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 March 31, 2003.
[ ] 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)
(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
March 31, 2003
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements (unaudited)
Condensed Balance Sheet at March 31, 2003 3
Condensed Statements of Operations for the three
month period ended March 31, 2003
and 2002 4
Condensed Statements of Partners' Capital
for the three months ended March 31, 2003
and the year ended December 31, 2002. 5
Condensed Statements of Cash Flows for the
three months ended March 31, 2003 and 2002. 6
Notes to Condensed Financial Statements. 7
Item 2. Management's Discussion and Analysis or Plan
of Operations 13-29
Item 3. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 1 - 3 Not applicable 30
Item 4 - Submission of Matters to a Vote of Security
Holders 30
Item 5 - Not Applicable
Item 6. Exhibits and Reports on Form 8-K. 30
SIGNATURES 31
Certification 32
Exhibit Index 34
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
March 31, 2003
(unaudited)
ASSETS
CURRENT ASSETS:
Rent receivable $ 38,413
Escrow funds 500
Prepaid expenses and other assets 150,434
Total Current Assets 189,347
INVESTMENT PROPERTIES, AT COST: 32,404,711
Less: accumulated depreciation (7,875,477)
Net Investment Properties 24,529,234
OTHER ASSETS:
Investment in unconsolidated affiliate 4,366,106
Utility deposits 44,762
Deferred rent receivable 17,509
Debt issue costs, net of accumulated
amortization 526,752
Total Other Assets 4,955,129
Total Assets $29,673,710
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
CURRENT LIABILITIES:
Current portion of mortgages notes
payable $ 687,800
Accounts payable and accrued taxes 273,772
Payables to affiliates 241,125
Checks issued in excess of bank balance 122,453
Unearned rent collections 43,844
Tenant security deposits 89,409
Total current liabilities 1,458,403
Long-term Liabilities
Payables to affiliates 1,432,698
Mortgage notes payable 26,282,484
Total long-term Liabilities 27,715,182
Total Liabilities 29,173,585
PARTNERS' CAPITAL:
General Partner Capital (21,720)
Limited Partners (authorized--18,000 Interests;
outstanding--10,261.51 Interests at 03/31/03) 521,845
Total Partners' Capital 500,125
Total Liabilities and Partners' Capital $29,673,710
See Notes to Unaudited Condensed Financial Statements.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31
2003 2002
Operating revenue:
Rental and other income $1,465,979 $ 1,125,267
Operating expenses:
Operating and administration 723,043 561,902
Real estate taxes 191,715 125,400
Interest expense 350,352 351,165
Depreciation 251,655 169,379
Amortization of debt issue costs 33,134 22,963
Total operating expenses 1,549,899 1,230,809
Loss from investment properties (83,920) (105,542)
Other income (expenses):
Interest on payables to affiliates (10,474)
Interest income --- 28,940
Partnership administration (40,711) (72,804)
Net other income (expenses) (51,185) (43,864)
Net loss before equity in net income
of unconsolidated affiliate and
discontinued operations (135,105) (149,406)
Equity in earnings of unconsolidated
affiliate 90,244 ---
Discontinued operations, Net --- 8,330,836
NET INCOME (LOSS) $ (44,861) $ 8,181,430
Net income (loss) attributable to
General Partner (1%) $ (449) $ 81,814
Net income (loss) attributable to
Limited Partners (99%) (44,412) 8,099,616
$ (44,861) $ 8,181,430
Net income (loss) per Limited
Partner Interest $ (4.33) $ 604.57
See Notes to Unaudited Condensed Financial Statements
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
(Unaudited as to the Three Months Ended March 31, 2003)
Limited General Limited
Partnership Partner Partners'
Interests Capital Capital Total
Balance at 12/31/01 13,397.27 ($95,661) $(3,613,153) $(3,708,814)
Distributions to Partners --- --- (294,039) (294,039)
Net income for the period --- 74,390 7,364,641 7,439,031
Redemption of Interests (3,135.76) --- (2,806,505) (2,806,505)
Tender Offer expenses --- (84,687) (84,687)
Balance at 12/31/02 10,261.51 $(21,271) $ 566,257 $ 544,986
Net loss for the period --- (449) (44,412) (44,861)
Balance at 3/31/03 10,261.51 $(21,720) $ 521,845 $ 500,125
See Notes to Unaudited Condensed Financial Statements
CONDENSED STATEMENTS OF CASH FLOWS - (UNAUDITED)
For The Three Months Ended March 31,
2003 2002
CASH PROVIDED BY OPERATIONS $ 286,156 $ 157,922
INVESTING ACTIVITIES:
Proceeds from sale of investment property --- 6,662,575
Deposits to exchange escrow --- (6,681,536)
Additions to investment properties (26,019) (63,690)
Capital distributions from
unconsolidated affiliate 66,780 ---
NET CASH USED IN INVESTING ACTIVITIES 40,761 (82,651)
FINANCING ACTIVITIES:
Checks issued in excess of bank balance (140,954) ---
Redemption of interests --- (81,456)
Principal payments on mortgage notes (185,963) (94,183)
Distributions paid to limited partners --- (167,466)
NET CASH USED IN FINANCING ACTIVITIES (326,917) (343,105)
INCREASE (DECREASE) IN CASH & CASH
EQUIVALENTS --- (267,834)
CASH & CASH EQUIVALENTS AT THE BEGINNING
OF PERIOD --- 3,183,319
CASH & CASH EQUIVALENTS
AT THE END OF PERIOD $ --- $ 2,915,485
Supplementary disclosure of cash flow information:
Interest paid $ 469,325 $ 387,560
Income taxes paid 0 0
See Notes to Unaudited Condensed 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 March 31, 2003, 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 condensed 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 months ended March 31, 2003 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
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, 2002.
Note C. 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 the sale of approximately $8.6 million was recognized.
The components of discontinued operations for the three-month periods ended
March 31, 2003 and 2002, respectively, are outlined below:
Three Months Ended
03/31/03 03/31/02
OPERATING REVENUES
Rental and other income $ 0 $ 184,547
OPERATING EXPENSES
Operating and administrative expenses 0 268,518
Real estate taxes 0 21,922
Interest expense 0 55,356
Depreciation 0 6,575
Amortization of debt issue costs 0 80,460
Total operating expenses 0 432,831
Loss from investment property 0 (248,284)
Gain on sale of property 0 8,579,120
Discontinued operations, net $ 0 $8,330,836
Note D - COMMITMENTS AND CONTINGENCIES
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 E - Operations by Industry Segment
Description of Products and Services by Segment
The Partnership has two reportable segments: Apartments and Office Buildings.
The Partnership's Apartments 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
03/31/03 03/31/02
Operating revenue associated
with investment properties
Apartments $ 1,082,000 $ 1,125,000
Office buildings 384,000 0
Total operating revenue 1,466,000 1,125,000
Operating expenses associated with
investment properties
Operating and administration expenses
Apartments 501,000 562,000
Office buildings 222,000 0
Total 723,000 562,000
Depreciation
Apartments 171,000 169,000
Office buildings 81,000 0
Total 252,000 169,000
Interest, including amortization of finance costs
Apartments 179,000 374,000
Office buildings 204,000 0
Total 383,000 374,000
Real estate taxes
Apartments 126,000 125,000
Office buildings 66,000 0
Total 192,000 125,000
Total operating expenses associated
with investment properties 1,550,000 1,230,000
Income (loss) from operations
of investment properties $ (84,000)$ (105,000)
Segment assets
Apartments $14,304,000 $14,809,000
Office buildings 10,225,000 0
Total $24,529,000 $14,809,000
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. The words "may," "will," "believe,"
"expect," "anticipate," "estimate," "intends," "project," or "continue" or the
negative thereof or other similar expressions that are predictions of or
indicate future events and trends and which do not relate solely to historical
matters identify forward-looking statements. Such forward-looking statements
are subject to risks and uncertainties, which could cause actual results,
performance, or achievements of the Partnership to differ materially from
anticipated future results, performance of achievements expressed or implied by
such forward-looking statements. Factors that might cause such differences
include, but are not limited to, the following:
occupancy levels and market rents may be adversely
affected by national and local economic and market
conditions including, without limitation, new
construction of multifamily housing, new construction of
office buildings, continuing decline in employment,
availability of low interest mortgages for single-family
home buyers and the potential for geopolitical
instability, all of which are beyond the Partnership's
control;
alternative sources of capital to the Partnership or
labor and materials required for maintenance, repair, or
capital expenditure are more expensive than anticipated;
and
additional factors as discussed in Part I of the Annual
Report on Form 10-KSB, particularly those under "Risk
Factors".
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.
During 2002, the Partnership changed its investment strategy by selling The
Meadows II Apartments in Madison, Wisconsin, and reinvesting a portion of the
proceeds in two Office Buildings (Spectrum and Plymouth Plaza) located in
Florida, and using the remaining balance of the sale proceeds to purchase a
48.7% interest in an affiliated entity that purchased the outstanding mortgage
note that encumbers the Office Buildings. The General Partner believes that the
Partnership sold The Meadows II at an opportune time and at a very favorable
price. The General Partner also believes that the Partnership's purchase of the
Office Buildings was made at a time when the office market is generally
depressed, and at purchase prices that are below the replacement cost
(generally due to the higher level of vacancy).
The General Partner believes that the 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 there will likely 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.
Although the investment strategy was changed during 2002, the principal
investment objectives of the Partnership have not changed. Those objectives,
in order of priority, are to invest in real properties and/or mortgage loans
which will:
1. Preserve and protect the Partnership's capital investment;
2. Provide quarterly distributions of cash from operations;
and
3. Provide capital appreciation through increases in the
value of the Partnership's real property assets or, in
the case of mortgage loans, increased cash distributions
and/or capital appreciation through participation in any
increased value of the properties securing those loans
that provide for such participation rights.
During the near-term, the Office Buildings are not expected to support the
existing level of debt service. Consequently, the quarterly cash distributions,
which were suspended during the third quarter of 2002, will not resume until the
operation of the Office Buildings is stabilized.
Although quarterly cash distributions remain as a principal investment objective
and may resume after the occupancy in the Office Buildings is stabilized, the
potential for capital appreciation through increases in the value of the
Partnership's real property assets, particularly the Office Buildings, is more
likely, given the revised investment strategy.
In 2003, the Partnership plans to take actions to reduce the number of Limited
Partners to fewer than 300 (from the current 422) in order to qualify to
terminate the registration of the Interests under the Securities Exchange Act of
1934 (the "Exchange Act"). The termination of registration of the Interests
under the Exchange Act would likely reduce certain of the Partnership's
administrative costs, such as legal, accounting, printing, mailing and investor
communications expenses, and would reduce the information required to be
furnished by the Partnership to the Securities and Exchange Commission and the
Limited Partners. The termination of registration would also make certain
provisions of the Exchange Act, such as the short-swing profit recovery
provisions of Section 16(b), no longer applicable and suspend the requirement to
file reports pursuant to Section 15(d).
Another motivation for the Partnership to take actions to reduce the number of
limited partners, would be to provide liquidity for those limited partners who
are not in favor of the recent change in investment strategy and prefer to
receive cash flow distributions rather than future capital appreciation, if any.
The Partnership Agreement provides for termination at December 31, 2005.
However, the General Partner will likely propose an amendment to the Partnership
Agreement to extend the termination date. Mr. Jeffrey Keierleber, an affiliate
of the General Partner, currently owns approximately 65% of the 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.
Results of Operations
The comparative presentation of operations reflects the operation of 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:
Number Purchase/Sale
Of Apartment Price
Properties Units RSF $ Millions
At December 31, 2001 3 935 0
Q1 of 2002 Sale of The
Meadows II Apartments (1) (316) 0 $16.0
At March 31, 2002 2 619
Q3 of 2002 Purchase of
the Office Buildings 2 0 166,000 $10.3
At March 31, 2003 4 619 166,000
The Partnership's acquisition and disposition activity has impacted overall
results of operations for the three-month period ended March 31, 2003.
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 $1,466,000 in the quarter ended March
31, 2003, compared to $1,126,000 for the same period in 2002, an increase of
30.2%. Rental income was provided by the four sites for the comparative
three-month period as set forth below:
Percent
Three Months Ended Increase Increase
3/31/03 3/31/02 (Decrease) (Decrease)
Pelican Sound $ 686,000 $ 723,000 $ (37,000) (5.1%)
Town Place 396,000 403,000 (7,000) (1.7%)
Plymouth 182,000 --- 182,000 N/A
Spectrum 202,000 --- 202,000 N/A
Total $ 1,466,000 $1,126,000 $ 340,000 30.2%
The $340,000 increase in operating revenue consisted of increases
of $182,000 at Plymouth and $202,000 at Spectrum, offset by decreases at Town
Place of $7,000, and at Pelican Sound of $37,000. The $182,000 increase at
Plymouth, and the $202,000 increase at Spectrum, was attributed to their
purchase on July 30, 2002. The $37,000 decrease at Pelican Sound was attributed
to a 1% increase in gross potential rent, offset by a 1% decrease in average
occupancy (from 90% to 89%). The $7,000 decrease at Town Place was a result of
a 1% increase in gross potential rent, offset by a 2% decrease in average
occupancy (from 82% to 80%). 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 remainder of 2003.
The average monthly gross potential rent per unit at the Apartments for the
first quarter ended March 31, 2003 and for the comparative period in 2002,
is set forth below:
Number Three Months Ended
of Units 3/31/03 3/31/02
Pelican Sound 379 $702 $693
Town Place 240 $686 $678
All Rental Units 619 $696 $687
"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 first quarter of 2003 is set forth below:
Three Months Ended 03/31/03
Gross
Total RSF Average Annual
RSF Leased Rent/SF
Plymouth 53,573 43,086 $19.11
Spectrum 112,840 43,750 $18.70
All office spaces 166,413 86,836 $18.90
"Gross potential rent" for the 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 first quarter ended March
31, 2003 and the comparable period in 2002, is set forth below:
Three Months Ended
3/31/03 3/31/02
Pelican Sound 88.5% 89.6%
Town Place 79.9% 81.7%
All Rental Units 85.2% 86.9%
The average occupancy level at the Office Buildings for the first quarter of
2003 is set forth below:
Three Months Ended
03/31/03
Plymouth 80.2%
Spectrum 39.8%
All office spaces 46.8%
The range of occupancy levels at the Apartments for the first quarter period
ended March 31, 2003 and the comparable period in 2002, is set forth below:
Three Months Ended
3/31/03 3/31/02
Pelican Sound 87.7-89.2% 88.8-90.0%
Town Place 78.7-81.7% 80.0-84.1%
All Rental Units 84.2-86.4% 86.5-87.8%
The range of occupancy levels at the office spaces for the three-month period
ended March 31, 2003 is set forth below:
Three Months Ended
3/31/03
Plymouth 80.2-80.2%
Spectrum 39.7-39.8%
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.
The Partnership believes that it is helpful to investors to provide certain
computations that are not in accordance with GAAP, but serve as a supplemental
measure of the operating performance of a real estate company, along with net
income, and cash flows from operating activities, financing activities and
investing activities. Such computations used herein include the following:
(1) operating expenses before depreciation, amortization, and debt service,
(2) income from investment properties before debt service, (3) income from
investment properties before depreciation, amortization, and debt service, (4)
net loss before equity in net income of unconsolidated affiliate, and (5) income
exclusive of depreciation, amortization, and equity in earnings of
unconsolidated affiliate. The Partnership believes that these computations
provide investors an understanding of the ability of the Partnership to incur
and service debt and to make capital expenditures. These supplemental
computations in and of themselves do not represent operating expenses, net
income, or cash generated from operating activities in accordance with GAAP and
therefore should not be considered as an alternative to net income as an
indication of the Partnership's performance or to net cash flows from operating
activities as determined by GAAP as a measure of liquidity and are not
necessarily indicative of cash available to fund cash needs.
A summary of operating expenses before depreciation, amortization, and debt
service by site follows:
Increase Increase
For the Three Months Ended (Decrease) (Decrease)
3/31/03 3/31/02 Amount Percent
Pelican Sound $381,000 $ 403,000 $ (22,000) (5.5%)
Town Place 245,000 284,000 (39,000) (13.7%)
Plymouth 117,000 0 117,000 N/A
Spectrum 171,000 0 171,000 N/A
Total $914,000 $ 687,000 $ 227,000 33.0%
The $22,000 decrease in operating expenses at Pelican Sound was primarily
attributable to an increase in personnel expense of $10,000, offset by a
decrease in building exterior expenses of $15,000, a decrease in insurance
expense of $6,000, a decrease in property management fees of $5,000 and a
decrease in other expenses of $6,000.
The $39,000 decrease in operating expenses at Town Place was primarily
attributable to an increase in personnel expense of $17,000, offset by a
decrease in insurance expense of $3,000, a decrease in building exterior
expenses of $22,000, a decrease in administration expenses of $12,000, a
decrease in property management fees of $3,000, a decrease in utilities
expense of $7,000, and a decrease in other expenses of $9,000.
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, income from investment properties before debt
service, depreciation and amortization, was approximately $551,000 for the
first quarter of 2003, compared to $438,000 for the comparable 2002 period, an
increase of approximately $113,000. The net increase consisted of increases at
Plymouth of $65,000, at Spectrum of $31,000, and at Town Place of $32,000,
offset by a decrease at Pelican Sound of $15,000.
A summary of income from investment properties 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
3/31/03 3/31/02 (Decrease)(Decrease)
Amount Percent Amount Percent Amount Percent
Pelican Sound $305,000 55% $320,000 73% $ (15,000) (4.7%)
Town Place 150,000 27% 118,000 27% 32,000 27.1%
Plymouth 65,000 12% 0 0% 65,000 N/A
Spectrum 31,000 6% 0 0% 31,000 N/A
Total $551,000 100% $438,000 100% $ 113,000 25.8%
Interest expense for the first quarter of 2003 increased $9,000. The increase
was comprised of an increase for Plymouth of $91,000, at Spectrum of $95,000,
and an increase of $10,000 for interest on payables to affiliates, offset by a
decrease for Pelican Sound of $125,000 and a decrease for Town Place of $62,000.
The decreases for Pelican Sound and Town Place are the result of interest
charged on the decreasing principal balances of the notes and a lower interest
rate on both mortgages. The interest rates on the Apartment mortgages are
variable.
The 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 increased $92,000 for the first quarter of 2003
compared to 2002.
The Partnership's net other expenses increased during the first quarter in 2003
by approximately $7,000. The $7,000 increase consisted of a decrease in
interest income of $29,000, a decrease in partnership management expenses of
$32,000 and an increase in interest on payables to affiliates of $10,000.
The Partnership's net loss before equity in net income of unconsolidated
affiliate and discontinued operations for the quarter ended March 31, 2003 was
approximately $135,000, compared to a net loss of approximately $149,000 in the
same period of 2002. Exclusive of depreciation, amortization, and equity in
earnings of unconsolidated affiliate, the Partnership's income for the quarters
ended March 31, 2003 and 2002 was approximately $149,000 and $43,000,
respectively.
Income from the earnings of the unconsolidated affiliate, Decade Mortgage Loan
Partners, LLC ("DMLP") increased approximately $90,000 between the periods under
comparison. This increase is attributable to the Partnership's investment in
DMLP during the second half of 2002.
Liquidity and Sources of Capital
The Partnership did not have any cash or cash equivalents as of March 31, 2003.
Net cash flow from operations represents the primary source of liquidity to fund
distributions, debt service, and capital improvements. The General Partner
expects that operations 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.
Operating activities provided approximately $286,000 during the three month
period ending March 31, 2003. Approximately $67,000 was received from DMLP.
The cash flow was used to make principal payments on the outstanding mortgage
notes of approximately $186,000, and to purchase assets capitalized as part of
the investment properties in the amount of approximately $26,000, and to reduce
the amount of checks written in excess of the bank balance by approximately
$141,000.
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, so long as the cash distributions to the partners continue
to be suspended until occupancy increases at the Office Buildings.
Current liabilities total approximately $1,458,000, consisting of approximately
$688,000 of mortgage principal liabilities and $770,000 of other current
liabilities.
The mortgage rates on the Apartments, and the Office Buildings bear interest at
3.59% (floating), and 8.46% (fixed) respectively at March 31, 2003.
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 properties generated income in the first quarter of 2003 of
approximately $201,000 (before depreciation and amortization of $285,000)
compared to income of approximately $87,000 for the same period in 2002.
The Limited Partnership Agreement provides that the Partnership will make
distributions for each calendar quarter of cash flow less amounts set aside
for reserves. Cash distributions were suspended during the third quarter of
2002. Through March 31, 2003, 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 $3.3 million over the
next five years. These obligations will most likely be satisfied by cash
generated from operations. In the year 2007, the Town Place mortgage note
requires a balloon payment of approximately $4.97 million. The Pelican Sound
note is due in 2007 and will require a balloon payment of approximately $10.5
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.
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 $12,229,000. The mortgage note on Pelican Sound is due in
2007 and will require a balloon payment of approximately $10.5 million. The
Pelican Sound mortgage note bears interest at a variable rate (3.59% at March
31, 2003). The Partnership could refinance the Pelican Sound mortgage loan to
obtain additional liquidity. However, the amount of additional loan proceeds
would be restricted by the average occupancy of 88.5% at Pelican Sound.
Town Place was independently appraised at an estimated value of $11.5 million as
of April 8, 2002, and $10.4 million as of September 20, 2002. The current
outstanding principal balance of the mortgage debt is approximately $5,992,000.
The Town Place mortgage note bears interest at a variable rate (3.59% at March
31, 2003). The Partnership could refinance the Town Place mortgage loan to
obtain additional liquidity. However, the amount of additional loan proceeds
would be restricted by the average occupancy of 79.9% at Town Place.
Another source of liquidity for the Partnership would be for the Partnership to
reduce its investment in DMLP. However, for income tax purposes of each limited
partner, if Mr. Keierleber's beneficial interest in the mortgage note that
encumbers the Office Buildings (the "Note") exceeds 80% at a year end, then the
entire amount of the Note would be allocated to Mr. Keierleber (and none to the
limited partners) for the purpose of computing the adjusted income tax basis in
the Interests. Such allocation could be detrimental to any limited partner to
the extent that relief of nonrecourse liability would result in the recognition
of gain for income tax purposes.
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 decreased by approximately $45,000 during the first three
months of 2003 due to the net loss for the three-month period of approximately
$45,000.
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:
(a) carpets and hardwood floors;
(b) appliances;
(c) mechanical equipment such as individual furnace/air
units, hot water heaters, etc;
(d) furniture and fixtures such as kitchen/bath
cabinets, light fixtures, ceiling fans, sinks,
tubs, toilets, mirrors, countertops, etc;
(e) flooring such as vinyl, linoleum or tile; and
(f) 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:
(a) roof replacement and major repairs;
(b) paving or major resurfacing of parking lots, curbs,
sidewalks;
(c) amenities and common areas such as pools, exterior
sports and playground equipment, lobbies,
clubhouses, laundry rooms, alarm and security
systems and offices;
(d) major building mechanical systems;
(e) interior and exterior structural repair,
replacements and exterior painting;
(f) major landscaping and grounds improvement; and
(g) office and maintenance equipment.
All building improvements are depreciated over a 30-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:
(a) 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.
(b) 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.
Quantitative and Qualitative Disclosures About Market Risk
The Partnership's market risk has not changed materially from the amounts and
information reported in the Partnership's Form 10-KSB for the year ended
December 31, 2002.
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, 2, 3, and 5. Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 31, 2003, the Partnership solicited a Proxy Statement to all Limited
Partners of the Partnership. The approval of certain actions already taken by
the General Partner (the "Approval") was sought and several amendments to the
limited partnership agreement (the "Proposed Amendments") were proposed. A more
detailed description of the Approval and the Proposed Amendments can be found
in the Proxy Statements. The Approval and the Proposed Amendments were designed
to ratify the General Partner's action of investing cash generated from the
January 31, 2002 sale of The Meadows II Apartments into a limited liability
company that purchases or issues mortgage notes or other debt instruments in
connection with real estate owned by the Partnership and to allow the
Partnership to make similar investments in the future. The number of votes cast
for the Approval was 7,938.24, the number of votes cast against the Approval was
341.70, and the number of abstentions was 337.39. The number of votes cast for
the Amendments was 7,916.74, the number of votes cast against the Amendments was
361.20, and the number of abstentions was 337.39. No meeting was held in
connection with the Approval or Amendments. On March 31, 2003, the Approval was
received and the Amendments were adopted.
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 did not file any reports on Form 8-K
during the quarter ended March 31, 2003.
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: May 14, 2003 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: May 14, 2003 /s/ Jeffrey Keierleber
Jeffrey Keierleber
Principal Executive Officer and
Principal Financial Officer
EXHIBIT INDEX
to
FORM 10-QSB QUARTERLY REPORT
For the quarter ended March 31, 2003
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
3/31/03 3/31/02
Numerator
Net income (loss) attributable
to Limited Partners 99% $(44,412) $8,099,616
Denominator
Denominator for basic earnings
per Interest-weighted-average
Interest 10,261.51 13,397.27
Net income (loss) per Interest ($4.33) $604.57
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 March 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Jeffrey Keierleber, 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
May 14, 2003
This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Partnership
for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.