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 June 30, 1998
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, 1997. 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 conjunction
with the year-end financial statements. While the financial information
is unaudited, in the opinion of the Partnership, all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included. The results of operations for the
six months ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(In Thousands, Except for Unit Data)
June 30, December 31,
1998 1997
(Unaudited) (Audited)
----------- ---------
ASSETS
Real Estate:
Land, buildings and improvements $ 29,614 $ 29,614
Accumulated depreciation (7,316) (7,041)
-------- --------
22,298 22,573
Cash and cash equivalents 894 638
Restricted cash 3,752 3,503
Deferred expenses, net 283 283
Accounts receivable and
other assets 64 19
-------- --------
Total assets $ 27,291 $ 27,016
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 26,613 $ 26,723
Payables and accrued liabilities 174 259
-------- --------
Total liabilities 26,787 26,982
-------- --------
General partner deficit (396) (401)
Limited partners' capital
18,995 limited partnership units
issued and outstanding 900 435
-------- --------
Total partners' capital 504 34
-------- --------
Total liabilities and
partners' capital $ 27,291 $ 27,016
======== ========
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 JUNE 30, 1998 AND 1997
(In Thousands, Except for Unit Data)
1998 1997
(Unaudited) (Unaudited)
----------- -----------
REVENUES
Rental (including revenue from
Affiliates of $0 and $120,
respectively) $ 1,397 $ 1,332
Other income 47 38
Interest income 59 39
------- -------
Total revenues 1,503 1,409
------- -------
EXPENSES
Interest and amortization 476 690
Operating 688 494
Depreciation 137 134
Administrative 14 12
Payments to general partner and
affiliates:
Management fees 76 68
Operating and administrative 132 114
------- -------
Total expenses 1,523 1,512
------- -------
NET LOSS $ (20) $ (103)
======= =======
Net loss per $1,000
limited partnership unit $ (1) $ (5)
======= =======
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 SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(In Thousands, Except for Unit Data)
1998 1997
(Unaudited) (Unaudited)
----------- -----------
REVENUES
Rental (including revenue from
Affiliates of $0 and $260,
respectively) $ 2,782 $ 2,607
Other income 88 77
Interest income 115 69
------- -------
Total revenues 2,985 2,753
------- -------
EXPENSES
Interest and amortization 869 1,370
Operating 959 758
Depreciation 275 268
Administrative 28 23
Payments to general partner and
affiliates:
Management fees 148 135
Operating and administrative 236 208
------- -------
Total expenses 2,515 2,762
------- -------
NET INCOME (LOSS) $ 470 $ (9)
======= =======
Net income (loss) per $1,000
limited partnership unit $ 25 $ (.5)
======= =======
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 SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(In Thousands)
1998 1997
(Unaudited) (Unaudited)
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $ 470 $ (9)
Adjustments to reconcile net income
to cash provided by operating
activities:
Depreciation 275 268
Amortization 15 43
Decrease in accounts receivable
and other assets (45) (38)
Deferral of mortgage interest 0 833
Decrease in payables
and accrued liabilities (85) (182)
------- -------
Net cash provided by
operating activities 630 915
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in restricted cash (249) 0
Principal reductions on notes payable (110) (46)
Increase in deferred loan fees (15) 0
------- -------
Net cash used for financing activities (374) (46)
------- -------
Net increase in cash and cash equivalents 256 869
Cash and cash equivalents at
beginning of year 638 2,227
------- -------
Cash and cash equivalents at
end of period $ 894 $ 3,096
======= =======
The accompanying notes are an integral
part of these financial statements.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
1. THE PARTNERSHIP
Prometheus Income Partners, a California Limited Partnership (the
"Partnership"), was formed to construct, invest in, operate and
ultimately sell two multi-family apartment projects, Alderwood
Apartments ("Alderwood") and Timberleaf Apartments ("Timberleaf"),
located in Santa Clara, California. The General Partner is Prometheus
Development Co., Inc., a California corporation.
The financial information does not include any adjustments for the
capitalization of any improvements which are done only in conjunction
with the year end financial statements. The financial information
included herein at June 30, 1998 and for the three and six months ended
June 30, 1998 and 1997 is unaudited and, in the opinion of the Partnership,
reflects all adjustments (which include only normal recurring accruals)
necessary for a fair presentation of the financial position as of those
dates and the results of operations for those periods. Management fees
and payments to the General Partner and Affiliates represent
compensation for services provided and certain expense reimbursements, at
cost, in accordance with the Partnership Agreement. The information in
the Balance Sheets at December 31, 1997 was derived from the
Partnership's audited annual report for 1997.
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 General Partner has learned that 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.
The wood technologist retained by the General Partner to test the performance
of the hardboard siding confirms that the physical characteristics of the
hardboard at both properties has deteriorated. A construction consultant
retained by the General Partner to investigate the failure of the hardboard
siding, along with the defendants in the case, has completed his destructive
investigation phase and is currently performing temporary repairs to maintain
the integrity of the buildings. To date, there is no conclusion regarding
the extent of damage nor, the ultimate cost to repair.
The General Partner has filed litigation on behalf of the Partnership
as a result of this problem. Several unrelated property owners are
litigating the matter against the hardboard siding manufacturer. One
such case has concluded the trial phase. In that case, the owner
reached various settlements with the contractor and various subcontractors
and vendors before the trial, then prevailed in a jury verdict
against the manufacturer which had not settled. The extent of the
recovery from the trial has not yet been finally determined, as the
court has yet to decide on the allocation of liabilities among settling
and non-settling defendants for all the damages that were suffered.
Also, the manufacturer has the right to appeal. It is not possible to
predict whether any appeal will be filed, and if filed, the outcome
thereof. While each case is different and the extent of the hardboard
siding damage at each property is different, the General Partner is
closely following the aforementioned case and its potential impact
to the Partnership's case. Lastly, one defendant named in the
Partnership's complaint has filed a cross-complaint against the
Partnership. The amount of damages being sought is unspecified at this
time.
4. REAL ESTATE
Statement of Financial Accounting Standards 121 ("FASB 121"),
Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of, requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. In connection
with the hardboard siding matter, 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 FASB 121. Further,
although the full extent of the damage to the hardboard siding for these
two properties is unknown, management believes that the fair market
value of each property still remains greater than their respective book
values.
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
INTRODUCTION
Alderwood and Timberleaf, which are located in Santa Clara,
California, are apartment complexes with 234 units and 124 units,
respectively. The properties commenced operations at completion of
construction in December 1986.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated by operations during the first six months of 1998
was used to pay current operating expenses and debt service, including
payments to the hardboard siding security account.
Quarterly distributions have been suspended in order to accumulate
working capital reserves until the degree of damage to the hardboard
siding and determination 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 bear fixed interest of 6.99% for Alderwood
and 7.09% for Timberleaf.
The terms of the notes payable require that each property
maintain a hardboard siding security account. These security accounts
are additional collateral for the lender. Cash held in these security
accounts was $2,103,000 and $1,643,000 for Alderwood and Timberleaf,
respectively, as of June 30, 1998. The Alderwood trust deed requires
that the security account be increased to $2,200,000 by December 1998.
Thereafter, until the Completion Date, as defined, an additional 10%, 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 payable, then
the Completion Date shall be extended 18 months from the earlier of the
pending settlement date or the last day for filing an appeal. Should
construction not be completed by the Completion Date due to an act of
force majeure, the Completion Date can be further extended to complete
the construction work.
RESULTS OF OPERATIONS
During the past year, Santa Clara County has continued to experience
growth in the creation of new jobs. This continued job growth has helped
offset the impact of the new housing developed. Since the second quarter
of 1997, approximately 2,000 new apartments have been developed in the
Santa Clara County market and an additional 900 units are due to come on
line this summer. The new supply of apartments in the market has
stabilized market rent growth. In the second quarter of 1998, the properties
marketed available units at rents that averaged $1,260 for one bedroom units
and $1,556 for two bedroom units. Average occupied rent per unit for the
quarter was $1,348 and average occupancy during the quarter was 97% for both
Alderwood and Timberleaf. As of June 30, 1998, Alderwood was 97% occupied
and Timberleaf was 98% occupied.
In the second quarter of 1997, the properties marketed available units at
rents which averaged $1,247 for one bedroom units and $1,514 for two
bedroom units. Average occupied rent per unit for the quarter was $1,231
and average occupancy during the quarter was 96% for Alderwood and 94% for
Timberleaf. As of June 30, 1997, Alderwood was 97% occupied and Timberleaf
was 92% occupied.
Excluding expenditures relating to quantification of the extent of damage
to the hardboard siding and associated litigation costs, operating
expenses increased 3%. The following second quarter operating
expenses increased between years: payroll, due to an addition of an
assistant manager; management fees due to an increase in revenues;
repairs and maintenance associated with exercise equipment and fire
alarms, purchase of glass and screen supplies, and the first installment
on the carport replacement contract. These increases were offset
by the decrease in costs associated with the elimination of the
corporate housing program which was discontinued in the second quarter
1997. Operating expenses inclusive of hardboard siding related costs
increased 32%.
Overall, net operating income decreased 22% during the three months ending
June 30, 1998 when compared to 1997.
IMPACT OF THE YEAR 2000
The year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year.
Any computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to
process transactions or engage in similar normal business activities.
The General Partner believes that it will not be required to modify
or replace significant portions of its software and that the year 2000
issue will not pose significant operational problems for its computer
systems. Ultimately, the potential impact of the year 2000 issue, will
depend not only on the corrective measures the General Partner
undertakes, but also on the way in which the year 2000 issue is
addressed by businesses and other entities whose financial condition or
operational capability is important to the Partnership. Therefore, the
General Partner is communicating with the parties to ensure they are
aware of the year 2000 issue, to learn how they are addressing it, and
to evaluate any likely impact on the Partnership.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
Fisher Friedman, the project architects, have filed a cross
complaint against the Partnership. The cross complaint seeks a
determination of the proportionate share of responsibility of the
various defendants for the damage to the property arising from the
defective hardboard siding, but does not specify any basis for making
such an apportionment. The cross complaint further claims that if
negligence is found, that Fisher Friedman's negligence be found to be
secondary (rather than primary) in nature, thereby obligating the
primarily liable defendants to indemnify Fisher Friedman for its
liability. Again, the cross complaint fails to state any basis for which
the Partnership has primary liability for the defective hardboarding siding.
Also see Note 3 to Financial Statements, Hardboard Siding, for a
more comprehensive discussion of this matter.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of 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: August 12, 1998 By: /s/ Vicki R. Mullins
Vicki R. Mullins
Executive Vice President and
Chief Financial Officer
Date: August 12, 1998 By: /s/ John J. Murphy
John J. Murphy
Vice President of 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 Income filed as part of the
annual report on Form 10-Q and is qualified in its entirety by reference
to such annual report on Form 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 894
<SECURITIES> 0
<RECEIVABLES> 64
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 958
<PP&E> 29,614
<DEPRECIATION> 7,316
<TOTAL-ASSETS> 27,291
<CURRENT-LIABILITIES> 174
<BONDS> 0
0
0
<COMMON> 504
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 27,291
<SALES> 2,782
<TOTAL-REVENUES> 2,985
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,646
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 869
<INCOME-PRETAX> 470
<INCOME-TAX> 0
<INCOME-CONTINUING> 470
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 470
<EPS-PRIMARY> 25
<EPS-DILUTED> 0
</TABLE>
