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, 2000 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, 1999. 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.
Historically the Registrant's Form 10-Q filings have not made any
adjustments for the capitalization of improvements except in conjunction with
the year-end financial statements. This Form 10-Q reflects the financial
results on a basis consistent with the Registrant's Form 10-K filing. 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, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
(Unaudited and in Thousands, Except for Unit Data)
June 30, December 31,
2000 1999
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ASSETS
Real Estate:
Land, buildings and improvements $ 30,502 $ 30,288
Accumulated depreciation (8,531) (8,183)
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21,971 22,105
Cash and cash equivalents 2,201 1,942
Restricted cash 5,097 4,558
Deferred expenses, net 224 239
Accounts receivable and other assets 61 29
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Total assets $ 29,554 $ 28,873
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LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Notes payable $ 26,036 $ 26,188
Payables and accrued liabilities 278 323
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Total liabilities 26,314 26,511
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General partner deficit (368) (378)
Limited partners' capital
18,995 limited partnership units
issued and outstanding 3,608 2,740
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Total partners' capital 3,240 2,362
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Total liabilities and partners' capital $ 29,554 $ 28,873
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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, 2000 AND 1999
(Unaudited and in Thousands, Except for Unit Data)
2000 1999
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REVENUES
Rental $ 1,595 $ 1,397
Other income 24 50
Interest income 104 64
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Total revenues 1,723 1,511
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EXPENSES
Interest and amortization 465 470
Operating 405 382
Depreciation 174 144
Administrative 10 17
Payments to general partner and affiliates:
Management fees 104 74
Operating and administrative 138 125
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Total expenses 1,296 1,212
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NET INCOME $ 427 $ 299
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Net income per $1,000
limited partnership unit $ 22 $ 16
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Number of limited partnership
units used in computation 18,995 18,995
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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, 2000 AND 1999
(Unaudited and in Thousands, Except for Unit Data)
2000 1999
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REVENUES
Rental $ 3,115 $ 2,797
Other income 51 90
Interest income 218 122
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Total revenues 3,384 3,009
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EXPENSES
Interest and amortization 933 861
Operating 773 624
Depreciation 348 288
Administrative 23 27
Payments to general partner and affiliates:
Management fees 182 147
Operating and administrative 247 227
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Total expenses 2,506 2,174
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NET INCOME $ 878 $ 835
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Net income per $1,000
limited partnership unit $ 46 $ 44
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Number of limited partnership
units used in computation 18,995 18,995
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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, 2000 AND 1999
(Unaudited and in Thousands)
2000 1999
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CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 878 $ 835
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation 348 288
Amortization 15 15
(Decrease) increase in accounts receivable
and other assets (32) 43
Decrease in payables
and accrued liabilities (45) (237)
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Net cash provided by operating activities 1,164 944
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CASH FLOW FROM INVESTING ACTIVITIES
Increase in fixed asset additions (214) (132)
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CASH FLOWS FROM FINANCING ACTIVITIES
Increase in restricted cash (539) (478)
Principal reductions on notes payable (152) (141)
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Net cash used for financing activities (691) (619)
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Net increase in cash and cash equivalents 259 193
Cash and cash equivalents at beginning of year 1,942 1,183
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Cash and cash equivalents at end of period $ 2,201 $ 1,376
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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 ("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 has been restated to reflect capitalization of
improvements on a basis consistent with the practice followed annually. The
financial information included herein at June 30, 2000 and for the three and
six months ended June 30, 2000 and 1999 is unaudited and, in the opinion of
the Partnership, reflects all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the financial position as of
those dates and the results of operations for those periods. Management fees
and payments to the General Partner and affiliates represent compensation for
services provided and certain expense requirements, at cost, in accordance
with the Partnership Agreement. The information in the Balance Sheets at
December 31, 1999 was derived from the Partnership's audited annual report for
1999.
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. CONSTRUCTION DEFECTS
The General Partner has learned that the type of hardboard siding that
was used at both Alderwood and Timberleaf is failing to perform as expected in
a number of projects in various parts of the United States. Two lawsuits have
been filed against the siding manufacture, the general contractor, the
subcontractors and the architects by the Partnership, one for each property.
Moisture has accumulated in the walls of the apartment projects through a
combination of construction defects and endemic problems with the hardboard
siding. Sufficient moisture over time causes rot and decay in the wood,
framing and siding which necessitates repairs which, in some cases, are
structural in nature.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. CONSTRUCTION DEFECTS (CONTINUED)
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. Additionally, certain structural issues caused by
the defects in the hardboard siding were uncovered at Timberleaf and were
rebuilt as part of the immediate repair process. The General Partner has
subsequently determined that additional immediate repairs were necessary. The
repairs necessitated immediately (with the exception of roof repairs noted
below) have been completed and the General Partner continues to monitor the
condition of the property to look for any other signs of rot and decay which
would necessitate immediate attention and repair. Rot and decay, which form
inside the wall, are not visible, and until rot and decay have caused changes
in the physical appearance of the exterior of the buildings, it is difficult
to ascertain all the locations where rot and decay exist.
In addition to the hardboard siding problems, routine roofing inspection
has uncovered failing roof substrate at dormer roof assemblies for both
Alderwood and Timberleaf. The cause has been traced to inadequate venting of
the roof space. Inadequate venting leads to condensation in roof areas. This
has been sufficient to cause deflection and decay of the roof and its
structural support, requiring replacement. In addition to the hardboard siding
problems, the roof repair design and repair bids have been received and are
currently being evaluated and a repair scope refined so this work may proceed
as necessary. The passage of time and ongoing investigations have resulted in
a number of deficiencies, in addition to the siding material, being uncovered.
Issues related to the hardboard siding and other construction defects are
currently referred to as Construction Defects as this more accurately reflects
the scope of work being undertaken at this time. For Alderwood, the estimated
cost of repair, including siding and roof repairs and a component for
projected lost rents, but not including attorney's fees or litigation costs,
range from $9 to 10 million. The total claimed damages at this point are
$11,239,280. For Timberleaf, the estimated cost of repair, including siding
and roof repairs and a component for projected lost rents, but not including
attorney's fees or litigation costs, range from $6 to 7 million. The total
claimed damages at this point are $8,352,330.
Both cases continue to be under the supervision of a Special Master who
is 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 of pending litigation can occur anytime,
but the General Partner believes this unlikely. In the absence of a settlement,
the Special Master eventually will order a trial date to be set.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. CONSTRUCTION DEFECTS (CONTINUED)
A trial date has not yet been ordered by the Special Master. The General
Partner has and is demanding a trial date be set so this matter can be
resolved. However, even if a trial date is set it will still likely take two
to three years or more to complete the matter. In addition, the discovery of
additional construction defect problems, as discussed above, will likely result
in additional delays.
The extent and magnitude of the construction defects continues to worsen
with time. The General Partner believes that the Partnership can no longer
wait for the cases to be settled and has authorized the start of repairs using
the cash reserve funds currently held. It is anticipated that funds held in
reserve are not adequate to repair the entire project, so completion of the
most critical projects will be prioritized.
The actual costs to make necessary or desired repairs of construction
defects cannot be predicted, but the General Partner believes such costs will
be substantial. The cost of pursuing litigation also is significant. The
General Partner cannot predict or estimate what amounts, if any, will be
recovered through litigation.
4. REAL ESTATE
Statement of Financial Accounting Standards 121 ("SFAS 121"), Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed Of, requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In connection with the construction defect
problems, the General Partner reviewed the projected cash flows of both
Properties to ensure an adjustment of the book value was not required in
accordance with SFAS 121. Further, although the full extent of the damage to
the hardboard siding for the Properties is unknown, management believes that
the fair market value of each Property still remains greater than its
respective book value.
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 2000 was used
to pay current operating expenses and debt service, including payments to the
hardboard siding security accounts.
Quarterly distributions have been suspended in order to accumulate
working capital reserves until the degree of damage cause by the construction
defects and determination of liability are known. See Note 3 to Financial
Statements, Construction Defects, for a more comprehensive discussion of this
matter.
Each Property has a non-recourse note payable, secured by a first deed of
trust. These notes bear fixed interest of 6.99% for Alderwood and 7.09% for
Timberleaf.
The terms of the notes require that each Property maintain a hardboard
siding security account. These security accounts are additional collateral for
the lender. Cash held in these security accounts was $2,947,000 and $2,150,000
for Alderwood and Timberleaf, respectively, as of June 30, 2000. 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, then the Completion
Date, shall be extended 18 months from the earlier of the pending settlement
date or the last day for filing an appeal. Should construction not be completed
by the Completion Date due to an act of force majeure, the Completion Date can
be further extended to complete the construction work.
Results of Operations
The job market and low unemployment rates are driving the strong demand
for housing. According to the Employment and Development Department, the
unemployment rate for Santa Clara County in the second quarter of 2000 averaged
2.0%, down from 2.3% in the first quarter. There was a net job gain of 10,600
compared to the end of the prior quarter. In the second quarter of 2000, the
Properties marketed available units at rents that averaged $1,653 for one
bedroom units and $2,082 for two bedroom units. Average occupied rent per unit
for the quarter was $1,505 and average occupancy during the quarter was 99% for
Alderwood and Timberleaf. As of June 30, 2000, Alderwood was 99% occupied and
Timberleaf was 100% occupied.
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 and Timberleaf were each 97% occupied.
Excluding expenditures, relating to quantification of the extent of
damage to the hardboard siding and associated litigation costs, operating
expenses increased 2%. The following second quarter operating expenses
increased between years: Management Fees due principally to construction
project management; Payroll, Benefits & Taxes due to bonus potential,
maintenance salaries, health insurance, other employee benefits and workers'
compensation. These increases were offset by decreases in Major Repairs and
Maintenance due to landscaping, bathroom and kitchen remodeling expenditures,
On-Site Administration due to employee training and office supplies, Utilities
due to the credit received from a reassessment of electricity and gas usage,
Turnover Costs due to higher occupancy. Operating expenses, inclusive of
hardboard siding related costs, increased 10%.
Overall, net operating income increased 13% during the three months ended
June 30, 2000 when compared to 1999.
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. 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 10, 2000 By: /s/ Vicki R. Mullins
Vice President
Date: August 10, 2000 By: /s/ John J. Murphy
Vice President
EXHIBIT
NO. DESCRIPTION
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27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information.
