- ------------------------------------------------------------------
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, 1997 Commission File No. 000-16950
Prometheus Income Partners, a California Limited Partnership
(Exact name of registrant as specified in its charter)
California 77-0082138
(State or other jurisdiction of (IRS employee ID Number)
incorporation or organization)
350 Bridge Parkway
Redwood City, California 94065-1517
(Address of principal (zip code)
executive offices)
Registrant's telephone number, including area code: (415)596-5300
- -------------------------------------------------------------------------
(Former name, address and former fiscal year, if changed since last report)
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 []
- --------------------------------------------------------------------------
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
The accompanying unaudited financial statements should be read in
conjunction with the Form 10-K filed by the Partnership for the year ended
December 31, 1996. These statements have been prepared in accordance with
the instructions of the Securities and Exchange Commission Form 10-Q and do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
The financial information does not include any adjustments for the
capitalization of any improvements which are done only in conjuction 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 ended
March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
<PAGE>
<TABLE>
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
(In Thousands, Except for Unit Data)
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Real Estate:
Land, buildings and improvements $ 29,420 $ 29,420
Accumulated depreciation (6,625) (6,491)
-------- --------
22,795 22,929
Cash and cash equivalents 2,817 2,227
Deferred expenses, net 57 78
Accounts receivable and other assets 15 25
-------- --------
Total assets $ 25,684 $ 25,259
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Notes payable $ 25,637 $ 25,248
Payables and accrued liabilites 397 454
-------- --------
Total liabilities 26,034 25,702
-------- --------
General partner deficit (405) (405)
Limited partners' capital (deficit)
18,995 limited partnership units
issued and outstanding 55 (38)
-------- --------
Total partners' capital (deficit) (350) (443)
-------- --------
Total liabilities and partners'
capital (deficit) $ 25,684 $ 25,259
======== ========
The accompanying notes are an integral
part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(In Thousands, Except for Unit Data)
<CAPTION>
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES
Rental (including revenue from affiliates
of $140 and $50, respectively) $ 1,274 $ 1,180
Other income 39 24
Interest income 30 7
------- -------
Total revenues 1,343 1,211
------- -------
EXPENSES
Interest 658 620
Operating 264 275
Depreciation and amortization 155 158
Administrative 12 10
Payments to general partner and affiliates:
Management fees 67 61
Operating and administrative 94 79
------- -------
Total expenses 1,250 1,203
------- -------
NET INCOME $ 93 $ 8
======= =======
Net income per $1,000
limited partnership unit $ 5 $ .4
======= =======
Number of limited partnership
units used in computation 18,995 18,995
====== ======
The accompanying notes are an integral
part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(In Thousands)
<CAPTION>
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 93 $ 8
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 155 158
Decrease (increase) in accounts
receivable and other assets 10 (46)
Deferral of mortgage interest 412 373
(Decrease) increase in payables
and accrued liabilities (57) 117
----- ------
Net cash provided by operating activities 613 610
----- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal reductions on notes payable (23) (23)
Distribution to partners 0 (375)
----- ------
Net cash used for financing activities (23) (398)
----- ------
Net increase in cash and cash equivalents 590 212
Cash and cash equivalents at
beginning of year 2,227 603
----- ------
Cash and cash equivalents at
end of period $ 2,817 $ 815
====== ======
The accompanying notes are an integral
part of these financial statements.
</TABLE>
<PAGE>
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 March 31, 1997 and for the three months ended March 31, 1997 and 1996 is
unaudited and, in the opinion of the Partnership, reflects all adjustments
(which include only normal recurring accruals) necessary for a fair
presentation of the financial position as of those dates and the results of
operations for those periods. Management fees and payments to the General
Partner and Affiliates represent compensation for services provided and
certain expense requirements, at cost, in accordance with the Partnership
Agreement. The information in the Balance Sheets at December 31, 1996 was
derived from the Partnership's audited annual report for 1996.
Partnership profits, losses and distributions are allocated among the
partners based on the provisions of the Partnership Agreement which generally
provide for allocations to begin when the partners are admitted to the
Partnership.
2. INCOME TAXES
In accordance with federal and California income tax regulations, no
income taxes are levied on the Partnership; rather, such taxes are levied
on the individual partners. Consequently, no provision or liability for
federal or California income tax has been reflected in the accompanying
financial statements.
3. HARDBOARD SIDING
The type of hardboard siding which was used at Alderwood and Timberleaf
is failing to perform as expected in a number of projects in various parts of
the United States. A wood technology expert was retained to test the
performance of the hardboard siding. In November 1996, this expert presented
a preliminary verbal report which indicated that the physical characteristics
of the hardboard siding at Alderwood and Timberleaf have deteriorated since
the construction of the properties.
In September 1996, a construction consultant retained by the General
Partner to investigate the hardboard siding reported that its preliminary
findings indicated damage, which on the surface does not currently appear to
be major. However, they recommended further investigation in view of the
deterioration, since there could be significant problems which are not
evident from prior tests that were conducted. The General Partner has
retained a consultant to conduct non-destructive and destructive testing as
recommended.
The General Partner has received the results of the "non-destructive"
testing. Non-destructive testing looks for potential damage to the outside of
the building. The testing showed damage to both properties. The estimated
damage for both properties combined ranges from $4 million to $13 million.
Potential damage of this magnitude reinforces the need to perform
"destructive" testing. Destructive testing looks for damage inside the walls
of the building caused by defective materials, design and construction. In
addition, the General Partner is continuing to pursue litigation on behalf of
the Partnership against the hardboard siding manufacturer.
The General Partner has determined that it is in the best interest of the
Partnership to continue building reserves for the potential cost of dealing
with the hardboard siding problems. At this time, the General Partner cannot
predict when cash distributions will resume due to the build up of reserves;
however, it is the General Partner's current intention to resume distributions
as soon as reasonably possible and prudent. The reinstatement and level of
future distributions will be dependent on several factors, including the
degree of damage caused by the hardboard siding, determination of liability for
potential costs and expenses of dealing with the hardboard siding problem, and
continued stabilized operations at the properties.
<PAGE>
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 1997 was
used to pay current operating expenses and debt service.
Quarterly distributions have been suspended in order to accumulate
working capital reserves until the degree of damage to the hardboard siding
and determinatiobn of liability are known. See Note 3 to Financial
Statements, Hardboard Siding, for a more comprehensive discussion of this
matter.
Each property has a non recourse note payable, secured by a first deed
of trust. These notes accrue interest at 10.375%; interest is payable
monthly at 6.25% on the principal balance, with the difference between
accrual rate and the pay rate added to principal. Both loans mature on
December 1, 1997. Given the time it may take to resolve the hardboard siding
issue discussed above, the General Partner has begun the process of refinancing
the loans. As part of the refinance, the Partnership may be able to take
advantage of a currently favorable interest rate environment.
RESULTS OF OPERATIONS
During the past year, Santa Clara County has continued to experience
growth in the creation of new jobs. This growth contributed to a strong
rental market and allowed the properties to increase their rental rates. In
the first quarter of 1997, the properties marketed available units at
rents which averaged $1,203 for one bedroom units and $1,501 for two
bedroom units. Average occupied rent per unit for the quarter was $1,213 and
average occupancy during the quarter was 97% for Alderwood and 95% for
Timerleaf. As of March 31, 1997, Alderwood was 97% occupied and
Timberleaf was 93% occupied.
In the first quarter of 1996, the properties marketed available units at
rents which average $1,103 for one bedroom units and $1,330 for two bedroom
units. Average occupied rent per unit for the quarter was $1,078 and average
occupancy during the quarter was 97% for Alderwood and 98% for Timberleaf. As
of March 31, 1996, Alderwood and Timberleaf were both 97% occupied.
With the exception of an increase in management fees, which are directly
related to the increase in rental activity, operating expenses decreased 2%
during the first three months of 1997 when compared to the first three
months of 1996.
<PAGE>
PART II: OTHER INFORMATION
- ----------------------------------------------------------------------------
Item 1. Legal Proceedings.
On March 12, 1997, a limited partner owning twenty-five (25) units
(.1316% of the outstanding units), filed a class and derivative
action complaint in the Superior Court of San Mateo County against
the Partnership, certain officers of the General Partner and
certain affiliates of the General Partner. The suit alleges that
the defendants used their power over the Partnership and its assets
to inhibit and discourage a tender offer for units that was
commenced by an unaffiliated third party, utilized Partnership funds
and resources to facilitate and subsidize an inferior tender offer
by an affiliated party, misled and induced limited partners who
wished to sell units to tender them to the affiliated party rather
than to a third party offering more money, refused to pursue or
consider transactions that would maximize the value of the limited
partners' units, including the sale of the Partnership properties or
the preparation of a plan of liquidatiion. The suit also alleges
that the Partnership has reimbursed affiliated parties for costs of
goods and materials used by the Partnership and services rendered
by the affiliates of the Partnership for sums in excess of
contractual limits and that the Partnership has wasted Partnership
assets and funds in subsidizing the expenses of an offer from an
affiliated entity.
The plaintiff is seeking to enjoin the Partnership from reimbursing
or indemnifying the affiliated entity for any costs or fees with
respect to the tender offer or from any further acts to thwart
competing tender offers. The plaintiff asks for compensatory and
punitive damages and for reasonable attorneys' fees. Included in
the damage demand are all profits made by the affiliated entity
resulting from its offer or compensation for the use of the
Partnership assets and the alleged excessive charges and fees
specified above. Other equitable relief is sought, including an
order prohibiting defandants from voting any units obtained, and an
order oppointing a receiver to protect the Partnership from any
alleged further harm.
The defendants intend to vigorously defend the suit and believe
they have meritorious defenses; however, it is not possible to
predict the outcome of this litigation at this early stage, and
therefore, whether the consequences will be material to the
Partnership.
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.
Tender Offer
Commencing in the fourth quarter, competing tender offers were
made for limited partner interests ("Units") in the Partnership.
One tender offer expired in December and the second in January.
The Partnership is continuing the process of reviewing the
documentation to process the transfers of Units sold by limited
partners. Under the terms of the Partnership Agreement, all
eligible transfers, as to which all required approvals, opinions
and documentation were satisfactorily completed and submitted prior
to March 31, 1997, are effective April 1, 1997.
Item 6. Exhibits and Reports on Form 8-K.
None.
<PAGE>
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
Its General Partner
Date: May 15, 1997 By: /s/ Vicki R. Mullins
__________________________
Vicki R. Mullins
Executive Vice President
Chief Financial Officer
Date: May 15, 1997 By: /s/ John J. Murphy
___________________________
John J. Murphy
Vice President Finance and
Accounting
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
NO. DESCRIPTION
- ------- -----------
27 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheets and the Statements of Operations filed as part of the annual report on
Form 10-K and is qualified in its entirety by reference to such annual report on
Form 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,817
<SECURITIES> 0
<RECEIVABLES> 15
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,832
<PP&E> 29,420
<DEPRECIATION> 6,625
<TOTAL-ASSETS> 25,684
<CURRENT-LIABILITIES> 397
<BONDS> 0
0
0
<COMMON> (350)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 25,684
<SALES> 1,274
<TOTAL-REVENUES> 1,343
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 592
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 658
<INCOME-PRETAX> 93
<INCOME-TAX> 0
<INCOME-CONTINUING> 93
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 93
<EPS-PRIMARY> 5
<EPS-DILUTED> 0
</TABLE>
