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, 1999 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, 1998. 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 that 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, 1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(In Thousands, Except for Unit Data)
September 30, December 31,
1999 1998
(Unaudited) (Audited)
---------- ----------
ASSETS
Real Estate:
Land, buildings and improvements $ 29,938 $ 29,938
Accumulated depreciation (8,030) (7,610)
-------- --------
21,908 22,328
Cash and cash equivalents 1,831 1,183
Restricted cash 4,502 3,990
Deferred expenses, net of
accumulated amortization of $52 and $30 246 268
Accounts receivable and other assets 26 61
-------- --------
Total assets $ 28,513 $ 27,830
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 26,262 26,476
Payables and accrued liabilities 279 424
-------- --------
Total liabilities 26,541 26,900
-------- --------
General partner deficit (381) (392)
Limited partners' capital
18,995 limited partnership units
issued and outstanding 2,353 1,322
-------- --------
Total partners' capital 1,972 930
-------- --------
Total liabilities and partners' capital $ 28,513 $ 27,830
======== ========
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 SEPTEMBER 30, 1999 AND 1998
(In Thousands, Except for Unit Data)
1999 1998
(Unaudited) (Unaudited)
----------- -----------
REVENUES
Rental $ 1,422 $ 1,414
Other income 55 43
Interest income 49 61
------- -------
Total revenues 1,526 1,518
------- -------
EXPENSES
Interest and amortization 470 474
Operating 376 552
Depreciation 140 137
Administrative 14 13
Payments to general partner and affiliates:
Operating and administrative 121 108
Management fees 74 73
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Total expenses 1,195 1,357
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NET INCOME $ 331 $ 161
======= =======
Net income per $1,000
limited partnership unit $ 17 $ 8
======= =======
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 INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In Thousands, Except for Unit Data)
1999 1998
(Unaudited) (Unaudited)
----------- -----------
REVENUES
Rental $ 4,219 $ 4,196
Other income 149 131
Interest income 172 176
------- -------
Total revenues 4,540 4,503
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EXPENSES
Interest 1,331 1,343
Operating 1,129 1,512
Depreciation 420 412
Administrative 46 40
Payments to general partner and affiliates:
Operating and administrative 351 344
Management fees 221 222
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Total expenses 3,498 3,873
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NET INCOME $ 1,042 $ 630
======= =======
Net income per $1,000
limited partnership unit $ 54 $ 33
======= =======
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, 1999 AND 1998
(In Thousands)
1999 1998
(Unaudited) (Unaudited)
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 1,042 $ 630
Adjustments to reconcile net income
to cash provided by operating
activities:
Depreciation 420 412
Amortization 22 22
Decrease in accounts
receivable and other assets 35 2
(Decrease) increase in
payables and accrued liabilities (145) 1
------- -------
Net cash provided by
operating activities 1,374 1,067
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in restricted cash (512) (372)
Principal reductions on notes payable (214) (178)
Increase in deferred loan fees 0 (15)
------- -------
Net cash used for financing activities (726) (565)
------- -------
Net increase in cash and cash equivalents 648 502
Cash and cash equivalents at
beginning of year 1,183 638
------- -------
Cash and cash equivalents at
end of period $ 1,831 $ 1,140
======= =======
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, 1999 and for the three and nine months ended September 30, 1999
and 1998 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, 1998 was derived from the
Partnership's audited annual report for 1998.
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 Alderwood and Timberleaf is failing to perform as expected in a
number of projects in various parts of the United States, and lawsuits have
been filed.
NOTES TO THE FINANCIAL STATEMENTS (Continued)
3. CONSTRUCTION DEFECTS (Continued)
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. Certain structural issues were uncovered at Timberleaf and were
rebuilt as a part of the immediate repair process. The General Partner has
subsequently determined that additional immediate repairs are necessary. To
date, the repairs are nearing completion.
A 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. A repair plan has been
developed and a bid is currently being solicited for the repair of the affected
areas. The passage of time and ongoing investigations have resulted in a number
of deficiencies, other than the siding material being uncovered. Issues
related to the hardboard siding and other construction defects are collectively
referred to as construction defects as this more accurately reflects the scope
of work being undertaken at this time.
Both cases have been assigned to a Special Master who is duly appointed
and empowered by the court to assist in resolving the cases. 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 at anytime under the Special
Master. It is not likely however that this will occur in either of the cases,
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 and if necessary, the matter will be litigated in
court.
A trial date assignment, if one were ordered, would likely occur between
24 to 36 months from now depending on the court's schedule. Therefore, it is
not likely that the matter will be fully concluded within the next two to three
years. The information relating to the trial has not changed since the June
30, 1999 Form 10-Q filing.
In addition, the discovery of additional construction defect problems may
result in additional delays and further extend the ultimate date for settlement
of all matters.
Lastly, one defendant named in the Partnership's complaint has filed a
cross-complaint against the Partnership. The amount of damages being sought is
unspecified at this time
NOTES TO THE FINANCIAL STATEMENTS (Continued)
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 construction defects
(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 construction
defects for these two properties is unknown, management believes that the fair
market value of each property still remains greater than their respective book
values.
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 1999 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 to 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 (collectively the "Notes"). The Notes bear fixed interest of 6.99% for
Alderwood and 7.09% for Timberleaf, respectively.
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 $2,603,000 and $1,899,000
for Alderwood and Timberleaf, respectively, as of September 1999. Annually,
until the Completion Date, as defined, an additional 10% of the initial
contributions, 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 continued to experience
growth in the creation of new jobs; the unemployment rate fell to a low of
3.1%. This continued job growth has helped offset the impact of new housing
developed. The increased demand allowed for increases in market rates during
the third quarter on both unit types at both properties. In the third quarter
of 1999, the properties marketed available units at rents that averaged $1,334
for one-bedroom units and $1,569 for two bedroom units. Average occupied rent
per unit for the quarter was $1,378 and average occupancy during the quarter
was 98% for both Alderwood and Timberleaf. As of September 30, 1999, Alderwood
and Timberleaf were both 98% occupied.
In the third quarter of 1998, the properties marketed available units at
rents that averaged $1,241 for one-bedroom units and $1,602 for two bedroom
units. Average occupied rent per unit for the quarter was $1,373, and average
occupancy during the quarter was 97% for both Alderwood and Timberleaf. As of
September 30, 1998, Alderwood was 96% occupied and Timberleaf was 98% occupied.
Excluding expenditures, relating to quantification of the extent of
damage to the hardboard siding and associated litigation costs, and other
construction defects, operating expenses decreased 4%. The following third
quarter operating expenses decreased between years: Turnover due to a reduced
number of units requiring interior painting; Marketing due to less media
advertising resulting from lower turnover; Insurance & Licenses primarily due
to uninsured liability losses incurred last year; Miscellaneous Partnership due
to timing of charges for the audit and tax preparation fees; and Major Repairs
& Maintenance due to principally less non routine projects such as the addition
of three carports, kitchen remodeling, lighting fixtures and hardboard siding
and associated litigation costs. These decreases were offset by increases in
expenses between years for: Payroll, Benefits and Taxes due to fully staffed
positions, annual salary increases, employer 401(k) matching contribution, and
a change in payroll frequency from semi-monthly to bi-weekly; Repairs &
Maintenance due to window cleaning; and Utilities due to timing of invoice
payments for refuse and sewer. Operating expenses, inclusive of hardboard
siding related costs, decreased 21%.
IMPACT OF THE YEAR 2000 COMPLIANCE COSTS ON OPERATIONS
The Partnership's State of Readiness. The Partnership utilizes a number
of computer software programs and operating systems across its entire
organization, including applications used in financial business systems and
various administrative functions. To the extent that the Partnership's software
applications contain source code that is unable to appropriately interpret the
upcoming calendar year "2000" and beyond, some level of modification or
replacement of such applications will be necessary. The Partnership currently
believes that its "Year 2000" issues are limited to information technology
("IT") systems (i.e., software programs and computer operating systems). The
Partnership currently believes there are no non-IT systems (i.e., embedded
systems such as devices used to control, monitor or assist the operation of
equipment and machinery), the failure of which would have a material effect on
the Partnership's operations.
The Partnership has completed its identification of IT systems that are
not yet Year 2000 compliant and has commenced modification or replacement of
such systems as necessary. The Partnership is currently communicating with
third parties with which it does significant business, such as financial
institutions and vendors to determine their readiness for Year 2000 compliance.
The Partnership has also completed its assessment of the Year 2000 compliance
issues presented by its hardware components.
Cost of Addressing the Partnership's Year 2000 Issues. Given the
information known at this time about the Partnership's systems that are non-
compliant, coupled with the Partnership's ongoing, normal course-of-business
efforts to upgrade or replace critical systems, as necessary, the Partnership
does not expect Year 2000 compliance costs to have any material adverse impact
on the Partnership's liquidity or ongoing results of operations. The costs of
such assessment and remediation will be reflected as general and administrative
expenses.
Risks of the Partnership's Year 2000 Issues. In light of the
Partnership's assessment and remediation efforts to date, and the planned,
normal course-of business upgrades, the Partnership currently has no knowledge
of any critical business applications that will not be compliant. No assurance
can be given, however, that all of the Partnership's systems will be Year 2000
compliant or that compliance will not have a material adverse effect on the
Partnership's future liquidity or results of operations or ability to service
debt.
The Partnership's Contingency Plans. The Partnership is currently
developing its contingency plan for all operations to address the most
reasonably likely worst case scenarios regarding Year 2000 compliance. The
Partnership expects such contingency plans to be completed by the end of the
year.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
Fisher Friedman, the project architects, have filed a cross complaint
against the Partnership. The cross complaint seeks a determination of the
proportionate share of responsibility of the various defendants for the damage
to the property arising from the defective hardboard siding, but does not
specify any basis for making such an apportionment. The cross complaint further
claims that if negligence is found, that Fisher Friedman's negligence be found
to be secondary (rather than primary) in nature, thereby obligating the
primarily liable defendants to indemnify Fisher Friedman for its liability.
Again, the cross complaint fails to state any basis for which the Partnership
has primary liability for the defective hardboarding siding.
Also see Note 3 to Financial Statements, Construction Defects, for a
more comprehensive discussion of this matter.
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 10, 1999 By: /s/ Vicki R. Mullins
Vicki R. Mullins
Vice President
Date: November 10, 1999 By: /s/ John J. Murphy
John J. Murphy
Vice President
EXHIBIT INDEX
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EXHIBIT
NO. DESCRIPTION
- ------- -----------
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information.