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 March 31, 2001 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, 2000. 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.
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, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
BALANCE SHEETS
MARCH 31, 2001 AND DECEMBER 31, 2000
(Unaudited and in Thousands, Except for Unit Data)
March 31, December 31,
2001 2000
--------- ------------
ASSETS
Real Estate:
Land, buildings and improvements $ 30,857 $ 30,778
Accumulated depreciation (8,976) (8,801)
-------- --------
21,881 21,977
Cash and cash equivalents 3,932 3,568
Restricted cash 5,713 5,256
Deferred expenses, net 201 209
Accounts receivable and other assets 42 78
-------- --------
Total assets $ 31,769 $ 31,088
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Notes payable $ 25,799 $ 25,879
Payables and accrued liabilities 414 439
-------- --------
Total liabilities 26,213 26,318
-------- --------
General partner deficit (345) (354)
Limited partners' capital
18,995 limited partnership units
issued and outstanding 5,901 5,124
-------- --------
Total partners' capital (deficit) 5,556 4,770
-------- --------
Total liabilities and partners' capital (deficit) $ 31,769 $ 31,088
======== ========
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, 2001 AND 2000
(Unaudited and in Thousands, Except for Unit Data)
2001 2000
---- ----
REVENUES
Rental $ 1,929 $ 1,520
Other income 11 26
Interest income 125 114
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Total revenues 2,065 1,660
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EXPENSES
Interest and amortization 462 468
Operating 391 360
Depreciation 175 167
Administrative 13 13
Payments to general partner and affiliates:
Management fees 97 77
Operating and administrative 141 116
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Total expenses 1,279 1,201
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NET INCOME $ 786 $ 459
======= =======
Net income per $1,000
limited partnership unit $ 41 $ 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, 2001 AND 2000
(Unaudited and in Thousands)
2001 2000
---- ----
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 786 $ 459
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation 175 167
Amortization 8 7
Decrease in accounts receivable and other assets 36 24
Increase in payables and accrued liabilities (25) 40
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Net cash provided by operating activities 980 697
======= =======
CASH FLOW FROM INVESTING ACTIVITIES
Increase in fixed asset additions (79) (78)
------- -------
Net cash used for investing activities (79) (78)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in restricted cash (457) (466)
Principal reductions on notes payable (80) (75)
------- -------
Net cash used for financing activities (537) (541)
------- -------
Net increase in cash and cash equivalents 364 78
Cash and cash equivalents at beginning of year 3,568 1,942
------- -------
Cash and cash equivalents at end of period $ 3,932 $ 2,020
======= =======
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 (the "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 included herein at March 31, 2001 and for the
three months ended March 31, 2001 and 2000 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,
2000 was derived from the Partnership's audited annual report for 2000.
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
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 taxes has been reflected in the accompanying
financial statements. The net income or loss for financial reporting purposes
differs from the net income or loss for income tax reporting purposes primarily
due to differences in useful lives and depreciation methods for buildings and
improvements and amortization of construction period interest and taxes.
Syndication costs incurred in raising Limited Partners' capital were charged to
Limited Partners' capital.
3. CONSTRUCTION DEFECTS
In June 1996, The General Partner learned that the hardboard siding
used at both Alderwood and Timberleaf was beginning to fail. That was the first
indication of potential product failure at these Properties, and the General
Partner commissioned a survey of the sites.
On June 26, 1996, experts conducted the first visual inspection of
Alderwood with respect to the defects on behalf of Prometheus Income Partners.
Throughout 1997 and 1998, the Partnership inspected and investigated Alderwood
with respect to the construction defects, and in March and November 1998,
various defendants inspected and investigated Alderwood as well. Similarly, on
July 11, 1996 experts conducted the first visual inspection of Timberleaf.
Additional investigations took place in 1997, 1998 and 2000.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. CONSTRUCTION DEFECTS (CONTINUED)
As of the dates of these inspections, moisture had accumulated in the
walls of these projects through a combination of construction defects and
endemic problems with the hardboard siding. Sufficient moisture over time causes
rot and decay in the wood, framing and siding which necessitates repairs, which,
in some cases, are structural in nature. Rot and decay, which form inside the
wall, are not visible, and until rot and decay have caused changes in the
physical appearance of the exterior of the buildings, it is difficult to
ascertain all the locations where rot and decay exist. On September 23, 1996,
Prometheus Income Partners filed two lawsuits against the siding manufacturer,
the general contractor, the subcontractors and the architects, one for each of
its Properties, regarding problems at the Properties stemming from the hardboard
siding. Each of these parties has denied responsibility for the defects. In
October 1997, a cross-claim was filed by one of the defendants in each of these
lawsuits against the Partnership seeking relief against other parties to the
litigation if either filing party is found liable in the litigation. This cross
claim was tendered to the Partnership's insurance carrier, counsel for whom has
denied all allegations. The General Partner does not believe there is a
substantial risk of recovery against the Partnership on this claim, but there is
no assurance a judgment will not be rendered against the Partnership based on
this claim.
As part of the inspections discussed above, certain structural issues
caused by the defects in the hardboard siding were uncovered at Alderwood and
Timberleaf and were rebuilt as part of an immediate repair process. The General
Partner subsequently determined that additional immediate repairs were
necessary, which, with the exception of roof repairs noted below, have been
completed. The General Partner continues to monitor the condition of the
Property to look for any other signs of rot and decay that would necessitate
immediate attention and repair.
In addition to the hardboard siding problems, in September 1999 routine
roofing inspection uncovered failing roof substrate at dormer roof assemblies
for Alderwood and Timberleaf. The General Partner traced the cause of this
roofing problem to inadequate venting of the roof space. Inadequate venting
leads to condensation in roof areas. This has been sufficient to cause
deflection and decay of the roof and its structural support, requiring
replacement. The General Partner has received design specifications for remedial
roof repairs and has completed a prototype repair of four dormer roof
assemblies. The General Partner has executed a contract for those dormer roof
assemblies identified by the Partnership's consulting engineer as in need of
immediate repairs. These repairs are currently underway.
Based on information currently available to the General Partner,
damages and economic loss appear to be in the range of $19-$20 million.
Since 1997, both cases have been under the supervision of a Special
Master who is appointed and empowered by the court to assist in resolving the
cases. Investigations and other subsequent discoveries have been 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 in March 1998 for Alderwood and May 1998 for Timberleaf, has
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. CONSTRUCTION DEFECTS (CONTINUED)
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. Additional
testing and investigations have been conducted periodically on the Properties
and continue to be performed from time to time.
The first settlement conference supervised by the Special Master was
held on March 11, 1997 among the various defendants and Prometheus Income
Partners. Since then, there have been conferences with respect to Timberleaf in
May, June, September and December 1997, April, June, August, October and
December 1998, and February, June and October 1999. There have also been
conferences with respect to Alderwood in January, March, April, September,
October and November of 1999. None of these conferences produced a settlement,
and so on May 5, 2000, the judge ordered another mandatory settlement conference
to be held on August 16, 2000. No settlement was reached at this conference. A
trial date has been set for Timberleaf on May 14, 2001, and Alderwood's trial is
set to commence immediately thereafter.
On March 26, 2001, the Partnership reached a settlement with one of
several principal defendants in the two lawsuits. Under the terms of this
settlement, this defendant has agreed to pay an aggregate of $3.58 million for
the full and final settlement of the claims against it. Of this amount, the
Partnership would receive a net amount of approximately $2.3 million, after
payment of attorneys' fees, costs and a litigation management fee of 3% of the
gross settlement to an affiliate of the General Partner and the acquiring
parties. This settlement is subject to the approval of the court and the
approval of interconnected settlements in related lawsuits by the respective
courts in which such suits are being tried. The Partnership intends to continue
to pursue vigorously its claims against the remaining defendants.
The terms of the mortgages on the Properties require that a security
account be maintained for each Property to cover contingent liabilities with
respect to defects in the Properties' hardboard siding. These security accounts
are additional collateral for the lender, and total, as of March 31, 2001,
approximately $5,713,000. Because there is no current prospect for settling the
hardboard siding litigation or of refinancing the Properties to remove these
covenants, there are no current prospects for the liquidation and distribution
of these accounts to limited partners.
In addition to the security accounts mandated under the Partnership's
financing arrangements, 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 known and unknown construction defects. The General Partner
currently maintains cash accounts totaling as of March 31, 2001 approximately
$3,932,000, which is primarily intended to cover additional contingent
liabilities related to the construction defects and other matters.
The extent and magnitude of the construction defects continues to
worsen with time. The General Partner believes that Prometheus Income Partners
can no longer wait for the cases to be resolved and has authorized the start of
repairs using the cash reserve funds currently held. As of March 31, 20010,
Prometheus Income Partners has spent approximately $1,667,000 on emergency
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. CONSTRUCTION DEFECTS (CONTINUED)
repairs and litigation expenditures. Assuming that the litigation is not
successfully resolved, over the next twelve months the Partnership anticipates
spending approximately $1,900,000 to $2,400,000 on additional urgent repairs. 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. The
cost of pursuing litigation also is significant. The General Partner cannot
predict or estimate what amounts, if any, will be recovered through litigation.
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 2001 was
used to pay current operating expenses and debt service, including payments to
the hardboard siding security accounts.
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 $3,304,000 and $2,409,000
for Alderwood and Timberleaf, respectively, as of March 31, 2001. 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 experienced a relatively
flat growth in the creation of new jobs, unemployment increased from 1.5% in the
fourth quarter of 2000 to 2.2% in the first quarter of 2001. In the first
quarter of 2001, the Properties marketed available units at rents that averaged
$1,803 for one-bedroom units and $2,370 for two-bedroom units. Average occupied
rent per unit for the quarter was $1,815 and average occupancy during the
quarter was 98% for Alderwood and Timberleaf. As of March 31, 2001, Alderwood
was 98% occupied and Timberleaf was 100% occupied.
In the first quarter of 2000, the Properties marketed available units
at rents that average $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.
Excluding expenditures relating to quantification of the extent of
construction defects and associated litigation costs, operating expenses
increased 22%. The following first quarter operating expenses increased between
years: Payroll, Benefits and Payroll Taxes due to salary increases; Utilities
primarily due to increases of water and sewer usage and rates; Marketing due to
print and internet advertising; Management Fees due to increased rents given to
residents upon turnover. Operating expenses, inclusive of hardboard siding
related costs, increased 14%.
Overall, net operating income increased 33% during the first three months of
2001 when compared to the first three months of 2000.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 3 to Financial Statements, Construction Defects, for a
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. The following reports on Form 8-K's were filed during the period covered
by this report.
The company filed Form 8-K on March 5, 2001, with respect to the
notification of the change in accounting firms for the fiscal
year ended December 31, 2000.
The company filed Form 8-K on March 12, 2001 with respect to
matters not required to be disclosed in a Form 10-Q filing.
The company filed Form 8-K on March 26, 2000 with respect to a
settlement with one of several principal defendants in its two
lawsuits filed September 1996 against the siding manufacturer,
the general contractor, the subcontractors and the architect.
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: May, 14, 2001 By: /s/ Vicki R. Mullins
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Vice President
Date: May, 14, 2001 By: /s/ John J. Murphy
--------------------------
Vice President