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, 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 and nine months ended September 30, 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
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(Unaudited and in Thousands, Except for Unit Data)
September 30, December 31,
2001 2000
---------- -----------
ASSETS
Real Estate:
Land, buildings and improvements $ 31,251 $ 30,778
Accumulated depreciation (9,353) (8,801)
-------- -------
21,898 21,977
Cash and cash equivalents 3,923 3,568
Restricted cash 5,821 5,256
Deferred financial costs, net
of accumulated amortization of $112 and $90 186 209
Accounts receivable and other assets 1,017 78
-------- -------
Total assets $ 32,845 $ 31,088
======== =======
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Notes payable $ 25,633 $ 25,879
Payables and accrued liabilities 412 439
-------- -------
Total liabilities 26,045 26,318
-------- -------
General partner deficit (333) (354)
Limited partners' capital
18,995 limited partnership units
issued and outstanding 7,133 5,124
-------- -------
Total partners' capital (deficit) 6,800 4,770
-------- -------
Total liabilities and partners' capital (deficit) $ 32,845 $ 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 SEPTEMBER 30, 2001 AND 2000
(Unaudited and in Thousands, Except for Unit Data)
2001 2000
---- ----
REVENUES
Rental $ 1,776 $ 1,724
Other income 25 20
Interest income 80 117
--------- --------
Total revenues 1,881 1,861
--------- --------
EXPENSES
Interest and amortization 458 465
Operating 369 368
Depreciation 199 173
Administrative 12 18
Payments to general partner and affiliates:
Management fees 103 92
Operating and administrative 141 143
--------- --------
Total expenses 1,282 1,259
--------- --------
NET INCOME $ 599 $ 602
========= ========
Net income per $1,000
limited partnership unit $ 31 $ 31
========= ========
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, 2001 AND 2000
(Unaudited and in Thousands, Except for Unit Data)
2001 2000
---- ----
REVENUES
Rental $ 5,640 $ 4,839
Other income 50 71
Interest income 309 335
--------- --------
Total revenues 5,999 5,245
--------- --------
EXPENSES
Interest and amortization 1,380 1,397
Operating 1,249 1,176
Depreciation 553 531
Administrative 37 41
Payments to general partner and affiliates:
Management fees 300 274
Operating and administrative 450 358
--------- --------
Total expenses 3,969 3,777
--------- --------
NET INCOME $ 2,030 $ 1,468
========= ========
Net income per $1,000
limited partnership unit $ 106 $ 77
========= ========
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, 2001 AND 2000
(Unaudited and in Thousands)
2001 2000
---- ----
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 2,030 $ 1,468
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation 552 531
Amortization 23 22
Increase in accounts receivable and other assets (939) (10)
(Decrease)/Increase in payables and accrued liabilities (27) 65
--------- ---------
Net cash provided by operating activities 1,639 2,076
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Increase in fixed asset additions (473) (347)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in restricted cash (565) (618)
Principal reductions on notes payable (246) (230)
--------- ---------
Net cash used for financing activities (811) (848)
--------- ---------
Net increase in cash and cash equivalents 355 881
Cash and cash equivalents at beginning of year 3,568 1,942
--------- ---------
Cash and cash equivalents at end of period $ 3,923 $ 2,823
========= =========
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 September 30, 2001 and for
the three and nine months ended September 30, 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
The General Partner is pleased to announce that it has now reached
settlement with all parties in the Alderwood and Timberleaf construction defect
litigation. Defendants have agreed to pay Prometheus Income Partners a total of
$8.5 million in the Alderwood matter and $6.1 million in the Timberleaf matter
for an aggregate total of $14.6 million. Of this amount the Partnership will
receive a net amount after expenses of approximately $10.6 million.
The General Partner is now engaged in the process of trying to develop a
repair plan in light of the anticipated recovery and will move forward with
repairs estimated to occur during 2002 and 2003.
NOTES TO FINANCIAL STATEMENTS
3. CONSTRUCTION DEFECTS (CONTINUED)
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 restricted
security accounts are additional collateral for the lender, and total, as of
September 30, 2001, approximately $5,821,000.
In addition to the security accounts mandated under the Partnerships'
financing arrangements, the Partnership currently maintains an additional
account totaling as of September 30, 2001 approximately $3,823,000, which is
primarily intended to cover additional contingent liabilities related to the
construction defects and other matters.
While the litigation has been settled, the General Partner believes it
is in the best interest of the Partnership to continue to build reserves until
it can determine the actual cost to repair. Cash distributions will only resume
when a determination has been made that the Partnership has adequate cash
reserves (including restricted cash) to complete repairs of the construction
defects in the Partnership's properties. This determination can only be made
when the costs to repair construction defects to the Partnership's properties
have been definitively determined. Therefore, it is uncertain when cash
distributions will resume. In addition, the security accounts must be maintained
until such time as the Partnership's lenders have determined that these accounts
contain sufficient cash to complete the repairs of the Partnership's properties.
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.
5. SUBSEQUENT EVENTS
Pursuant to settlements reached on March 26, 2001 and May 22, 2001
between the Partnership and certain other parties in the Partnership's
construction defects litigation, as more fully explained in Note 3 above, the
Partnership received $4,586,000 of net settlement proceeds on October 10, 2001.
The remaining construction defects litigation was settled on October 3, 2001,
and the Partnership will be entitled to receive the net proceeds from these
additional settlements in future periods.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SUBSEQUENT EVENTS (CONTINUED)
The Partnership intends to record all of the net settlement proceeds on its
Balance Sheet as deferred income. As of September 30, 2001, permanent repairs of
the construction defects to which this litigation relates have not commenced,
except for certain roof repairs. The permanent repairs of the construction
defects, when they are completed, are expected to fully utilize all proceeds
received from the legal actions. The repairs to the extent of the deferred
income recorded will not be capitalized. All repairs in excess of the net
settlement proceeds will be capitalized.
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 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 is 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 $3,366,000 and $2,455,000
for Alderwood and Timberleaf, respectively, as of September 30, 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
- ---------------------
The county of Santa Clara experienced an increase in unemployment during
the third quarter. According to the Employment and Development Department, the
unemployment rate had increased during the third quarter to 5.9%, up from 4.2%
in the second quarter, and 2.2% in the first quarter of 2001. In addition, the
number of wage and salary jobs decreased from June 2001 by 22,100 jobs. The
number of wage and salary jobs has decreased by 36,700 from December 2000. The
volatility being experienced in the high tech industry and the layoffs from
local companies has caused the demand from prospective residents to drop off
significantly and has caused many current residents to leave the area. Along
with the drop in demand and occupancy, there has been an average decrease of
16.8% and 26.6% in market rates for the quarter and for the nine months ended
September 2001, respectively. In response to the market, Alderwood and
Timberleaf offered rental concessions ranging from $300 off the first month's
rent to one month free for a one-year lease. In the third quarter of 2001, the
Properties marketed available units at rents that averaged $1,534 for
one-bedroom units and $1,806 for two-bedroom units. Average occupied rent per
unit for the quarter was $1,853 and average occupancy during the quarter was 94%
for Alderwood and 93% for Timberleaf. As of September 30, 2001, Alderwood was
95% occupied and Timberleaf was 94% occupied.
In the third quarter of 2000, the Properties marketed available units at
rents that averaged $1,832 for one-bedroom units and $2,238 for two bedroom
units. Average occupied rent per unit for the quarter was $1,620 and average
occupancy during the quarter was 98% for both Alderwood and Timberleaf. As of
September 30, 2000, Alderwood and Timberleaf were 99% and 100% occupied,
respectively.
Excluding expenditures relating to quantification of the extent of
construction defects and associated litigation costs, operating expenses
increased 6%. The following third quarter operating expenses increased between
years: Payroll, Benefits and Payroll Taxes due to salary and overtime, and
benefit increases, the use of roving maintenance and temporary help; Utilities
primarily due to energy rate increases; Repairs and Maintenance mainly in window
cleaning, fire prevention, and plumbing and sewer expenditures; Turnover Costs
due to cleaning and painting; Management Fees due principally to construction
project management; Marketing due to media advertising; Insurance due to premium
increases. These increases were offset by the decreases in On-site
Administration primarily due to lower Corporate Training & Motivation,
Telephone/Pagers and Postage/Mail/Shipping expenses. Operating expenses,
inclusive of hardboard siding related costs, increased 15%.
Overall, net operating income increased 5% during the three months ended
September 30, 2001 when compared to the three months ended September 30, 2000.
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. The following report on Form 8-K was filed during the period covered by
this report.
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: November 13, 2001 By: /s/ Vicki R. Mullins
-----------------------------
Vice President
Date: November 13, 2001 By: /s/ John J. Murphy
-----------------------------
Vice President