SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1997 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 employee 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, 1996. 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 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 and nine months ended September
30, 1997 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(In Thousands, Except for Unit Data)
September 30, December 31,
1997 1996
(Unaudited) (Audited)
------------ ---------
ASSETS
Real Estate:
Land, buildings and improvements $ 29,420 $ 29,420
Accumulated depreciation (6,894) (6,491)
---------- ----------
22,526 22,929
Cash and cash equivalents 3,862 2,227
Accounts receivable and other assets 50 25
Deferred expenses, net 14 78
--------- --------
Total assets $ 26,452 $ 25,259
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Notes payable $ 26,444 $ 25,248
Payables and accrued liabilities 363 454
--------- ---------
Total liabilities 26,807 25,702
--------- ---------
General partner deficit (405) (405)
Limited partners' capital (deficit)
18,995 limited partnership units
issued and outstanding 50 (38)
--------- ---------
Total partners' deficit (355) (443)
--------- ---------
Total liabilities and partners' deficit $ 26,452 $ 25,259
========= =========
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, 1997 AND 1996
(In Thousands, Except for Unit Data)
1997 1996
(Unaudited) (Unaudited)
----------- ----------
REVENUES
Rental (including revenue from affiliates
of $39 and $185, respectively) $ 1,358 $ 1,260
Other income 40 39
Interest income 45 18
-------- --------
Total revenues 1,443 1,317
-------- --------
EXPENSES
Interest 679 639
Operating 324 238
Depreciation and amortization 155 158
Administrative 19 16
Payments to general partner and affiliates:
Operating and administrative 97 142
Management fees 71 68
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Total expenses 1,345 1,261
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NET INCOME $ 98 $ 56
======= =======
Net income per $1,000
limited partnership unit $ 5 $ 3
======= =======
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 OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(In Thousands, Except for Unit Data)
1997 1996
(Unaudited) (Unaudited)
----------- ----------
REVENUES
Rental (including revenue from affiliates
of $128 and $299, respectively) $ 3,964 $ 3,644
Other income 117 96
Interest income 114 34
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Total revenues 4,195 3,774
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EXPENSES
Interest 2,005 1,888
Operating 1,082 782
Depreciation and amortization 467 475
Administrative 42 38
Payments to general partner and affiliates:
Operating and administrative 305 310
Management fees 206 189
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Total expenses 4,107 3,682
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NET INCOME $ 88 $ 92
======== ========
Net income per $1,000
limited partnership unit $ 5 $ 5
======== ========
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 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(In Thousands)
1997 1996
(Unaudited) (Unaudited)
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 88 $ 92
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 467 475
(Increase) decrease in accounts
receivable and other assets (25) 25
Deferral of mortgage interest 1,219 1,148
(Decrease) increase in payables
and accrued liabilities (91) 36
--------- --------
Net cash provided by operating activities 1,658 1,776
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CASH FLOWS FROM FINANCING ACTIVITIES
Principal reductions on notes payable (23) (69)
Distribution to partners 0 (375)
-------- --------
Net cash used for financing activities (23) (444)
-------- --------
Net increase in cash and cash equivalents 1,635 1,332
Cash and cash equivalents at
beginning of year 2,227 603
-------- --------
Cash and cash equivalents at
end of period $ 3,862 $ 1,935
======== =======
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, 1997 and for the three and nine months ended September 30, 1997
and 1996 is unaudited and, in the opinion of the Partnership, 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 reimbursements, at cost, in accordance with the Partnership Agreement.
The information in the Balance Sheets at December 31, 1996 was derived from the
Partnership's audited annual report for 1996.
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 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. A wood technology expert was retained to test the
performance of the hardboard siding. In November 1996, this expert presented a
preliminary verbal report which indicated that the physical characteristics of
the hardboard siding at Alderwood and Timberleaf have deteriorated since the
construction of the properties.
In September 1996, a construction consultant retained by the General
Partner to investigate the hardboard siding reported that it's preliminary
findings indicated damage, which on the surface does not currently appear to be
major. However, they recommended further investigation in view of the
deterioration, since there could be significant problems which are not evident.
The General Partner has retained a consultant to conduct non-destructive and
destructive testing as recommended.
The General Partner has received the results of the "non-destructive"
testing. Non-destructive testing looks for potential damage to the outside of
the building. The testing showed damage to both properties. The initial
estimated damage for both properties could be as high as $13 million. Potential
damage of this magnitude reinforces the need to perform "destructive" testing.
Destructive testing looks for damage inside the walls of the building caused by
defective materials, design and construction. The General Partner is continuing
to pursue litigation on behalf of the Partnership against the hardboard siding
manufacturer. A special master has now been assigned by the Court to handle
this case, and the special master will schedule further testing and
investigation.
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 hardboard siding 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, including the degree
of damage caused by the hardboard siding, determination of liability for
potential costs and expenses of dealing with the hardboard siding problem, and
continued stabilized operations at the properties.
4. REAL ESTATE
Statement of Financial Accounting Standards 121 ("FASB 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 hardboard
siding matter (see Note 3), the General Partner reviewed the cash flows of
both properties to ensure an adjustment of the book value was not required
in accordance with FASB 121. Further, although the full extent of the damage
to the hardboard siding for these two properties is unknown, management
believes that the fair market value of each property still remains greater
than their respective book values.
Both properties are located in the Silicon Valley area of California. While
the rental growth has moderated slightly this year, these rental markets are
seeing rental growth (9% growth for the nine month period ending September 30,
1997 versus the same nine months in 1996; versus 15% for the year 1996 over
1995) which has exceeded past historical highs. At the same time, the
weighted average occupancy rate is also at a high level (97%). Housing demand
for both owner occupied and rental properties is exceedingly tight.
Given the strong rental market combined with the cash flow from operations,
the General Partner believes the values of the properties exceed their
carrying value, even with the hardboard siding problem.
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 1997 was
used to pay current operating expenses, debt service and build cash reserves.
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. Both loans mature on December 1, 1997.
Given the time it may take to resolve the hardboard siding issue discussed
above, the General Partner is in the process of refinancing both loans. As part
of the refinance, the Partnership may be able to take advantage of a currently
favorable interest rate environment.
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 continued
strong rental market. In the third quarter of 1997, the properties marketed
available units at rents that averaged $1,236 for one bedroom units and $1,525
for two bedroom units. Average occupied rent per unit for the quarter was
$1,272 and average occupancy during the quarter was 97% for both Alderwood and
Timberleaf. As of September 30, 1997, Alderwood and Timberleaf were both 99%
occupied.
In the third quarter of 1996, the properties marketed available units at
rents that averaged $1,214 for one bedroom units and $1,495 for two bedroom
units. Average occupied rent per unit 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%.
Operating expenses increased by 10% during the three months ended
September 30, 1997, when compared to the three months ended September 30, 1996.
The below categories of operating expenses have contributed to this net
increase in expenses. First, payroll, benefits and taxes increased due to
merit pay increases in July and the need for temporary help due to staff
changes. Second, insurance and other taxes increased due to premium increases.
Third, capital improvement expenditures increased due to carpet, linoleum and
kitchen countertop replacements, and re-paving of roads and walkways.
Offsetting the increases was a decrease in corporate housing expenses as the
corporate housing program was discontinued.
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 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,
It's General Partner
Date: November 13, 1997 By: /s/ Vicki R. Mullins
_______________________
Vicki R. Mullins
Vice President
Chief Financial Officer
Date: November 13, 1997 By: /s/ John J. Murphy
_______________________
John J. Murphy
Vice President
of Finance and Accounting
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