings rent office space to
businesses).
The other category consists of interest income on various
investments and partnership management expenses.
Three Months Ended Nine Months Ended
09/30/02 09/30/01 09/30/02 09/30/01
Operating Revenue
Apartments 1,173,000 774,000 3,471,000 3,547,000
Office Buildings 241,000 438,000 241,000 0
Total operating
revenue 1,414,000 1,212,000 3,712,000 3,547,000
Operating expenses
Apartments 719,000 674,000 2,139,000 1,978,000
Office Buildings 155,000 0 155,000 0
Total operating
expenses 874,000 674,000 2,294,000 1,978,000
Net operating income
Apartments 454,000 538,000 1,332,000 1,569,000
Office Buildings 86,000 0 86,000 0
Net operating income 540,000 538,000 1,418,000 1,569,000
Reconciling items
Interest income 19,000 29,000 89,000 121,000
Interest expense (495,000) (294,000) (1,206,000) (1,110,000)
Depreciation (205,000) (169,000) (541,000) (495,000)
Amortization (23,000) (22,000) (69,000) (68,000)
Partnership Management (32,000) (30,000) (211,000) (154,000)
(736,000) (486,000) (1,938,000) (1,706,000)
Net income (loss) from
continuing operations(196,000) 52,000 (520,000) (137,000)
Item 2. Management's Discussion and Analysis or Plan of Operations
Forward-Looking Information
Forward-looking statements in this report, including without
limitation, statements relating to Decade Companies Income
Properties' (the "Partnership") 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;
and (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 Quarterly Report on Form 10-QSB
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," "believe," "expect," "anticipate," "estimate" or "continue"
or the negative thereof or other variations thereon or comparable
terminology. There are a number of important factors with respect
to such forward looking statements, including certain risks and
uncertainties, that could cause actual results, performance, or
achievements of the Partnership to differ materially from
anticipated future results, performance or achievements expressed
or implied by such forward-looking statements. Such factors, which
could adversely affect the Partnership's ability to obtain these
results, include, but are not limited to, the following: (i)
occupancy levels and market rents may be adversely affected by
local economic and market conditions, which are beyond the
Partnership's control; (ii) debt financing could adversely affect
the Partnership's performance, (iii) scheduled debt payments could
adversely affect the Partnership's financial condition, (iv)
financial covenants could adversely affect the Partnership's
financial condition, (v) the Partnership's degree of leverage could
limit its ability to obtain additional financing, (vi) control and
influence by significant limited partners could be exercised in a
manner averse to other limited partners, (vii) environmental
problems are possible and can be costly, (viii) the Partnership's
performance and Limited Partnership Interest value are subject to
risks associated with the real estate industry, (ix) the
Partnership may be unable to renew leases or relet space as leases
expire, (x) new real estate acquisitions may fail to perform as
expected, (xi) competition for real estate acquisitions may result
in increased prices for properties, (xii) because real estate
investments are illiquid, the Partnership may not be able to sell
properties when appropriate, (xiii) changing laws could affect the
Partnership's business, (xiv) provisions in the Limited Partnership
Agreement could inhibit changes in control, (xv) the Partnership
depends on key personnel; and (xvi) other factors described
elsewhere in this Quarterly Report on Form 10-QSB, and in the
Annual Report on Form 10-KSB, particularly the "Risk Factors"
appearing therein.
Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof. The
Partnership undertakes no obligation to publicly release any
revisions to these forward-looking statements, which may be made to
reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
The General Partner believes that opportunity for the Partnership
to purchase the Office Buildings in July 2002 was in the long-term
best interest of the Partnership. The total capital cost to
purchase the Office Buildings was approximately $10.33 million.
The average cost per square foot was approximately $62 per rentable
square foot (there are approximately 166,000 rentable square feet).
The General Partner believes that this price is below the
replacement cost and below market. The General Partner believes
that there will be an upside to this investment to the extent that
the vacant office space can be re-leased to an occupancy level in
the 90% range. As occupancy increases the Partnership may have
opportunities for resale of the Office Buildings or for refinancing
of the related mortgage debt. The effective value of the Office
Buildings may also be increased to the extent that a new mortgage
loan can be obtained at an interest rate below the current rate of
8.46% per annum. Even when adding the estimated costs of future
tenant improvements and other lease-up costs to the acquisition
cost of the Office Buildings, the General Partner believes that
there will be an upside to this investment in the Office Buildings.
Of course, there is no guarantee. Timing of the lease-up period
will be a factor in the ultimate success of the Office Buildings.
During the near-term, however, the Office Buildings are not
expected to support the existing level of debt service.
Consequently, the quarterly cash distributions were suspended
during the third quarter of 2002 until the operation of the Office
Buildings are stabilized.
There are certain events that should cause the reported financial
information to not be indicative of future operating results or
future financial condition, as follows:
The sale of The Meadows II Apartments in January 2002 will
impact future operations by eliminating the net operating
income previously generated by the property. The retirement
of the mortgage debt upon the sale of The Meadows II
eliminates the debt service burden associated with it. The
net sale proceeds held in escrow increased the amount of
portfolio earnings generated by the investment of such cash
reserves until they were used to purchase the two Office
Buildings in July, to invest in DMLP in August, and to reduce
the outstanding mortgage debt on the Office Buildings in
August.
During the first nine months of 2002, the Partnership used
approximately $2.9 million of cash reserves to purchase and
retire 3,135.76 Interests and to pay for tender offer
expenses. This use of cash reserves may impact future
operations by reducing the amount of cash reserves available
for investment, thereby reducing portfolio income earnings.
The retirement of 3,135.76 Interests should have an impact on
the future earnings per Interest because there are fewer
Interests outstanding.
The purchase of the two Office Buildings on July 30, 2002,
will impact future operations by generating net operating
income or loss. The mortgage debt of $10,079,064
(subsequently reduced to approximately $8.8 million) incurred
in the purchase of the Office Buildings adds the associated
debt service burden.
The investment of $4.2 million in DMLP on August 27, 2002,
should impact future operations by increasing portfolio
interest income to be earned on DMLP's investment in the Note
which bears interest at a fixed rate of 8.46% per annum.
The use of approximately $1.3 million of cash reserves on
August 29, 2002, to reduce the Note from $10,079,064 to
$8,801,838 will affect future operations by decreasing the
debt service burden associated with it.
There are certain matters that might impact future operations and
cash flows but that have not had an impact in the past, as follows:
The redemption of 3,135.76 Interests during the 2002 required
the use of approximately $2.9 million of cash reserves
(approximately $2,807,000 to purchase Interests, plus tender
offer expenses of approximately $80,000). The use of $2.9
million of cash reserves will have a negative impact on future
portfolio income to be earned.
As a result of the redemption of Interests during 2002 there
are now 10,261.51 Interests outstanding. Accordingly, future
per Interest cash distributions to Limited Partners, if any,
will be require less cash outlay because there will be
3,135.76 fewer Interests outstanding.
During the third quarter, cash distributions to Partners were
suspended, which will permit the resulting cash flow, if any,
to increase cash reserves.
As a result of the purchase of Interests by Mr. Keierleber (an
affiliate of the General Partner) during the nine-month period
ended September 30, 2002, Mr. Keierleber (directly and
beneficially) owned 6,259.067 Interests on September 30, 2002
(61.0% of the remaining outstanding Interests). He therefore
has the power to approve matters on which Limited Partners are
entitled to vote. Under Wisconsin's Limited Partnership law,
such actions include:
removal of the General Partners;
certain amendments to the Partnership Agreement;
termination or extension of the Partnership; and
sales of all or substantially all of the
Partnership's assets.
Accordingly, Mr. Keierleber will continue to have substantial
influence over the Partnership, which influence might not be
consistent with the desires and interests of other Limited
Partners, and on the outcome of any matters submitted to the
Partnership's Limited Partners for approval.
On May 4, 2002, the Partnership forwarded a consent
solicitation to all Limited Partners of the Partnership. An
amendment to the Partnership Agreement was proposed. The
amendment grants the Partnership the right to purchase Limited
Partnership Interests on terms and conditions no less
favorable than those offered by third parties in exchange for
Interests, including a right of first refusal over any
Interests subject to a third party tender offer. On May 14,
2002, the Partnership received the affirmative consent of a
majority of the outstanding Interests and the Amendment was
adopted.
The Partnership Agreement provides for termination at December 31,
2005.
Results of Operations
The comparative presentation of operations reflects the operation
of 935 apartment units during each period presented for 2001.
During 2002, the Partnership operated 935 apartment units through
January 30, 2002, when The Meadows II was sold, and 619 apartment
units thereafter. Two office buildings consisting of approximately
166,000 rentable square feet were operated beginning July 30, 2002.
The following table summarizes the number of properties and related
Apartment units or rentable square feet ("RSF") for Office
Buildings during 2002:
Number Purchase/Sale
Of Apartment Price
Properties Units RSF $ Millions
At December 31, 2001 3 935 0
Q1 Sale of The
Meadows II Apartments (1) (316) 0 $16.0
Q3 Purchase of the
Office Buildings 2 0 166,000 $10.3
At September 30, 2002 4 619 166,000
The Partnership's acquisition and disposition activity has impacted
overall results of operations for the three-month and nine-month
periods ended September 30, 2002. Significant changes in revenues
and expenses have resulted primarily from the Office Buildings
acquired in July 2002, which have been partially offset by the
disposition of The Meadows II Apartments in January 2002.
Significant changes in expenses have also resulted from changes in
insurance costs, general and administrative costs, and interest
expense. This impact is discussed in greater detail herein.
Income is received primarily from rental revenue including
reimbursements from Office Building tenants for certain operating
costs and from parking revenue. As a result of the current
slowdown in economic activity, there has been a decrease in
occupancy rates and a general decline in overall market rental
rates.
Operating revenue from rental income was $1,414,000 in the quarter
ended September 30, 2002, compared to $1,212,000 for the same
period in 2001, an increase of 16.7%. Rental income was provided
by the four sites for the comparative three-month period as set
forth below:
Percent
Three Months Ended Increase Increase
9/30/02 9/30/01 (Decrease) (Decrease)
Pelican Sound $ 767,000 $ 774,000 $ (7,000) 0.9%
Town Place 406,000 438,000 (32,000) (7.3%)
Plymouth 127,000* --- 127,000 N/A
Spectrum 114,000* --- 114,000 N/A
Total $ 1,414,000 $1,212,000 $ 202,000 16.7%
* The 2002 figures for Plymouth and Spectrum reflect only two
months of operations.
The $202,000 increase in operating revenue consisted of increases
of $127,000 at Plymouth and $114,000 at Spectrum, offset by
decreases at Town Place of $32,000, and at Pelican Sound of $7,000.
The $127,000 increase at Plymouth, and the $114,000 increase at
Spectrum, was attributed to their purchase on July 30, 2002. The
$32,000 decrease at Town Place was a result of a 3% increase in
gross potential rent, offset by a 10% decrease in average occupancy
(from 92% to 82%). The $7,000 decrease at Pelican Sound was
attributed to a 2% increase in gross potential rent, offset by a 1%
decrease in average occupancy (from 97% to 96%). The General
Partner believes that the decline in occupancy at both Pelican
Sound and Town Place was a direct result of a softening rental
market nationwide, and in the Pinellas County, Florida area in
particular. The General Partner does not anticipate improved
occupancy or improved collections during the fourth quarter of
2002.
Operating revenue from rental income for the nine-month period
ended September 30, 2002 was $3,712,000, compared to $3,547,000 for
the same period in 2001, an increase of 4.7%. Rental income was
provided by the four sites for the comparative nine month periods
as set forth below:
Percent
For Nine Months Ended Increase Increase
9/30/02 9/30/01 (Decrease) (Decrease)
Pelican Sound $2,248,000 $2,247,000 $ 1,000 0.0%
Town Place 1,223,000 1,300,000 (77,000) (5.9%)
Plymouth 127,000** 0 127,000 N/A
Spectrum 114,000** 0 114,000 N/A
Total $3,712,000 $3,547,000 $ 165,000 4.7%
** The 2002 figures for Plymouth and Spectrum reflect only two
months of operations.
The $165,000 increase in rental income for the nine-month period,
compared to the prior year's same nine-month period, is primarily
attributed to the operation of the Office Buildings. The $165,000
increase consisted of increases at Plymouth of $127,000, at
Spectrum of $114,000, and at Pelican Sound of $1,000, offset by a
decrease at Town Place $77,000. The $77,000 decrease at Town Place
is attributed to a weakening rental market.
The average monthly gross potential rent per unit at the Apartments
for the third quarter of 2002 and for the nine-month period of
2002, and the comparative periods in 2001, is set forth below:
Number Three Months Ended Nine Months Ended
of Units 9/30/02 9/30/01 9/30/02 9/30/01
Pelican Sound 379 $699 $685 $696 $681
The Meadows II 316 $N/A* $654 $665* $643
Town Place 240 $684 $666 $681 $660
All Rental Units 935 $693* $668 $688* $663
* The 2002 figures for The Meadows II reflect only one month of
operation.
"Gross potential rent" for apartments represents the asking rent
established by the Partnership for a vacant apartment plus the rent
in effect for occupied apartments.
The average annual gross potential rent per rentable square foot
("RSF") at the Office Buildings for the two months of ownership in
the third quarter of 2002 is set forth below:
Three Months Ended 09/30/02
Gross
Total RSF Average Annual
RSF Leased Rent/SF
Plymouth 53,573 42,284 $19.08*
Spectrum 112,840 43,694 $18.48*
All office spaces 166,413 85,978 $18.72
* The 2002 figures reflect only two months of operations.
"Gross potential rent" for Office Buildings represents the
annualized asking rent per RSF established by the Partnership for
vacant rentable space plus the rent in effect for occupied rentable
space.
The average occupancy level at the Apartments for the third quarter
ended September 30, 2002 and for the nine-month period of 2002, and
the comparable periods in 2001, is set forth below:
Three Months Ended Nine Months Ended
9/30/02 9/30/01 9/30/02 9/30/01
Pelican Sound 95.6% 96.7% 92.6% 94.5%
The Meadows II N/A 88.3% 90.1% 91.3%
Town Place 81.7% 92.1% 82.9% 90.6%
All Rental Units 90.3% 92.7% 89.1% 92.4%
The average occupancy level at the Office Buildings for the two
months of ownership in the third quarter of 2002 is set forth
below:
Three Months Ended
09/30/02
Plymouth 74.8%*
Spectrum 36.2%*
All office spaces 51.2%*
* The 2002 figures reflect only two months of operations.
The range of occupancy levels at the Apartments for the third
quarter period ended September 30, 2002 and for the nine-month
period of 2002, and the comparable periods in 2001, is set forth
below:
Three Months Ended Nine Months Ended
9/30/02 9/30/01 9/30/02 9/30/01
Pelican Sound 94.5-96.6% 95.9-97.1% 88.8-96.6% 91.7-97.1%
Town Place 80.3-82.5% 90.3-93.4% 80.0-85.7% 87.3-93.4%
All Rental Units 81.7-95.5% 92.2-93.4% 82.9-92.6% 90.8-93.8%
The range of occupancy levels at the office spaces for the three-
month period ended September 30, 2002 is set forth below:
Three Months Ended
9/30/02
Plymouth * 69.4-80.2%
Spectrum * 32.3-40.2%
* The 2002 figures reflect only two months of operations.
The General Partner believes that it is not currently possible to
draw any conclusions about where occupancy levels or market rents
ultimately will stabilize. Further decreases in occupancy rates
and/or rents could adversely affect the Partnership's revenues and
results of operations in subsequent periods.
Total operating expenses before depreciation, amortization and debt
service in the three-month period ended September 30, 2002
increased by $200,000, from $674,000 to $874,000, compared to the
same period of 2001. This consisted of increases at Town Place of
$52,000, at Plymouth of $60,000 and at Spectrum of $95,000, offset
by a decease at Pelican Sound of $7,000.
For the nine-month period ended September 30, 2002 total operating
expenses before depreciation, amortization and debt service
increased by $317,000 from $1,977,000 to $2,294,000. This
consisted of increases at Pelican Sound of $60,000, Town Place of
$102,000, Plymouth of $60,000, and Spectrum of $95,000.
A summary of operating expenses before depreciation, amortization,
and debt service by site follows:
Increase Increase
For the Three Months Ended (Decrease) (Decrease)
9/30/02 9/30/01 Amount Percent
Pelican Sound $406,000 $ 413,000 $ (7,000) (1.7%)
Town Place 313,000 261,000 52,000 19.9%
Plymouth 60,000 0 60,000 N/A
Spectrum 95,000 0 95,000 N/A
Total $874,000 $ 674,000 $ 200,000 29.7%
Increase Increase
For the Nine Months Ended (Decrease) (Decrease)
9/30/02 9/30/01 Amount Percent
Pelican Sound $1,253,000 $1,193,000 $ 60,000 5.0%
Town Place 886,000 784,000 102,000 13.0%
Plymouth 60,000 0 60,000 N/A
Spectrum 95,000 0 95,000 N/A
Total $2,294,000 $1,977,000 $ 317,000 16.0%
The $102,000 increase in operating expenses at Town Place was
primarily attributable to an increase in insurance expense of
$37,000, an increase in utilities expense of $13,000, an increase
in personnel expenses of $18,000, an increase in grounds expenses
of $5,000, an increase in outside contractors of $17,000, and an
increase of other items of $12,000.
The $60,000 increase in operating expenses at Pelican Sound was
primarily attributable to an increase in insurance expense of
$60,000, an increase in utilities of $15,000, an increase in
personnel of $27,000, offset by a decrease in outside contractors
of $9,000 and a decrease in building services of $33,000.
As a result of the terrorist acts on September 11, 2001, the
Partnership has realized increased costs for property insurance and
safety and security. The General Partner believes that these
increased costs will remain higher than similar costs incurred in
previous periods for the foreseeable future. Substantially all of
the office leases require the tenant to pay, as additional rent, a
portion of any increases in these operating expenses over a base
amount. The General Partner believes that a significant portion of
any increase in these operating expenses will be offset by expense
reimbursements from tenants.
As a result of the foregoing, net income from rental property
operations before debt service, depreciation and amortization, was
approximately $540,000 for the third quarter of 2002, compared to
$538,000 for the comparable 2001 period, an increase of
approximately $2,000. The net increase consisted of increases at
Plymouth of $67,000 and at Spectrum of $19,000, offset by a
decrease at Town Place of $84,000.
For the nine-month period ended September 30, net income from
rental operations before depreciation, amortization, and debt
service is approximately $1,416,000 for the 2002 period compared to
$1,569,000 for the comparable 2001 period, a decrease of
approximately $153,000. The decrease consists of decreases at
Town Place of $180,000 and at Pelican Sound of $59,000, which were
offset by increases at Plymouth of $67,000 and at Spectrum of
$19,000.
A summary of net operating income before depreciation,
amortization, and debt service, by site including the percent of
the total for each site for the three-month periods ended follows:
Increase Increase
9/30/02 9/30/01 (Decrease)(Decrease)
Amount Percent Amount Percent Amount Percent
Pelican Sound $361,000 67% $361,000 67% $ 0 (0.0%)
Town Place 93,000 17% 177,000 33% (84,000) (47.5%)
Plymouth 67,000 12% 0 0% 67,000 N/A
Spectrum 19,000 4% 0 0% 19,000 N/A
Total $540,000 100% $538,000 100% $ 2,000) 0.4%
A summary of net operating income before depreciation,
amortization, and debt service, by site for the nine-month periods
ended follows:
Increase Increase
9/30/02 9/30/01 (Decrease) (Decrease)
Amount Percent Amount Percent Amount Percent
Pelican Sound $ 994,000 70% $1,053,000 67% $ (59,000) (5.6%)
Town Place 336,000 24% 516,000 22% (180,000) (34.9%)
Plymouth 67,000 5% 0 0% 67,000 N/A
Spectrum 19,000 1% 0 0% 19,000 N/A
Total $ 1,416,000 100% $1,569,000 100% $(153,000) (9.8%)
Interest expense for the third quarter of 2002 increased
approximately $87,000 from the comparable 2001 period primarily as
a result of a higher amount of average outstanding debt between the
comparative periods. Interest expense decreased approximately
$195,000 for the nine-month period, primarily as a result of a
lower amount of average outstanding debt between the comparative
periods. The sale of The Meadows II Apartments reduced the related
mortgage debt in January 2002 by approximately $8.8 million. The
purchase of Office Buildings on July 30, 2002 increased the
mortgage debt by approximately $10.1 million. On August 29, 2002,
the Partnership reduced the mortgage debt on the Office Buildings
by approximately $1.3 million, from $10.1 million to $8.8 million.
The net income before debt service from real estate activities is
reduced by deductions for depreciation and amortization which do
not affect cash flow. Depreciation and amortization decreased
$65,000 for the third quarter of 2002 compared to 2001, and
decreased $171,000 for the nine-month period.
The Partnership's net other expenses increased during the third
quarter in 2002 by approximately $11,000. The $11,000 increase
consisted of a decrease in interest income of $9,000, an increase
in partnership management expenses of $2,000, which was
attributable to legal expenses and other costs incurred.
The Partnership's net other expenses increased during the nine-
month period in 2002 by approximately $88,000. The $88,000
increase consisted of a decrease in interest income of $31,000, and
an increase in partnership management expenses of $57,000.
The Partnership's net loss from continuing operations for the
quarter ended September 30, 2002 was approximately $196,000,
compared to net income of approximately $52,000 in the same period
of 2001. For the nine-month periods the Partnership's net loss
from continuing operations for 2002 was approximately $520,000,
compared to a net loss of approximately $137,000 for 2001.
Exclusive of depreciation and amortization, the Partnership's net
income from continuing operations for the quarters ended September
30, 2002 and 2001 was approximately $32,000 and $243,000,
respectively. For the nine-month periods the net income from
continuing operations exclusive of depreciation and amortization
was approximately $91,000 for 2002 and $423,000 for 2001.
Liquidity and Sources of Capital
Net cash flow from operations represents the primary source of
liquidity to fund distributions, debt service, and capital
improvements. The General Partner expects that cash reserves will
provide for funding of working capital, tenant improvements, and
unanticipated cash needs. The Partnership's net cash flow from
operations is dependent upon the occupancy level of the Properties,
the collectibility of rent from tenants, the level of operating and
other expenses, and other factors. Material changes in these
factors may adversely affect the net cash flow from operations.
Such changes, in turn, would adversely affect the Partnership's
ability to fund distributions, debt service, and capital
improvements.
At September 30, 2002 there was approximately $705,000 of cash and
cash equivalents and escrow deposits available to pay liabilities.
In addition, approximately $216,000 was held in a tax escrow
account on September 30, 2002.
During the first nine months of 2002, cash and cash equivalents
decreased by approximately $2,479,000 as shown herein on the
Statements of Cash Flows. Operating activities provided
approximately $873,000 during the nine months. Proceeds from the
sale of The Meadows I Apartments generated approximately
$6,663,000. The cash flow and cash reserves were used to make cash
distributions to the limited partners of approximately $462,000 (of
which approximately $88,000 (19%) was considered to be portfolio
income subject to income taxes), to make principal payments on the
outstanding mortgage notes of approximately $1,552,000 (not
including the payment of the principal balance of The Meadows II
mortgage at closing on January 31), to redeem Limited Partnership
Interests using approximately $2,897,000, to pay tender offer
expenses of approximately $80,000, to pay debt issue costs of
approximately $302,000, to purchase assets capitalized as part of
the investment properties in the amount of approximately $396,000,
to purchase 4,200 units in DMLP for $4,200,000, and to establish a
tax escrow of approximately $215,000.
The General Partner believes that the Partnership has the ability
to generate adequate amounts of cash to meet the Partnership's
current needs for the foreseeable future, if the cash distributions
to the partners are suspended until occupancy increases at the
office buildings.
Current liabilities total approximately $7,591,000, consisting of
approximately $6,423,000 of mortgage principal liabilities and
$1,168,000 of other current liabilities.
The mortgage note on Town Place is due in May 2003 and will require
a balloon payment of approximately $6.0 million. The Town Place
mortgage note bears interest at a fixed rate of 7.0% per annum.
The Partnership has applied to the lender for a reduction in the
interest rate and for an extension of the maturity date to October
2007. The Partnership expects to execute a revised note and
mortgage modification in November 2002.
On a short-term basis, rental operations are expected to provide a
stream of cash flow to pay day-to-day operating expenses from
investment properties. Investment property operations generated
net income in the third quarter of 2002 of approximately $45,000
(before depreciation and amortization of $229,000) compared to net
income of approximately $245,000 for the same period in 2001. For
the nine-month period, the net income from investment properties
was approximately $212,000 (before depreciation and amortization of
$610,000), compared to net income of $459,000 for the same period
in 2001.
The Limited Partnership Agreement provides that the Partnership
will make distributions for each calendar quarter of cash flow less
amounts set aside for reserves. In July the Partnership paid to
the Limited Partners the June declaration of approximately $128,000
($12.50 per Interest). Cash distributions were suspended during
the third quarter of 2002. A distribution payable to the General
Partner of $2,000 was accrued during the first six months of 2002,
and payment will be made before year end. Through September 30,
2002, the Partnership declared cash distributions of approximately
$14.8 million (82% of original capital) to the Limited Partners
since the inception in 1986. Cumulative cash distributions range
from $845 (85%) to $992 (99%) per $1,000 Interest purchased in the
initial public offering by 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 approximately
$1.8 million over the next five years. These obligations will most
likely be satisfied by cash generated from operations. The Pelican
Sound note is due in 2006 and will require a balloon payment of
approximately $11.4 million. The Office Buildings note is due in
August 2007 and requires a balloon payment of approximately $8.2
million. It is anticipated that all of the properties will be sold
or refinanced prior to the maturity dates.
The three mortgage notes on Pelican Sound, Town Place, and the
Office Buildings bear interest at 7.50%, 7.00%, and 8.46%
respectively. The Partnership has applied for a reduction of the
interest rates of its two nonrecourse mortgage that encumber
Pelican Sound and Town Place.
Pelican Sound was independently appraised at an estimated value of
$19.0 million as of April 8, 2002. The current outstanding
principal balance of the mortgage debt is approximately
$12,432,000. The mortgage note on Pelican Sound is due in October
2006 and will require a balloon payment of approximately $11.4
million. The Pelican Sound mortgage note bears interest at a fixed
rate of 7.5% per annum. The Partnership has applied to the lender
for a reduction of the interest rate and an extension of the
maturity date to October 2007. The Partnership expects to execute
a revised note and mortgage modification in November 2002.
Town Place was independently appraised at an estimated value of
$11.5 million as of April 8, 2002 and at $10.4 million as of
September 20, 2002. The current outstanding principal balance of
the mortgage debt is approximately $6,090,000.
The Partnership is exploring the feasibility of refinancing the
mortgage loans on Pelican Sound and Town Place during the next six
months. Additional proceeds, if any, from such refinancing 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.
Partners' Capital increased by approximately $4,597,000 during the
first nine months of 2002 due to the net income for the nine-month
period of approximately $7,779,000, less cash distributions
declared payable to the partners of approximately $296,000, less
the redemption of Interests of approximately $2,807,000, less
tender offer expenses of approximately $80,000.
Critical Accounting Policies and Estimates
The Partnership's condensed financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States, which require the Partnership to make estimates and
judgments that affect the reported amount of assets, liabilities,
revenues and expenses, and the related disclosures. The
Partnership believes that the following critical accounting
policies, among others, affect its more significant judgments and
estimates used in the preparation of its consolidated financial
statements.
Impairment of Long-Lived Assets, Including Goodwill
The Partnership periodically evaluates its long-lived assets,
including its investments in real estate and goodwill, for
impairment indicators. The judgments regarding the existence of
impairment indicators are based on factors such as operational
performance, market conditions and legal factors. Future events
could occur which would cause the Partnership to conclude that
impairment indicators exist and an impairment loss is warranted.
Depreciation of Investment in Real Estate
The Partnership depreciates the building component of its
investment in real estate over a 30-year estimated useful life,
building improvements over a 30-year estimated useful life, land
improvements over a 15-year estimated useful life, and both the
furniture, fixtures and equipment and replacements components over
a 5-year estimated useful life, all of which are judgmental
determinations.
Fair Value of Financial Instruments
The valuation of financial instruments under SFAS No. 107 and SFAS
No. 133 requires the Partnership to make estimates and judgments
that affect the fair value of the instruments. The Partnership
bases its estimates on factors relevant to the financial
instruments.
Capitalization of Fixed Assets and Improvement to Apartments:
The Partnership's policy with respect to capital expenditures that
improve the value of the property or extend the useful life of the
component asset of the property. The Partnership tracks
improvements to apartments in two major categories and several
subcategories:
Replacements (inside the unit). These include:
carpets and hardwood floors;
appliances;
mechanical equipment such as individual furnace/air
units, hot water heaters, etc;
furniture and fixtures such as kitchen/bath
cabinets, light fixtures, ceiling fans, sinks,
tubs, toilets, mirrors, countertops, etc;
flooring such as vinyl, linoleum or tile; and
blinds/shades
All personal property replacements are depreciated over
a 5-year estimated useful life. All permanent fixture
replacements are depreciated over a 30-year estimated
useful life. The Partnership expenses as incurred all
maintenance and turnover costs such as cleaning, interior
painting of individual units and the repair of any
replacement item noted above.
Building improvements (outside the unit). These include:
roof replacement and major repairs;
paving or major resurfacing of parking lots, curbs,
sidewalks;
amenities and common areas such as pools, exterior
sports and playground equipment, lobbies,
clubhouses, laundry rooms, alarm and security
systems and offices;
major building mechanical systems;
interior and exterior structural repair,
replacements and exterior painting;
major landscaping and grounds improvement; and
vehicles and office and maintenance equipment.
All building improvements are depreciated over a 35-year
estimated useful life. All land improvements are
depreciated over a 15-year estimated useful life. The
Partnership expenses as incurred all recurring
expenditures that do not improve the value of the asset
or extend its useful life.
Capital Improvements, Tenant Improvements and Leasing Commissions
of Office Buildings
Capital Improvements
Significant renovations and improvements which improve or extend
the useful life of the office buildings are capitalized. The
Partnership categorizes these capital expenditures as follows:
Capital Improvements - improvements that enhance
the value of the property such as lobby
renovations, roof replacement, significant
renovations for Americans with Disabilities Act
compliance, chiller replacement and elevator
upgrades.
Redevelopments Costs - include costs associated
with the redevelopment of an office property
including tenant improvements, leasing commissions,
capitalized interest and operating costs incurred
during completion of the property and incurred
while the property is made ready for its intended
use.
Tenant Improvements and Leasing Commissions
Costs related to the renovation, alteration or build-out of
existing second-generation space, as well as related leasing
commissions, are capitalized. These tenant improvements may
include, but are not limited to, floor coverings, ceilings, walls,
HVAC, mechanical, electrical, plumbing and fire protection systems.
Revenue Recognition for Apartments
Rental income attributable to leases is recorded when due from
residents and is recognized monthly as it is earned, which is not
materially different than on a straight-line basis. Interest
income is recorded on an accrual basis. Leases entered into
between a resident and a property for the rental of an apartment
unit are generally year-to-year, renewable upon consent of both
parties on a year-to-year or month-to-month basis.
Revenue Recognition for Office Buildings
Certain leases provide for tenant occupancy during periods for
which no rent is due or where minimum rent payments increase during
the term of the lease. The Partnership records rental income for
the full term of each lease on a straight-line basis. Accordingly,
a receivable is recorded from tenants for the current difference
between the straight-line rent and the rent that is contractually
due from the tenant ("Deferred Rent Receivable"). When a property
is acquired, the term of existing leases is considered to commence
as of the acquisition date for purpose of this calculation.
Item 3. Control and Procedures
Evaluation of Disclosures Controls and Procedures
Within the 90-day period prior to the date of this report, the
Partnership, under the supervision and with the participation of
the Partnership's management, including Jeffrey Keierleber, the
Partnership's Principal Executive Officer and Principal Financial
Officer, carried out an evaluation of the effectiveness of the
design and operation of the Partnership's disclosure controls and
procedures (the "Evaluations"). Based upon the Evaluation, Mr.
Keierleber concluded that the Partnership's disclosure controls and
procedures are effective in ensuring that material information
relating to the Partnership is made known to him by others within
the Partnership, particularly during the period in which this
quarterly report was being prepared, in a timely manner after
consideration of all permitted extensions.
Changes in Internal Controls
There were no significant changes in the Partnership's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of the Evaluation described above.
PART II.
OTHER INFORMATION
Items 1 through 5. Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: See the Exhibit Index following the Signature
page of this report, which is incorporated herein by
reference.
(b) The Partnership filed two reports on Form 8-K during the
quarter.
A Form 8-K dated July 30, 2002 was filed on August 14,
2002 to report the purchase of Plymouth and Spectrum.
A Form 8-K dated August 29, 2002 was filed on September
13, 2002 to report (i) the Partnership's investment in
DMLP and (ii) the purchase by DMLP of the mortgage note
encumbering Plymouth and Spectrum, including the use of
cash reserves to reduce the outstanding principal balance
from $10,079,064 to $8,801,838.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DECADE COMPANIES INCOME PROPERTIES -
A LIMITED PARTNERSHIP
(Registrant)
By: DECADE COMPANIES
(General Partner)
Date: November 19, 2002 By: /s/ Jeffrey Keierleber
Jeffrey Keierleber
General Partner and Principal
Financial and Accounting Officer
of Registrant
Certifications
I, Jeffrey Keierleber, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Decade
Companies Income Properties - A Limited Partnership.
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
conditions, results of operations and cash flows of the
registrant as of, and for, the period presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-
14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant is made known to us by others within those
entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report
(the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or person performing the equivalent
functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 19, 2002 /s/ Jeffrey Keierleber
Jeffrey Keierleber
Principal Executive Officer and
Principal Financial Officer
EXHIBIT INDEX
to
FORM 10-QSB QUARTERLY REPORT
For the quarter ended September 30, 2002
Exhibit Incorporated Herein Filed
Number Description by Reference to Herewith
11 Statement re: computation
of Earnings per Interest X
99.2 Certification of Chief
Executive Officer and Chief
Financial Officer Pursuant
to 18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-
Oxley Act of 2002 X
Exhibit 11 - Statement re: Computation of Per Interest Earnings
The following table sets forth the computation of earnings per
Interest:
Three Months Ended Nine Months Ended
9/30/02 9/30/01 9/30/02 9/30/01
Numerator
Net income (loss) attributable
to Limited Partners 99% $(195,697) $ 75,998 $7,701,637 $(35,701)
Denominator
Denominator for basic earnings
per Interest-weighted-average
Interest 10,261.51 13,397.27 11,625.02 13,398.94
Net income (loss)
per Interest ($19.07) $5.67 $662.51 $(2.66)
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Decade Companies Income
Properties (the "Partnership") on Form 10-QSB for the period ended
September 30, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Jeffrey
Keierleber, certifying in my dual capacities as Chief Executive
Officer and Chief Financial Officer of the Partnership, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of
my knowledge:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of the Partnership.
/s/ Jeffrey Keierleber
Jeffrey Keierleber
Chief Executive Officer and Chief Financial Officer
November 19, 2002