-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sgq2Dnw9CSyS/3zn2EX063wzhPFekWPA9kHvHowKruv+IS1vjvN6+s2FVYQ97QMp 3ZyoPUO9Rg0bX2WQY0S/aA== 0000803026-99-000010.txt : 19990517 0000803026-99-000010.hdr.sgml : 19990517 ACCESSION NUMBER: 0000803026-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROMETHEUS INCOME PARTNERS CENTRAL INDEX KEY: 0000803026 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 770082138 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16950 FILM NUMBER: 99623501 BUSINESS ADDRESS: STREET 1: 350 BRIDGE PKWY CITY: REDWOOD CITY STATE: CA ZIP: 94065 BUSINESS PHONE: 6505965300 FORMER COMPANY: FORMER CONFORMED NAME: PROMETHEUS DEVELOPMENT INCOME PARTNERS DATE OF NAME CHANGE: 19861229 10-Q 1 FORM 10-Q FOR 3/31/99 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, 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 ended March 31, 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 MARCH 31, 1999 AND DECEMBER 31, 1998 (In Thousands, Except for Unit Data) March 31, December 31, 1999 1998 (Unaudited) (Audited) ----------- --------- ASSETS Real Estate: Land, buildings and improvements $ 29,938 $ 29,938 Accumulated depreciation (7,750) (7,610) -------- -------- 22,188 22,238 Cash and cash equivalents 1,069 1,183 Restricted cash 4,417 3,990 Deferred expenses, net 261 268 Accounts receivable and other assets 72 61 -------- -------- Total assets $ 28,007 $ 27,830 ======== ======== LIABILITIES AND PARTNERS' CAPITAL Notes payable $ 26,406 $ 26,476 Payables and accrued liabilities 182 424 -------- -------- Total liabilities 26,588 26,900 -------- -------- General partner deficit (387) (392) Limited partners' capital 18,995 limited partnership units issued and outstanding 1,806 1,322 -------- -------- Total partners' capital 1,419 1,322 -------- -------- Total liabilities and partners' capital $ 28,007 $ 27,830 ======== ======== 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, 1999 AND 1998 (In Thousands, Except for Unit Data) 1999 1998 (Unaudited) (Unaudited) ----------- ----------- REVENUES Rental $ 1,400 $ 1,385 Other income 43 41 Interest income 58 56 ------- ------- Total revenues 1,501 1,482 ------- ------- EXPENSES Interest and amortization 391 393 Operating 300 272 Depreciation 140 137 Administrative 14 14 Payments to general partner and affiliates: Management fees 73 72 Operating and administrative 94 104 ------- ------- Total expenses 1,012 992 ------- ------- NET INCOME $ 489 $ 490 ======= ======= Net income per $1,000 limited partnership unit $ 26 $ 26 ======= ======= 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, 1999 AND 1998 (In Thousands) 1999 1998 (Unaudited) (Unaudited) ----------- ----------- CASH FLOW FROM OPERATING ACTIVITIES Net income $ 489 $ 490 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 140 137 Amortization 7 7 (Increase) decrease in accounts receivable and other assets ( 11) 17 Increase (decrease) in payables and accrued liabilities (242) 42 ------- ------- Net cash provided by operating activities 383 693 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in restricted cash (427) (127) Principal reductions on notes payable ( 70) ( 44) Increase in deferred loan fees ( 0) ( 15) ------- ------- Net cash used for financing activities (497) (186) ------- ------- Net (decrease) increase in cash and (114) 507 cash equivalents Cash and cash equivalents at beginning of year 1,183 638 ------- ------- Cash and cash equivalents at end of period $ 1,069 $ 1,145 ======= ======= 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 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, 1999 and for the three months ended March 31, 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 requirements, 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 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 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. Two lawsuits have been filed, one for each Property. 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 were uncovered at Timberleaf and were rebuilt as part of the NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. HARDBOARD SIDING, Continued immediate repair process. The General Partner has subsequently determined that additional immediate repairs are necessary, and is in the process of beginning that work. 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. Lastly, one defendant named in the Partnership's complaint filed a cross complaint against the Partnership. The amount of damages being sought is unspecified at this time. See Part II, Item 1 for further discussion of this matter. In addition to the security accounts mandated by the Partnership's lender, 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 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. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 the 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 three 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 $2,554,000 and $1,863,000 for Alderwood and Timberleaf, respectively, as of March 31, 1999. 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 During the past year, Santa Clara County has experienced a relatively flat growth in the creation of new jobs (.4%). The rental market was also stable during the first quarter of 1999. The rental supply and demand, despite new apartments coming into the market, also remained stable. However, these new apartment projects may have an effect on Management's ability to move rental rates upward as competitive market conditions have required offering concessions to maintain occupancy at all projects. In the first quarter of 1999, the Properties marketed available units at rents that averaged $1,220 for one bedroom units and $1,486 for two bedroom units. Average occupied rent per unit for the quarter was $1,362 and average occupancy during the quarter was 96% for Alderwood and 97% for Timberleaf. As of March 31, 1999, Alderwood was 95% occupied and Timberleaf was 97% occupied. In the first quarter of 1998, the Properties marketed available units at rents that average $1,258 for one bedroom units and $1,554 for two bedroom units. Average occupied rent per unit for the quarter was $1,324 and average occupancy during the quarter was 98% for Alderwood and 97% for Timberleaf. As of March 31, 1998, Alderwood and Timberleaf were both 97% occupied. Excluding expenditures relating to quantification of the extent of damage to the hardboard siding and associated litigation costs, operating expenses increased 7%. The following first quarter operating expenses increased between years: repairs and maintenance associated with HVAC and lighting supplies/fixtures; marketing due to increased advertising and resident activities; miscellaneous partnership due to increase in legal expenses; and major repairs and maintenance expenditures. These increases were offset by the decrease in costs associated with utilities, insurance and other taxes, and corporate housing expenditures. Corporate housing was discontinued in the second quarter of 1997. Operating expenses, inclusive of hardboard siding related costs, increased 4%. Overall, net operating income remained comparable during the first three months of 1999 when compared to the first three months of 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, 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 Properties 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 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: May 12, 1999 By:/s/Vicki R. Mullins Vice President Date: May 12, 1999 By:/s/John.J. Murphy Vice President EXHIBIT INDEX ------------- EXHIBIT NO. DESCRIPTION - ------- ----------- 27 Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 3-MOS DEC-31-1999 MAR-31-1999 5,486 0 72 0 0 5,558 29,938 7,750 28,007 182 0 0 0 1,419 0 28,007 1,400 1,501 0 0 629 0 383 489 0 489 0 0 0 489 26 0
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