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, 2002 Commission File No.0-16950
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/A filed by the Partnership for the year ended
December 31, 2001. 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, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002.
PROMETHEUS INCOME PARTNERS
a California limited partnership
BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001
(Unaudited and in Thousands, Except for Unit Data)
March 31, December 31,
2002 2001
-------- --------
ASSETS
Real Estate:
Land, buildings and improvements $ 32,944 $ 31,881
Construction in progress 27 776
Accumulated depreciation (9,673) (9,483)
-------- --------
23,298 23,174
Cash and cash equivalents 3,960 4,036
Restricted cash 17,190 10,437
Deferred financing costs, net of accumulated of
amortization of $128 and $120 171 179
Accounts receivable and other assets 13 2
Receivable from settlement of construction
defects litigation -- 6,299
-------- --------
Total assets $ 44,632 $ 44,127
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Notes payable $ 25,461 $ 25,548
Accounts payable and accrued liabilities 478 388
Construction defects reserve 10,792 10,832
-------- --------
Total liabilities 36,731 36,768
-------- --------
Partner's capital (deficit)
General partner deficit (322) (328)
Limited partners' capital
18,995 limited partnership units
issued and outstanding 8,223 7,687
-------- --------
Total partners' capital (deficit) 7,901 7,359
-------- --------
Total liabilities and partners' capital (deficit) $ 44,632 $ 44,127
======== ========
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, 2002 AND 2001
(Unaudited and in Thousands, Except for Unit Data)
2002 2001
------- -------
REVENUES
Rental $ 1,662 $ 1,929
Other income 38 11
Interest income 131 125
------- -------
Total revenues 1,831 2,065
------- -------
EXPENSES
Interest and amortization 456 462
Operating 341 391
Depreciation 190 175
Administrative 10 13
Payments to general partner and affiliates:
Management fees 150 97
Operating and administrative 142 141
------- -------
Total expenses 1,289 1,279
------- -------
NET INCOME $ 542 $ 786
------- -------
Net income per $1,000
limited partnership unit $ 28 $ 41
------- -------
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, 2002 AND 2001
(Unaudited and in Thousands)
2002 2001
------- -------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 542 $ 786
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation 190 175
Amortization 8 8
(Increase) decrease in accounts receivable and
other assets (11) 36
Increase (decrease) in payables and accrued
liabilities 90 (25)
------- -------
Net cash provided by operating activities 819 980
------- -------
CASH FLOW FROM INVESTING ACTIVITIES
Increase in fixed asset additions (1,063) (79)
Decrease in construction progress 749 --
------- -------
Net cash used for investing activities (314) (79)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in restricted cash (6,753) (457)
Principal reductions on notes payable (87) (80)
Decrease in construction defects reserve (40) --
Proceeds from settlement of construction defects
litigation 6,299 --
------- -------
Net cash used for financing activities (581) (537)
------- -------
Net (decrease) increase in cash and cash equivalents (76) 364
Cash and cash equivalents at beginning of year 4,036 3,568
------- -------
Cash and cash equivalents at end of period $ 3,960 $ 3,932
======= =======
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, 2002 and for the
three months ended March 31, 2002 and 2001 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 Sheet at December 31,
2001 was derived from the Partnership's audited annual report for 2001.
These unaudited financial statements should be read in conjunction with the
Notes to Financials Statements included in the 2001 audited financial
statements.
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. LITIGATION SETTLEMENT - CONSTRUCTION DEFECTS
In June 1996, the General Partner became aware of defects in the hardboard
siding used in both of the Partnership's Properties. At that time, the General
Partner began seeking recovery of costs to repair those defects from the
manufacturer of the hardboard siding, as well as the general contractor, the
subcontractors, and the architects involved in the original construction of the
two Properties.
NOTES TO FINANCIAL STATEMENTS (Continued)
3. LITIGATION SETTLEMENT - CONSTRUCTION DEFECTS (Continued)
Since June 1996, the General Partner has determined that the defects did
not reduce the assets' value to an amount below their net book value, based on a
comparison of future cash flows to the carrying amount of the Properties at the
end of subsequent reporting periods. This continues to be the case at March 31,
2002. The General Partner has also determined that, although the construction
defects may be substantial in nature, the Properties will continue to function
as safe, inhabitable, income-generating properties without a full repair of the
defects for an indeterminate amount of time. As such, the Partnership has been
under no obligation to undertake a major repair project to remedy the
construction defects at either of the Properties. The Partnership has made
certain emergency repairs to the Properties since June 1996, and has expensed
those repair costs as incurred with no consideration of potential recoveries
from the ongoing litigation or potential settlement thereof. As of March 31,
2002, the cost of emergency repairs charged to expense since June 1996 totaled
approximately $3,745,000. This amount is not included in the Partnership's
current estimates to repair construction defects.
In 2001, the Partnership's litigation against the responsible parties was
settled. In total, from all Alderwood and Timberleaf settlements, defendants
agreed to pay the Partnership an aggregate of $14,600,000. The Partnership
received net proceeds (after payment of attorney's fees, litigation costs and a
litigation management fee of 3% of the gross settlement amount to an affiliate
of the Partnership's General Partner) of $10,832,000. The net proceeds related
to the Timberleaf property of $4,533,000 were received by the Partnership in
2001. The Alderwood litigation was settled on October 3, 2001, and settlement
proceeds of $6,299,000 were received on March 5, 2002. The General Partner
believes that these settlements were, in substance, payment for non-operating
costs to be incurred by the partnership to repair the defects at both
Properties.
In 2001, upon learning that the defendants in the litigation were willing
to resolve the lawsuits in return for a substantial settlement to the
Partnership, the General Partner made the decision to utilize the proceeds of
the settlement to undertake a major repair project related to the construction
defects. The General Partner is currently engaged in the process of developing
an updated repair plan, and anticipates that the repairs will occur during 2002
and 2003. In light of the settlement recovery, the General Partner is hopeful,
that under prevailing circumstances and market conditions, it can develop a plan
to repair the construction defects, including all costs associated with the
repairs, (including rent concessions and lost rents) for approximately
$12,500,000 to $14,000,000, an amount that exceeds the net settlement proceeds
received by the Partnership. This preliminary projection of the cost to repair
the construction defects is an estimate, and as such it is at least reasonably
possible that the estimate could change in the near term due to certain factors
that could be encountered in either the design engineering phase and / or actual
construction phase due to hidden defects that are not evident until the current
siding is removed and the underlying wall and flooring structures are exposed
and examined. As such, the cost to repair could change, and the change could be
material to this preliminary projection. The Partnership has recorded a
construction defects reserve liability of $10,832,000 in the accompanying
Balance Sheet at December 31, 2001 equal to the net settlement proceeds. The
Partnership has incurred $40,000 of engineering costs to date and the liability
account balance is $10,792,000 as of March 31, 2002. All construction repair
expenditures up to $10,832,000 will be charged to the reserve liability and
NOTES TO FINANCIAL STATEMENTS (Continued)
3. LITIGATION SETTLEMENT - CONSTRUCTION DEFECTS (Continued)
amounts in excess of $10,832,000, if any, will be expensed as incurred. None of
the expenditures made to repair the construction defects will be capitalized,
due to the fact that the repairs are not considered a betterment that will
extend the life of the Partnership's assets. The construction defects repairs
are intended to restore the assets to their original condition as though the
defects had never existed.
4. REAL ESTATE
Statement of Financial Accounting Standards 144 ("SFAS 144"), Accounting
for the Impairment or Disposal of Long-Lived Assets, 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 144. 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 2002 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 costs to repair the construction defects have been
determined with a high degree of certainty. 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 and the Security Agreement, Disbursement Agreement
and Assignment of Agreements (collectively the "Agreements") 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 $3,620,000 and $2,639,000 for Alderwood and Timberleaf, respectively, as of
March 31, 2002. Until the Completion Date, as defined in the Agreements,
annually the Partnership is obligated to contribute, an additional 10%, as
defined in the Agreements, or monthly cash flow, whichever is less, and 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 security accounts 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 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.
Settlement has been reached with all parties in the Alderwood and
Timberleaf construction defects litigation. The net settlement proceeds related
to the Timberleaf property of $4,533,000 were received by the Partnership in
2001. The Alderwood net settlement proceeds of $6,299,000 were received on March
5, 2002. These net settlement proceeds are segregated in reserve bank accounts
and will be utilized to fund the repairs of the construction defects.
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------------------
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 determined with a high degree
of certainty. Therefore, it is uncertain when cash distributions will resume. As
of the date of this report, the Partnership anticipates with the receipt by the
Partnership of all settlement proceeds in respect of the construction defects
litigation, the Partnership will have sufficient reserves to enable it to begin
distributions to limited partners during 2002. However, there can be no
assurances given as to when distributions will actually resume and the level at
which any such distributions will be made. The hardboard siding security
accounts must be maintained until such time as the Partnership's lender has
determined the repair work has been completed. In addition, if repairs of the
Properties are not completed by December 2002, the Partnership's lender has the
right to require the Partnership to retain additional cash collateral reserves,
which could require further suspension of distributions to Limited Partners.
Construction Defects
- --------------------
In June 1996, the General Partner became aware of defects in the hardboard
siding used in both of the Partnership's Properties. At the time, the General
Partner began seeking recovery of costs to repair those defects from the
manufacturer of the hardboard siding, as well as the general contractor, the
subcontractors, and the architects involved in the original construction of the
two Properties.
Since June 1996, the General Partner has determined that the defects did
not reduce the assets' value to an amount below their net book value, based on a
comparison of future cash flows to the carrying amount of the Properties at the
end of subsequent reporting periods. This continues to be the case at March 31,
2002. The General Partner has also determined that, although the construction
defects may be substantial in nature, the Properties will continue to function
as safe, inhabitable, income-generating Properties without a full repair of the
defects for an indeterminate amount of time. As such, the Partnership has been
under no obligation to undertake a major repair project to remedy the
construction defects at either of the Properties. The Partnership has made
certain emergency repairs to the Properties since June 1996, and has expensed
those repair costs as incurred with no consideration of potential recoveries
from the ongoing litigation or potential settlement thereof. As of March 31,
2002, the cost of emergency repairs charged to expense since June 1996 totaled
approximately $3,745,000. This amount is not included in the Partnership's
current estimates
In 2001, the Partnership's litigation against the responsible parties was
settled. In total, from all Alderwood and Timberleaf settlements, defendants
agreed to pay the Partnership an aggregate of $14,600,000. The Partnership
received net proceeds (after payment of attorney's fees, litigation costs and a
litigation management fee of 3% of the gross settlement amount to an affiliate
of the Partnership's General Partner) of $10,832,000. The net proceeds related
to the Timberleaf property of $4,533,000 were received by the Partnership in
2001. The Alderwood litigation was settled on
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Construction Defects (continued)
- --------------------------------
October 3, 2001 and net settlement proceeds of $6,299,000 were received by the
Partnership on March 5, 2002. The General Partner believes that these
settlements were, in substance, payment for non-operating costs to be incurred
by the Partnership to repair the defects at both Properties.
In 2001, upon learning that the defendants in the litigation were willing
to resolve the lawsuits in return for a substantial settlement to the
Partnership, the General Partner made the decision to utilize the proceeds of
the settlement to undertake a major repair project related to the construction
defects. The General Partner is currently engaged in the process of developing
an updated repair plan, and anticipates that the repairs will occur during 2002
and 2003. In light of the settlement recovery, the General Partner is hopeful,
that under prevailing circumstances and market conditions, it can develop a plan
to repair the construction defects, including all costs associated with the
repairs, (including rent concessions and lost rents) for approximately
$12,500,000 to $14,000,000, an amount that exceeds the net settlement proceeds
received by the Partnership. This preliminary projection of the cost to repair
the construction defects is an estimate, and as such it is at least reasonably
possible that the estimate could change in the near term due to certain factors
that could be encountered in either the design engineering phase, and / or
actual construction phase due to hidden defects that are not evident until the
current siding is removed and the underlying wall and flooring structures are
exposed and examined. As such, the cost to repair could change, and the change
could be material to this preliminary projection. The Partnership has recorded a
construction defects reserve liability of $10,832,000 in the accompanying
Balance Sheet at December 31, 2001 equal to the net settlement proceeds. The
Partnership has incurred $40,000 of engineering costs to date and the liability
account balance is $10,792,000 as of March 31, 2002. All construction repair
expenditures up to $10,832,000 will be charged to the reserve liability and
amounts in excess of $10,832,000, if any, will be expensed as incurred. None of
the expenditures made to repair the construction defects will be capitalized,
due to the fact that the repairs are not considered a betterment that will
extend the life of the Partnership's assets. The construction defects repairs
are intended to restore the assets to their original condition as though the
defects had never existed.
The terms of the Notes require each Property maintain a Hardboard Siding
security account be maintained for each Property to cover potential liabilities
with respect to defects in the Properties' hardboard siding, to the extent that
the Partnership was unable to make sufficient recoveries from the responsible
parties. These security accounts serve as additional collateral for the lender
and, as of March 31, 2002, the Partnership has provided $6,259,000 toward these
accounts. These security accounts must be maintained until such time as the
Partnership's lender has determined the repairs have been completed.
Additionally, the net settlement proceeds of $10,931,000, included accumulated
interest income, have been segregated by the Partnership in reserve bank
accounts. The sum of these two amounts, or $17,190,000, is reflected as
restricted cash in the accompanying balance sheet as of March 31, 2002, as it
will be utilized to fund the repair costs.
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Construction Defects (continued)
- --------------------------------
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This Annual Report on
Form 10-K/A contains such forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Words such as "anticipate,"
"estimate," "expects," "projects," "intends," "plans," "believes" and words of
similar substance used in connection with any discussion of future operations or
financial performance identify forward-looking statements. In particular,
statements relating to working capital, liquidity and the cost to repair
construction defects are forward-looking statements. These forward-looking
disclosures are found at various places throughout this document. Wherever they
occur in this document, forward-looking disclosures are necessarily estimates
reflecting judgments based on currently available information. However, these
disclosures still involve a number of risks and uncertainties that could cause
actual results to differ materially from those suggested by the forward-looking
disclosures. These forward-looking disclosures should, therefore, be considered
in light of various important factors, including those set forth in the
preceding paragraphs. The limited partners are cautioned not to place undue
reliance on these forward-looking disclosures, which speak only as of the date
hereof. The Partnership disclaims any intent or obligation to update
forward-looking disclosures, except as required by law. Moreover, the
Partnership, through its General Partner, may from time to time make
forward-looking disclosures about the matters described in this document or
other matters concerning the Partnership.
While the General Partner believes the estimated cost to repair the
construction defects and estimate of the costs associated with the repairs and
assumptions are reasonable, there can be no assurance that these estimates will
prove to be accurate, and actual results may vary materially from those shown.
These estimates were based upon a variety of estimates and assumptions. It is
expected that there will be differences between the actual and estimated cost to
repair the construction defects and all costs associated with the repairs may be
materially higher or lower than those estimated. Inclusion of these estimates
should not be regarded as an indication that the General Partner considers it an
accurate prediction of future events. In light of the uncertainties inherent in
forward-looking information of any kind, the inclusion of this projection in
this document should not be regarded as a representation by the Partnership or
its General Partner that the anticipated cost to repair the construction defects
and all costs associated with the repairs will be achieved and limited partners
are cautioned not to place undue reliance on this information.
The Partnership is under no obligation, and expressly disclaims any
obligation, to update or alter any forward-looking statements, whether as a
result of new information, future events or otherwise. All forward-looking
statements contained herein are qualified in their entirety by the foregoing
cautionary statements.
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations
- ---------------------
COMPARISON OF THE QUARTER ENDED MARCH 31, 2002 TO THE QUARTER ENDED MARCH 31,
2001
RENTAL AND OTHER RESIDENT REVENUE: Both Properties are located in Santa Clara
County, in an area commonly referred to as Silicon Valley. With the decline in
the economy, and specifically in the high tech industry, the primary employer in
the Silicon Valley, job growth was non existent, and Santa Clara County
experienced a further decrease of 40,700 jobs between December 31, 2001 and
March 31, 2002. The quarter ending March 31, 2002 saw unemployment rise to 7.4%
from 2.2% at March 31, 2001, and from 6.1% at December 31, 2001. This decline in
jobs, coupled with new housing units (both single family and multi-family)
coming on line has resulted in a softening of the rental market. Average rental
rates decreased 6% during the quarter, compared to a 4% decrease during the
fourth quarter of 2001. Concessions were utilized to increase occupancy, and to
remain competitive in the Santa Clara market. In the first quarter of 2002, the
Properties marketed available units at rents that averaged $1,232 for
one-bedroom units and $2,391 for two-bedroom units. The average occupied rent
per unit for the quarter was $1,621. 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. The average occupied rent
per unit for the quarter was $1,815. Rental revenue as presented in the
Statements of Income decreased by $267,000 or 14% between March 2001 and March
2002, due to residents with newly leased units, and current residents upon lease
expiration who did renew their leases, renewed at significantly reduced market
rental rates. Rental revenues are recognized when contractually due based on the
terms of signed lease agreements, which range in duration from month-to-month to
one year. Given the sharp decrease in employment, many residents terminated
their leases early, while remaining contractually and economically bound to the
terms of their lease agreement until their respective units were either
re-leased or their lease expired. For those former residents whose units were
leased before their lease expiration date, they remained obligated for the short
fall in the rental rates through the end of their lease term. Average quarterly
occupancy went from 99% and 98% for Alderwood and Timberleaf, respectively as of
the quarter ending March 31, 2001 to 96% and 95%, respectively as of March 31,
2002. As of March 31, 2001, Alderwood was 98% occupied and Timberleaf was 100%
occupied. At March 31, 2002, Alderwood was 96% occupied and Timberleaf was 97%
occupied.
INTEREST INCOME: While more cash, including the Alderwood and Timberleaf net
settlement proceeds, were placed in interest bearing accounts in 2002 as
compared to 2001, interest income earned during the first quarter of 2002 was
only $6,000 higher than the first quarter of 2001 due to declining interest
rates.
OPERATING AND ADMINISTRATIVE EXPENSES: These expenses include on-site
management, maintenance, utilities, marketing and other expenses related to
earning rental revenues. Some of the operating expenses vary as occupancy
changes throughout the year. Others, such as property taxes, do not fluctuate in
response to changing occupancy levels. Although the operating expenses remained
relatively flat, increasing only $1,000 over the quarter ending March 31, 2001,
certain expenses did vary. The significant changes in expenses from 2001 to 2002
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
OPERATING AND ADMINISTRATIVE EXPENSES: (continued)
reflected the following. While Management Fees based upon rental revenues
decreased when compared to the quarter ending March 31, 2001, fees earned from
construction management for building improvements and construction defects work
resulted in a net overall increase of $53,000 between years. Hardboard siding
expenses decreased $67,000 due principally to the settlements reached on the
construction defects litigation during 2001. The softening residential rental
market resulted in an increase of $10,000 in turnover costs for unit cleaning,
painting and minor refurbishment supplies, and labor in those instances where
the work could not be accomplished by the resident staff.
INTEREST AND AMORTIZATION: Interest expense on the Notes, which both commenced
in December 1997, is at a fixed rate of 6.99% per annum for Alderwood, and 7.09%
per annum for Timberleaf and decreased $6,000 quarter-to-quarter. Monthly
principal and interest payments under these Notes are $114,659 and $63,587,
respectively. Amortization of financing costs remained constant between quarters
at $8,000 per quarter.
DEPRECIATION: Depreciation expense was $190,000 and $175,000 in March 2002 and
March 2001, respectively, primarily due to the acquisition of assets.
NET INCOME: Net income decreased between quarters to $542,000 in March 2002 from
$786,000 in March 2001, due principally to decrease in rental revenues
associated with the softening residential rental market.
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Economic Environment
- --------------------
Both the national and California economy and specifically the economy of
Santa Clara County in which the Partnership owns and manages its two Properties
have been and continue to be in a recession. This has resulted in reduced
occupancy rates, and reductions in market rental rates.
The Partnership's property type and geographic location provide some degree
of risk moderation but are not immune to a prolonged down cycle in the real
estate market in which the Partnership operates. Although the Partnership
believes it is well positioned to meet the challenges ahead, it is possible that
further reductions in occupancy and market rental rates will result in reduction
of rental revenues, operating income, cash flows.
Inflation
- ---------
Inflationary increases would likely have a negative effect on property
operating results and such increases may be at a greater rate of increases than
property rental rates in a period of recession. However, the ability to affect
increases in rental rates may be impacted by market conditions such as the
supply of rental housing or local economic conditions. Certain expenses, such as
property taxes and debt service, may not be impacted by inflation. Property
taxes are affected primarily by limits placed by legislation. Debt financing is
at a fixed rate. The Partnership believes it effectively manages its Properties
and other expenses but understands that a return to higher annual rates of
inflation would result in increases to operating expenses.
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 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-K filing.
The company filed Form 8-K on April 2, 2001, with respect to the
notification of the settlement reached with selected defendants in the
Timberleaf litigation.
The company filed Form 8-K on May 24, 2001, with respect to the
notification of the settlement reached with the remaining defendants
in the Timberleaf litigation.
The company filed Form 8-K on October 11, 2001, with respect to the
notification of the settlement reached with the defendants in the
Alderwood litigation.
The company filed Form 8-K on March 5, 2002, with respect to the
notification of the Limited Partners summarizing the settlements
reached with the defendants in the Alderwood and Timberleaf
litigations and the impacts on cash flow and future distributions.
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, 2002 By: /s/ Vicki R. Mullins
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Vice President
Date: May 14, 2002 By: /s/ John J. Murphy
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Vice President