SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amended FORM 10-Q/A Quarterly Report Under Section 13 or 15(d) Of the Securities Exchange Act of 1934 For Quarter Ended March 31, 2000 Commission File No. 000-16950 Prometheus Income Partners, a California Limited Partnership (Exact name of registrant as specified in its charter) California 77-0082138 (State or other jurisdiction of (IRS Employer ID Number) incorporation or organization) 350 Bridge Parkway Redwood City, California 94065-1517 (Address of principal (Zip code) executive offices) Registrant's telephone number, including area code: (650) 596-5300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] PART I: FINANCIAL INFORMATION Item 1. Condensed Financial Statements The accompanying unaudited financial statements should be read in conjunction with the Form 10-K filed by the Partnership for the year ended December 31, 1999. These statements have been prepared in accordance with the instructions of the Securities and Exchange Commission Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Historically the Rigistrant's Form 10-Q Filings have not made any adjustments for the capitalization of improvements except in conjunction with the year-end financial statements. This Amended Form 10-Q reflects the financial results on a basis consistent with the Registrant's Form 10-K Filing. While the financial information is unaudited, in the opinion of the Partnership, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. PROMETHEUS INCOME PARTNERS a California Limited Partnership BALANCE SHEETS MARCH 31, 2000 AND DECEMBER 31, 1999 (Unaudited and in Thousands, Except for Unit Data) March 31, December 31, 2000 1999 ---------- ---------- ASSETS Real Estate: Land, buildings and improvements $ 30,366 $ 30,288 Accumulated depreciation (8,350) (8,183) -------- -------- 22,016 22,105 Cash and cash equivalents 2,020 1,942 Restricted cash 5,024 4,558 Deferred expenses, net 231 239 Accounts receivable and other assets 5 29 -------- -------- Total assets $ 29,296 $ 28,873 ======== ======== LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) Notes payable $ 26,113 $ 26,188 Payables and accrued liabilities 363 324 -------- -------- Total liabilities 26,476 26,512 -------- -------- General partner deficit (373) (378) Limited partners' capital 18,995 limited partnership units issued and outstanding 3,193 2,739 -------- -------- Total partners' capital (deficit) 2,820 2,361 -------- -------- Total liabilities and partners' capital (deficit) $ 29,296 $ 28,873 ======== ======== The accompanying notes are an integral part of these financial statements. PROMETHEUS INCOME PARTNERS a California Limited Partnership STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (Unaudited and in Thousands, Except for Unit Data) 2000 1999 ----------- ----------- REVENUES Rental $ 1,520 $ 1,400 Other income 26 43 Interest income 114 58 ------- ------- Total revenues 1,660 1,501 ------- ------- EXPENSES Interest and amortization 468 473 Operating 360 248 Depreciation 167 140 Administrative 13 14 Payments to general partner and affiliates: Management fees 77 73 Operating and administrative 116 94 ------- ------- Total expenses 1,201 1,042 ------- ------- NET INCOME $ 459 $ 459 ======= ======= Net income per $1,000 limited partnership unit $ 24 $ 24 ======= ======= Number of limited partnership units used in computation 18,995 18,995 ======= ======= The accompanying notes are an integral part of these financial statements. PROMETHEUS INCOME PARTNERS a California Limited Partnership STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (Unaudited and in Thousands) 2000 1999 ----------- ----------- CASH FLOW FROM OPERATING ACTIVITIES Net income $ 459 $ 459 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 167 140 Amortization 7 7 Increase (decrease) in accounts receivable and other assets 24 (11) Decrease (increase) in payables and accrued liabilities 40 (161) ------- ------- Net cash provided by operating activities 697 434 ------- ------- CASH FLOW FROM INVESTING ACTIVITIES Increase in fixed asset additions (78) (51) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in restricted cash (466) (427) Principal reductions on notes payable (75) (70) -------- ------- Net cash used for financing activities (541) (497) ------- ------- Net increase (decrease) in cash and cash equivalents 78 (114) Cash and cash equivalents at beginning of year 1,942 1,183 ------- ------- Cash and cash equivalents at end of period $ 2,020 $ 1,069 ======= ======= The accompanying notes are an integral part of these financial statements PROMETHEUS INCOME PARTNERS a California Limited Partnership NOTES TO FINANCIAL STATEMENTS 1. THE PARTNERSHIP Prometheus Income Partners, a California Limited Partnership (the "Partnership"), was formed to construct, invest in, operate and ultimately sell two multi-family apartment projects ("Properties"), Alderwood Apartments ("Alderwood") and Timberleaf Apartments ("Timberleaf"), located in Santa Clara, California. The General Partner is Prometheus Development Co., Inc., a California corporation. The financial information has been restated as of March 31, 2000 and for the three months ended March 31, 2000 and 1999 to reflect capitalization of improvements on a basis consistent with the practices followed annually. The financial information included herein at March 31, 2000 and for the three months ended March 31, 2000 and 1999 is unaudited and, in the opinion of the Partnership, reflects all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the financial position as of those dates and the results of operations for those periods. Management fees and payments to the General Partner and affiliates represent compensation for services provided and certain expense requirements, at cost, in accordance with the Partnership Agreement. The information in the Balance Sheets at December 31, 1999 was derived from the Partnership's audited annual report for 1999. Partnership profits, losses and distributions are allocated among the partners based on the provisions of the Partnership Agreement which generally provide for allocations to begin when the partners are admitted to the Partnership. 2. INCOME TAXES In accordance with federal and California income tax regulations, no income taxes are levied on the Partnership; rather, such taxes are levied on the individual partners. Consequently, no provision or liability for federal or California income tax has been reflected in the accompanying financial statements. 3. CONSTRUCTION DEFECTS The General Partner has learned that the type of hardboard siding that was used at both Alderwood and Timberleaf is failing to perform as expected in a number of projects in various parts of the United States. Two lawsuits have been filed, one for each Property. At this time, experts on behalf of the Partnership have concluded the initial visual inspection, the scientific testing of the siding material and destructive investigation. The defendants have also completed their destructive investigation. Additionally, certain structural issues were uncovered at Timberleaf and were rebuilt as part of the immediate repair process. The General Partner subsequently determined that additional immediate repairs NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. CONSTRUCTION DEFECTS (CONTINUED) were necessary. These repairs (with the exception of roof repairs noted below) have been completed and the General Partner continues to monitor the condition of the Property. Routine roofing inspection has uncovered failing roof substrate at dormer roof assemblies for both Alderwood and Timberleaf. The cause has been traced to inadequate venting of the roof space. The roof repair design and repair bids have been received and are currently being evaluated and a repair scope refined so this work may proceed as necessary. The passage of time and ongoing investigations have resulted in a number of deficiencies, other than the siding material being uncovered. Both cases continue to be under the supervision of the Special Master. The investigation and other subsequent discoveries that will occur are ordered by the Special Master on behalf of both plaintiffs and defendants in an effort to come to a settlement. Destructive investigation, completed under the order of the Special Master, has produced a preliminary issues list which the Special Master will use in attempting to prompt a settlement from the defendants. This information is protected by the Special Master and is not for general distribution. It is possible that a settlement can occur anytime, but it appears unlikely, as one of the primary defendants has demonstrated very little willingness to settle. In the absence of a settlement, the Special Master will eventually order a trial date to be set. A trial date has not yet been ordered by the Special Master. The General Partner has and is demanding a trial date be set so this matter can be resolved. However, even if a trial date is set it will still likely take two to three years to complete the matter. In addition, the discovery of additional construction defect problems, as discussed above, will likely result in additional delays. The extent and magnitude of the construction defects continues to worsen with time. The General Partner believes that the Partnership can no longer wait for the cases to be settled and has authorized the start of repairs using the cash reserve funds currently held. It is anticipated that funds held in reserve are not adequate to repair the entire project, so completion of the most critical projects will be prioritized. Lastly, one defendant named in the Partnership's complaint filed a cross complaint against the Partnership. The amount of damages being sought is unspecified at this time. In addition to the security accounts mandated by the Partnership's lender, the General Partner has determined that it is in the best interest of the Partnership to continue building reserves for the potential cost of dealing with the construction defect problems. At this time, the General Partner cannot predict when cash distributions will resume due to the build up of reserves. However, it is the General Partner's current intention to resume distributions as soon as reasonably possible and prudent. The reinstatement and level of future distributions will be dependent on several factors, NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. CONSTRUCTION DEFECTS (CONTINUED) including the degree of damage caused by the construction defect problems, and continued stabilized operations at the Properties. Since the filing of the Form 10-K, a settlement conference was held. However, no agreement was reached with the defendants. The Judge in this matter has ordered a case management conference for May 26, 2000, and may set a trial date at this time. Other litigation efforts are ongoing. 4. REAL ESTATE Statement of Financial Accounting Standards 121 ("SFAS 121"), Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of, requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In connection with the construction defect problems, the General Partner reviewed the projected cash flows of both Properties to ensure an adjustment of the book value was not required in accordance with SFAS 121. Further, although the full extent of the damage to the hardboard siding for the Properties is unknown, management believes that the fair market value of each Property still remains greater than its respective book value. ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction Alderwood and Timberleaf, which are located in Santa Clara, California, are apartment complexes with 234 units and 124 units, respectively. The Properties commenced operations at completion of construction in December 1986. Liquidity and Capital Resources Cash generated by operations during the first three months of 2000 was used to pay current operating expenses and debt service, including payments to the hardboard siding security account. Quarterly distributions have been suspended in order to accumulate working capital reserves until the degree of damage from the construction defects and determination of liability are known. See Note 3 to Financial Statements, Construction Defects, for a more comprehensive discussion of this matter. Each Property has a non-recourse note payable, secured by a first deed of trust. These notes bear fixed interest of 6.99% for Alderwood and 7.09% for Timberleaf. The terms of the notes require that each Property maintain a hardboard siding security account. These security accounts are additional collateral for the lender. Cash held in these security accounts was $2,905,000 and $2,119,000 for Alderwood and Timberleaf, respectively, as of March 31, 2000. Until the Completion Date, as defined, an additional 10%, as defined, or monthly cash flow, whichever is less, shall be deposited into each security account. Should the hardboard siding repairs not be completed by December 2002, or every two years thereafter, and insufficient cash has been accumulated to cure the defects based upon the lender's determination of the cost, then all cash flow shall be deposited into each applicable security account, as necessary, to fully fund the cost of construction. If the projected cash flow is insufficient to satisfy this deficiency contribution, then the Partnership has 60 days to fund the shortage over the projected cash flow. No withdrawals are permitted from the account except to cure the siding defects. The lender shall have the right to hire its own consultants to review, approve and inspect the construction. All such reasonable fees and expenses incurred by the lender shall be paid by the Partnership. Should the litigation not be settled by December 2002, and the Partnership has met all its obligations under the notes, then the Completion Date, shall be extended 18 months from the earlier of the pending settlement date or the last day for filing an appeal. Should construction not be completed by the Completion Date due to an act of force majeure, the Completion Date can be further extended to complete the construction work. Results of Operations During the past year, Santa Clara County has experienced a relatively flat growth in the creation of new jobs (.3%), yet unemployment dropped from 3.3% to 2.1% during this time period. In the first quarter of 2000, the Properties marketed available units at rents that averaged $1,430 for one bedroom units and $1,815 for two bedroom units. Average occupied rent per unit for the quarter was $1,438 and average occupancy during the quarter was 99% for Alderwood and 98% for Timberleaf. As of March 31, 2000, Alderwood and Timberleaf were both 99% occupied. In the first quarter of 1999, the Properties marketed available units at rents that average $1,220 for one bedroom units and $1,486 for two bedroom units. Average occupied rent per unit for the quarter was $1,362 and average occupancy during the quarter was 96% for Alderwood and 97% for Timberleaf. As of March 31, 1999, Alderwood was 95% occupied and Timberleaf was 97% occupied. Excluding expenditures, relating to quantification of the extent of damage to the hardboard siding and associated litigation costs, operating expenses increased 8%. The following first quarter operating expenses increased between years: payroll, benefits and taxes due to salary increases; utilities primarily due to increases of water and sewer usage and rates; partnership expenses due to audit fees; and major repairs and maintenance due to hardboard siding and associated litigation costs. These increases were offset principally by landscaping due to savings in lake, landscaping and pool supplies. Operating expenses, inclusive of hardboard siding related costs, increased 32%. Overall, net operating income decreased 3% during the first three months of 2000 when compared to the first three months of 1999. PART II: OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PROMETHEUS INCOME PARTNERS, a California Limited Partnership By: PROMETHEUS DEVELOPMENT CO., INC., a California corporation, It's General Partner Date: September 6, 2000 By: /s/ Vicki R. Mullins Vice President Date: September 6, 2000 By: /s/ John J. Murphy Vice President EXHIBIT NO. DESCRIPTION - ------- ----------- 27 Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information.