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, 1999
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,
1998. 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 three months and six
months ended June 30, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31,1999.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(In Thousands, Except for Unit Data)
June 30, December 31,
1999 1998
(Unaudited) (Audited)
----------- ---------
ASSETS
Real Estate:
Land, buildings and improvements $ 29,938 $ 29,938
Accumulated depreciation (7,890) (7,610)
-------- --------
22,048 22,328
Cash and cash equivalents 1,376 1,183
Restricted cash 4,468 3,990
Deferred expenses, net accumulated 253 268
amortization of $45 and $30
Accounts receivable and
other assets 18 61
-------- --------
Total assets $ 28,163 $ 27,830
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 26,335 $ 26,476
Payables and accrued liabilities 187 424
-------- --------
Total liabilities 26,522 26,900
-------- --------
General partner deficit (384) (392)
Limited partners' capital
18,995 limited partnership units
issued and outstanding 2,025 1,322
-------- --------
Total partners' capital 1,641 930
-------- --------
Total liabilities and
partners' capital $ 28,163 $ 27,830
======== ========
The accompanying notes are an integral
part of these financial statements.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(In Thousands, Except for Unit Data)
1999 1998
(Unaudited) (Unaudited)
----------- -----------
REVENUES
Rental $ 1,397 $ 1,397
Other income 50 47
Interest income 64 59
------- -------
Total revenues 1,511 1,503
------- -------
EXPENSES
Interest and amortization 470 476
Operating 463 688
Depreciation 140 137
Administrative 17 14
Payments to general partner and
affiliates:
Management fees 74 76
Operating and administrative 125 132
------- -------
Total expenses 1,289 1,523
------- -------
NET INCOME (LOSS) $ 222 $ (20)
======= =======
Net income(loss) per $1,000
limited partnership unit $ 12 $ (1)
======= =======
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, 1999 AND 1998
(In Thousands, Except for Unit Data)
1999 1998
(Unaudited) (Unaudited)
----------- -----------
REVENUES
Rental $ 2,797 $ 2,782
Other income 90 88
Interest income 122 115
------- -------
Total revenues 3,009 2,985
------- -------
EXPENSES
Interest and amortization 861 869
Operating 756 959
Depreciation 280 275
Administrative 27 28
Payments to general partner and
affiliates:
Management fees 147 148
Operating and administrative 227 236
------- -------
Total expenses 2,298 2,515
------- -------
NET INCOME $ 711 $ 470
======= =======
Net income per $1,000
limited partnership unit $ 37 $ 25
======= =======
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, 1999 AND 1998
(In Thousands)
1999 1998
(Unaudited) (Unaudited)
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 711 $ 470
Adjustments to reconcile net income
to cash provided by operating
activities:
Depreciation 280 275
Amortization 15 15
Decrease(increase)in accounts
receivable and other assets 43 (45)
Decrease in payables
and accrued liabilities (237) (85)
------- -------
Net cash provided by
operating activities 812 630
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in restricted cash (478) (249)
Principal reductions on notes payable (141) (110)
Increase in deferred loan fees 0 (15)
------- -------
Net cash used for financing activities (619) (374)
------- -------
Net increase in cash and cash equivalents 193 256
Cash and cash equivalents at
beginning of year 1,183 638
------- -------
Cash and cash equivalents at
end of period $ 1,376 $ 894
======= =======
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 does not include any adjustments for the capitali-
zation of any improvements which are done only in conjunction with the year
end financial statements. The financial information included herein at June
30, 1999 and for the three and six months ended June 30, 1999 and 1998 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, 1998 was
derived from the Partnership's audited annual report for 1998.
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
building and improvements and amortization of construction period interest and
taxes.
3.HARDBOARD SIDING
The General Partner has learned that the type of hardboard siding that was used
at Alderwood and Timberleaf is failing to perform as expected in a number of
projects in various parts of the United States, and lawsuits have been filed.
At this time, experts on behalf of the Partnership have concluded the initial
visual inspection, the scientific testing of the siding material and destructive
investigation. The defendants have also completed their destructive
investigation. Certain structural issues were uncovered at Timberleaf and
were rebuilt as part of the immediate repair process, and these repairs are
still in progress. The General Partner has subsequently determined that
additional immediate repairs are necessary and expects this work to be
concluded in the coming quarter.
Both cases have been assigned to a Special Master who is duly appointed and
empowered by the court to assist in resolving the cases. The investigation and
other subsequent discoveries that will occur are ordered by the Special Master
on behalf of both plaintiffs and defendants in an effort to come to a
settlement. Destructive investigation completed under the order of the Special
Master has produced a preliminary issues list which the Special Master will use
in attempting to prompt a settlement from the defendants. This information is
protected by the Special Master and is not for general distribution.
It is possible that a settlement can occur anytime under the Special Master. It
is not likely however that this will occur in either of the cases, as one of the
primary defendants has demonstrated very little willingness to settle. In the
absence of a settlement, the Special Master will eventually order a trial date
to be set and if necessary the matter will be litigated in court.
A trial date assignment, if one were ordered, would likely occur between 24 to
36 months from now depending on the court's schedule. Therefore, it is not
likely that the matter will be fully concluded within the next two to three
years. The information relating to trial has not changed since the March 31,
1999 Form 10-Q filing.
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 ("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 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 SFAS 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 1999 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 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 $2,583,000 and $1,885,000
for Alderwood and Timberleaf, respectively, as of June 30, 1999. Until the
Completion Date, as defined, an additional 10% of the initial contributions, as
defined, or monthly cash flow, whichever is less, shall be deposited into each
security account. Should the hardboard siding repairs not be completed by
December 2002, or every two years thereafter, and insufficient cash has been
accumulated to cure the defects based upon the lender's determination of the
cost, then all cash flow shall be deposited into each applicable security
account, as necessary, to fully fund the cost of construction. If the
projected cash flow is insufficient to satisfy this deficiency contribution,
then the Partnership has 60 days to fund the shortage over the projected cash
flow. No withdrawals are permitted from the account except to cure the siding
defects. The lender shall have the right to hire its own consultants to review,
approve and inspect the construction. All such reasonable fees and expenses
incurred by the lender shall be paid by the Partnership.
Should the litigation not be settled by December 2002, and the Partnership has
met all its obligations under the Notes, then the Completion Date, shall be
extended 18 months from the earlier of the pending settlement date or the last
day for filing an appeal. Should construction not be completed by the Completion
Date due to an act of force majeure, the Completion Date can be further extended
to complete the construction work.
RESULTS OF OPERATIONS
During the past year, Santa Clara County has continued to experience growth in
the creation of new jobs; the unemployment rate remains a low 3.2%. This
continued job growth has helped offset the impact of the new housing developed.
The new supply of apartments in the market has stabilized market rent growth.
In the second quarter of 1999, the properties marketed available units at rents
that averaged $1,223 for one bedroom units and $1,552 for two bedroom units.
Average occupied rent per unit for the quarter was $1,361 and average occupancy
during the quarter was 97% for Alderwood and Timberleaf. As of June 30, 1999,
Alderwood was 96% occupied and Timberleaf was 97% occupied.
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.
Excluding expenditures relating to quantification of the extent of damage to the
hardboard siding and associated litigation costs, operating expenses decreased
10%. The following second quarter operating expenses increased between years:
Payroll, Benefits & Taxes due to temporary staffing and hiring a new maintenance
supervisor; On-site Administration due to training; Turnover costs due to
increased carpet and unit cleaning, and interior painting; Utilities due to
the timing of payments of invoices; Marketing due to media advertising.
These increases were offset by decreases in Repairs & Maintenance due to savings
in numerous accounts (carpet & linoleum repairs, doors, locks & keys, equipment
repairs and rental, and glass and screen supplies), and due to the timing of
payment of memberships fees for maintenance contracts; Miscellaneous Partnership
Expenses due to the reclassification of siding legal expenses to Major Repairs
and Maintenance; Major Repairs & Maintenance due to principally less non-routine
projects such as fountain pumps, entry door replacement, monument signage, the
addition of three carports and bathroom plumbing repairs which occurred in 1998.
Operating expenses, inclusive of hardboard siding related costs, decreased 25%.
Overall, net operating income increased 44% during the three months ended June
30, 1999 when compared to 1998.
Impact of the Year 2000 Compliance Costs on Operations
The Partnership's State of Readiness. The Partnership utilizes a number of
computer software programs and operating systems across its entire organization,
including applications used in financial business systems and various
administrative functions. To the extent that the Partnership's software
applications contains source code that is unable to appropriately interpret the
upcoming calendar year "2000" and beyond, some level of modification or
replacement of such applications will be necessary. The Partnership currently
believes that its "Year 2000" issues are limited to information technology
("IT") systems (i.e., software programs and computer operating systems). The
Partnership currently believes there are no non-IT systems (i.e., embedded
systems such as devices used to control, monitor or assist the operation of
equipment and machinery), the failure of which would have a material effect on
the Partnership's operations.
The Partnership has completed its identification of IT systems that are not yet
Year 2000 compliant and has commenced modification or replacement of such
systems as necessary. The Partnership is currently communicating with third
parties with which it does significant business, such as financial institutions
and vendors to determine their readiness for Year 2000 compliance. The
Partnership has also completed its assessment of the Year 2000 compliance issues
presented by its hardware components.
Cost of Addressing the Partnership's Year 2000 Issues. Given the information
known at this time about the Partnership's systems that are non-compliant,
coupled with the Partnership's ongoing, normal course-of-business efforts to
upgrade or replace critical systems, as necessary, the Partnership does not
expect Year 2000 compliance costs to have any material adverse impact on the
Partnership's liquidity or ongoing results of operations. The costs of such
assessment and remediation will be reflected as general and administrative
expenses.
Risks of the Partnership's Year 2000 Issues. In light of the Partnership's
assessment and remediation efforts to date, and the planned, normal course-of
business upgrades, the Partnership currently has no knowledge of any critical
business applications that will not be compliant. No assurance can be given,
however, that all of the Partnership's systems will be Year 2000 compliant or
that compliance will not have a material adverse effect on the Partnership's
future liquidity or results of operations or ability to service debt.
The Partnership's Contingency Plans. The Partnership is currently developing
its contingency plan for all operations to address the most reasonably likely
worst case scenarios regarding Year 2000 compliance. The Partnership expects
such contingency plans to be completed by the end of the year.
PART II: OTHER INFORMATION
Item 1.Legal Proceedings.
Fisher Friedman, the project architects, has 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 6, 1999 By: /s/ Vicki R. Mullins
Vicki R. Mullins
Vice President
Date: August 6, 1999 By: /s/ John J. Murphy
John J. Murphy
Vice President
<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-K 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-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,376
<SECURITIES> 0
<RECEIVABLES> 18
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,394
<PP&E> 29,938
<DEPRECIATION> 7,890
<TOTAL-ASSETS> 28,163
<CURRENT-LIABILITIES> 187
<BONDS> 0
0
0
<COMMON> 1,641
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 28,163
<SALES> 2,797
<TOTAL-REVENUES> 3,009
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,437
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 861
<INCOME-PRETAX> 711
<INCOME-TAX> 0
<INCOME-CONTINUING> 711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 711
<EPS-BASIC> 37
<EPS-DILUTED> 0
</TABLE>
