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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1996 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: (415)596-5300
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(Former name, address and former fiscal year, if changed since last report)
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 []
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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, 1995. 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.
The financial information does not include any adjustments for the
capitalization of any improvements which are done only in conjunction
with the year-end financial statements. While the financial
information is unaudited, in the opinion of the General Partner, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. The results of
operations for the three and nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
BALANCE SHEETS
September 30, 1996 AND DECEMBER 31, 1995
(In Thousands, Except for Unit Data)
September 30, December 31,
1996 1995
(Unaudited) (Audited)
ASSETS
Real Estate:
Land, buildings and improvements $ 29,288 $ 29,288
Accumulated depreciation (6,349) (5,938)
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22,939 23,350
Cash 1,935 603
Deferred loan fees, net 99 163
Accounts receivable and other assets 31 56
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Total assets $ 25,004 $ 24,172
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LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Notes payable $ 24,870 $ 23,791
Payables and accrued liabilites 312 276
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Total liabilities 25,182 24,067
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General partner deficit (403) (404)
Limited partners' capital
18,995 limited partnership units
issued and outstanding 225 509
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Total partners' capital (deficit) (178) 105
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Total liabilities and partners'
capital (deficit) $ 25,004 $ 24,172
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The accompanying notes are an integral
part of these financial statements.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(In Thousands, Except for Per Unit Data)
1996 1995
(Unaudited) (Unaudited)
REVENUES
Rental revenues (including revenue from
affilates of $185 and $0, respectively) $ 1,260 $ 1,117
Other income 39 28
Interest income 18 6
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Total revenues 1,317 1,151
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EXPENSES
Interest 639 603
Operating and administrative 376 390
Depreciation and amortization 158 153
Payments to general partner and affiliates:
Management fee 68 55
Operating and administrative 20 22
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Total expenses 1,261 1,223
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NET INCOME (LOSS) $ 56 $ (72)
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Net income (loss) per $1,000
limited partnership unit $ 3 $ (4)
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Number of limited partnership
units used in computation 18,995 18,995
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The accompanying notes are an integral
part of these financial statements.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(In Thousands, Except for Unit Data)
1996 1995
(Unaudited) (Unaudited)
REVENUES
Rental revenues (including revenue from
affiliates of $299 and $0, respectively) $ 3,644 $ 3,164
Other income 96 81
Interest income 34 17
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Total revenue 3,774 3,262
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EXPENSES
Interest 1,888 1,782
Operating and administrative 1,019 980
Depreciation and amortization 475 461
Payments to general partner and affiliates:
Management fee 189 158
Operating and administrative 111 73
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Total expenses 3,682 3,454
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NET INCOME (LOSS) $ 92 $ (192)
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Net income (loss) per $1,000
limited partnership unit $ 5 $ (10)
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Number of limited partnership
units used in computation 18,995 18,995
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The accompanying notes are an integral
part of these financial statements.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(In Thousands)
1996 1995
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 92 $ (192)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation and amortization 475 460
Decrease (increase) in accounts receivable
and other assets 25 (135)
Deferral of mortgage interest 1,148 1,042
Increase in payables
and accrued liabilities 36 152
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Net cash provided by operating activities 1,776 1,327
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CASH FLOWS FROM FINANCING ACTIVITIES
Principal reductions on notes payable (69) (69)
Distribution to partners (375) (1,174)
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Net cash used for financing activities (444) (1,243)
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Net increase in cash 1,332 84
Cash at beginning of year 603 514
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Cash at end of period $ 1,935 $ 598
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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, 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 does not include any adjustments for the
capitalization of any improvements which are done only in conjunction with
the year-end financial statements. The financial information included herein
at September 30, 1996 and for the three and nine months ended September 30,
1996 and 1995 is unaudited and, in the opinion of the General Partner,
reflects all adjustments (which include only normal recurring accruals)
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, 1995 was derived from the Partnership's audited annual report
for 1995.
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. HARDBOARD SIDING
The General Partner has learned that the same type of hardboard siding
which was used at Alderwood and Timberleaf is failing to perform as
expected in a number of projects in various parts of the United States,
including a 370 unit apartment project that is managed by Maxim Property
Management (Maxim), an Affiliate of the General Partner. The 370 unit
project is located in the same county as Alderwood and Timberleaf and is
subject to the same general climate conditions. A wood technology expert
was retained by Maxim to test the performance of the hardboard siding on
several properties managed by Maxim, including Alderwood and Timberleaf.
On November 1, 1996, this expert presented a preliminary verbal report to
Maxim which indicated that the physical characteristics of the hardboard
siding at Alderwood and Timberleaf have deteriorated dramatically since the
construction of the properties. The expert indicated that this deterioration
is in stark contrast to the performance of real wood.
In early September 1996, a structural engineer retained by Maxim to
investigate the hardboard siding at several properties, including Alderwood
and Timberleaf, reported that his preliminary findings indicated damage which
on the surface does not currently appear to be major. However, the engineer
has recommended destructive testing in view of the deterioration, since there
could be significant problems which are not evident from the tests conducted
to date. Maxim is in the process of obtaining proposals to conduct such
destructive testing. The General Partner has instituted litigation on behalf
of the Partnership as a result of this problem. Such litigation is similar
to the litigation instituted in connection with the 370 unit project referred
to above as a result of the same hardboard siding problem. In the 370 unit
project referred to above, when the first evidence of deterioration was
discovered, the problem did not appear to be major. The problem deteriorated
rapidly, however, and is currently believed to involve structural and other
damages, which exclusive of attorney's fees and other costs of litigation,
could exceed $28 million. Discovery in that litigation has involved
reviewing thousand of documents and will require the depositions of numerous
experts. The General Partner is extremely concerned about the hardboard
siding used on and the extent of damage caused to Alderwood and Timberleaf.
Alderwood and Timberleaf and the 370 unit apartment project are different,
and therefore exact comparisons cannot be made in evaluating the consequences
and the resulting damages from the hardboard siding problem.
As it is uncertain at this time what the degree of damage is and who will
ultimately be liable for the cost, the General Partner has determined that it
is in the best interest of the Partnership to continue the suspension of
distributions. This will enable the Partnership to build reserves to pay for
potential repairs and/or replacement costs. At this time, the General Partner
cannot predict when cash distributions will resume. The reinstatement and
level of future distributions will be dependent on several factors including,
the degree of damage to the hardboard siding, determination of liability for
potential costs and continued stabilized operations at the properties.
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 nine months of 1996 was used
to pay current operating expenses and debt service. During this period, the
Partnership also used cash flow from operations to make cash distributions to
the Limited Partners. In February 1996, the Partnership distributed $375,000
to the Limited Partners.
Quarterly distributions have been suspended in order to accumulate working
capital reserves until the degree of damage to the hardboard siding and
determination of liability are known. See Note 3 To Financial Statements,
Hardboard Siding, 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 accrue interest at 10.375%; interest is payable monthly at
6.25% on the principal balance, with the difference between the accrual rate
and the pay rate added to principal.
RESULTS OF OPERATIONS
During the past year, Santa Clara County has continued to experience growth
in the creation of new jobs. This growth contributed to a strong rental market
and allowed the properties to increase their rental rates. In the third quarter
of 1996, the properties marketed available units at rents which averaged
$1,214 for one bedroom units and $1,495 for two bedroom units. Average
occupied rent for the quarter was $1,185 and average occupancy during the
quarter was 97% for both Alderwood and Timberleaf. As of September 30, 1996,
Alderwood was 97% occupied and Timberleaf was 92% occupied.
In the third quarter of 1995, the properties marketed available units at rents
which averaged $1,002 for one bedroom units and $1,217 for two bedroom
units. Average occupied rent for the quarter was $1,000 and average
occupancy during the quarter was 97% for Alderwood and 99% for
Timberleaf. As of September 30, 1995, Alderwood was 95% occupied and
Timberleaf was 98% occupied.
With the exception of increases in management fees and corporate housing
expenses, which are directly related to the increase in rental activity,
operating expenses increased by 4% during the first nine months of 1996
when compared to the first nine months of 1995.
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.
Offers to Purchase Units
An unsolicited tender offer for approximately 47.4% of the Units of
Prometheus Income Partners ("the Partnership") at $405 per Unit was
commenced on or about October 18, 1996 by a newly formed entity calling
itself Prom Investment Partners, L.L.C. ("Prom"), which is an affiliate of
Apollo Real Estate Investment Fund, L.P.
As discussed in further detail in the Partnership's 14D-9 filing with the
Securities and Exchange Commission ("SEC") on November 4, 1996, a
Special Committee of the Board of Directors of the General Partner carefully
considered the offer and determined that the offer was misleading, possibly
illegal, and not in the best interests of individual Unitholders or the
Partnership. Accordingly the Special Committee strongly recommended that
the offer be rejected.
Mr. Sanford N. Diller, a Director of the General Partner (as well as its
beneficial owner, President and Secretary) agreed to make a tender offer for
approximately 47.4% of the Units at $450 per Unit through a newly formed
company, PIP Partners - General, LLC ("PIP General"). PIP General filed a
Schedule 14D-1 with the SEC on November 8, 1996. The Special Committee's
opinion was that all Limited Partners should retain their Units but
those that have a current need or desire for liquidity should tender all,
or a portion, of their Units to PIP General.
On November 12, 1996, Prom amended it's offer with an amended offer price
of $475. It appears that as a result of a lawsuit filed by the Partnership,
many of the false and misleading statements in the original offer by Prom
have been corrected. Accordingly, the General Partner on behalf of the
Partnership, is not currently seeking to enjoin Prom from proceeding with
its tender offer.
Item 6. Exhibits and Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the 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
Its General Partner
Date: November 14, 1996 By: John H. Pringle
__________________________
Vice President
Date: November 14, 1996 By: Vicki R. Mullins
__________________________
Chief Financial Officer
EXHIBIT INDEX
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EXHIBIT
NO. DESCRIPTION
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27 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information