-----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, IpOeV5CzvWNLWY4eIccYJ7kDxU99v3HgHRxENs7HkU/oO+9GW9PEIr93AbVaS8PQ vdTOolFwtCpJKWeTnwmFuA== 0000803026-99-000017.txt : 19991115 0000803026-99-000017.hdr.sgml : 19991115 ACCESSION NUMBER: 0000803026-99-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99748443 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 9/30/99 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 September 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 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: (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 that 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 nine months ended September 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 SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (In Thousands, Except for Unit Data) September 30, December 31, 1999 1998 (Unaudited) (Audited) ---------- ---------- ASSETS Real Estate: Land, buildings and improvements $ 29,938 $ 29,938 Accumulated depreciation (8,030) (7,610) -------- -------- 21,908 22,328 Cash and cash equivalents 1,831 1,183 Restricted cash 4,502 3,990 Deferred expenses, net of accumulated amortization of $52 and $30 246 268 Accounts receivable and other assets 26 61 -------- -------- Total assets $ 28,513 $ 27,830 ======== ======== LIABILITIES AND PARTNERS' CAPITAL Notes payable $ 26,262 26,476 Payables and accrued liabilities 279 424 -------- -------- Total liabilities 26,541 26,900 -------- -------- General partner deficit (381) (392) Limited partners' capital 18,995 limited partnership units issued and outstanding 2,353 1,322 -------- -------- Total partners' capital 1,972 930 -------- -------- Total liabilities and partners' capital $ 28,513 $ 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 SEPTEMBER 30, 1999 AND 1998 (In Thousands, Except for Unit Data) 1999 1998 (Unaudited) (Unaudited) ----------- ----------- REVENUES Rental $ 1,422 $ 1,414 Other income 55 43 Interest income 49 61 ------- ------- Total revenues 1,526 1,518 ------- ------- EXPENSES Interest and amortization 470 474 Operating 376 552 Depreciation 140 137 Administrative 14 13 Payments to general partner and affiliates: Operating and administrative 121 108 Management fees 74 73 ------- ------- Total expenses 1,195 1,357 ------- ------- NET INCOME $ 331 $ 161 ======= ======= Net income per $1,000 limited partnership unit $ 17 $ 8 ======= ======= 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (In Thousands, Except for Unit Data) 1999 1998 (Unaudited) (Unaudited) ----------- ----------- REVENUES Rental $ 4,219 $ 4,196 Other income 149 131 Interest income 172 176 ------- ------- Total revenues 4,540 4,503 ------- ------- EXPENSES Interest 1,331 1,343 Operating 1,129 1,512 Depreciation 420 412 Administrative 46 40 Payments to general partner and affiliates: Operating and administrative 351 344 Management fees 221 222 ------- ------- Total expenses 3,498 3,873 ------- ------- NET INCOME $ 1,042 $ 630 ======= ======= Net income per $1,000 limited partnership unit $ 54 $ 33 ======= ======= 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (In Thousands) 1999 1998 (Unaudited) (Unaudited) ----------- ----------- CASH FLOW FROM OPERATING ACTIVITIES Net income $ 1,042 $ 630 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 420 412 Amortization 22 22 Decrease in accounts receivable and other assets 35 2 (Decrease) increase in payables and accrued liabilities (145) 1 ------- ------- Net cash provided by operating activities 1,374 1,067 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in restricted cash (512) (372) Principal reductions on notes payable (214) (178) Increase in deferred loan fees 0 (15) ------- ------- Net cash used for financing activities (726) (565) ------- ------- Net increase in cash and cash equivalents 648 502 Cash and cash equivalents at beginning of year 1,183 638 ------- ------- Cash and cash equivalents at end of period $ 1,831 $ 1,140 ======= ======= 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 September 30, 1999 and for the three and nine months ended September 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 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. CONSTRUCTION DEFECTS 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. NOTES TO THE 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. Certain structural issues were uncovered at Timberleaf and were rebuilt as a part of the immediate repair process. The General Partner has subsequently determined that additional immediate repairs are necessary. To date, the repairs are nearing completion. A 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. A repair plan has been developed and a bid is currently being solicited for the repair of the affected areas. The passage of time and ongoing investigations have resulted in a number of deficiencies, other than the siding material being uncovered. Issues related to the hardboard siding and other construction defects are collectively referred to as construction defects as this more accurately reflects the scope of work being undertaken at this time. 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 at 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 the trial has not changed since the June 30, 1999 Form 10-Q filing. In addition, the discovery of additional construction defect problems may result in additional delays and further extend the ultimate date for settlement of all matters. 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 NOTES TO THE FINANCIAL STATEMENTS (Continued) 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 construction defects (see Note 3), the General Partner reviewed the 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 construction defects 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 nine 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 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 (collectively the "Notes"). The Notes bear fixed interest of 6.99% for Alderwood and 7.09% for Timberleaf, respectively. 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 $2,603,000 and $1,899,000 for Alderwood and Timberleaf, respectively, as of September 1999. Annually, 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 fell to a low of 3.1%. This continued job growth has helped offset the impact of new housing developed. The increased demand allowed for increases in market rates during the third quarter on both unit types at both properties. In the third quarter of 1999, the properties marketed available units at rents that averaged $1,334 for one-bedroom units and $1,569 for two bedroom units. Average occupied rent per unit for the quarter was $1,378 and average occupancy during the quarter was 98% for both Alderwood and Timberleaf. As of September 30, 1999, Alderwood and Timberleaf were both 98% occupied. In the third quarter of 1998, the properties marketed available units at rents that averaged $1,241 for one-bedroom units and $1,602 for two bedroom units. Average occupied rent per unit for the quarter was $1,373, and average occupancy during the quarter was 97% for both Alderwood and Timberleaf. As of September 30, 1998, Alderwood was 96% occupied and Timberleaf was 98% occupied. Excluding expenditures, relating to quantification of the extent of damage to the hardboard siding and associated litigation costs, and other construction defects, operating expenses decreased 4%. The following third quarter operating expenses decreased between years: Turnover due to a reduced number of units requiring interior painting; Marketing due to less media advertising resulting from lower turnover; Insurance & Licenses primarily due to uninsured liability losses incurred last year; Miscellaneous Partnership due to timing of charges for the audit and tax preparation fees; and Major Repairs & Maintenance due to principally less non routine projects such as the addition of three carports, kitchen remodeling, lighting fixtures and hardboard siding and associated litigation costs. These decreases were offset by increases in expenses between years for: Payroll, Benefits and Taxes due to fully staffed positions, annual salary increases, employer 401(k) matching contribution, and a change in payroll frequency from semi-monthly to bi-weekly; Repairs & Maintenance due to window cleaning; and Utilities due to timing of invoice payments for refuse and sewer. Operating expenses, inclusive of hardboard siding related costs, decreased 21%. 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 contain 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 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, Construction Defects, 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 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, it's General Partner Date: November 10, 1999 By: /s/ Vicki R. Mullins Vicki R. Mullins Vice President Date: November 10, 1999 By: /s/ John J. Murphy 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-K and is qualified in its entirety by reference to such annual report on Form 10-Q. 9-MOS DEC-31-1999 SEP-30-1999 1,831 0 26 0 0 1,857 29,938 8,030 28,513 279 0 0 0 1,972 0 28,513 4,219 4,540 0 0 2,167 0 1,331 1,042 0 1,042 0 0 0 1,042 54 0
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