-----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, I1EUKbKY99TIBGKZPFdlUNhEqcswziijMSLbIDM6j+6Y7Tlaf/K+fIxgthpYqyg5 uNWKao78GzVrrzNDu81DEw== 0001116679-01-501008.txt : 20020410 0001116679-01-501008.hdr.sgml : 20020410 ACCESSION NUMBER: 0001116679-01-501008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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: 1934 Act SEC FILE NUMBER: 000-16950 FILM NUMBER: 1788208 BUSINESS ADDRESS: STREET 1: 350 BRIDGE PKWY CITY: REDWOOD CITY STATE: CA ZIP: 94065 BUSINESS PHONE: 6505965300 MAIL ADDRESS: STREET 1: 350 BRIDGE PKWY CITY: REDWOOD CITY STATE: CA ZIP: 94065 FORMER COMPANY: FORMER CONFORMED NAME: PROMETHEUS DEVELOPMENT INCOME PARTNERS DATE OF NAME CHANGE: 19861229 10-Q 1 pro10q.txt QUARTER ENDED SEPTEMBER 30, 2001 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, 2001 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, 2000. 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. 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 and nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. PROMETHEUS INCOME PARTNERS a California Limited Partnership BALANCE SHEETS SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 (Unaudited and in Thousands, Except for Unit Data) September 30, December 31, 2001 2000 ---------- ----------- ASSETS Real Estate: Land, buildings and improvements $ 31,251 $ 30,778 Accumulated depreciation (9,353) (8,801) -------- ------- 21,898 21,977 Cash and cash equivalents 3,923 3,568 Restricted cash 5,821 5,256 Deferred financial costs, net of accumulated amortization of $112 and $90 186 209 Accounts receivable and other assets 1,017 78 -------- ------- Total assets $ 32,845 $ 31,088 ======== ======= LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) Notes payable $ 25,633 $ 25,879 Payables and accrued liabilities 412 439 -------- ------- Total liabilities 26,045 26,318 -------- ------- General partner deficit (333) (354) Limited partners' capital 18,995 limited partnership units issued and outstanding 7,133 5,124 -------- ------- Total partners' capital (deficit) 6,800 4,770 -------- ------- Total liabilities and partners' capital (deficit) $ 32,845 $ 31,088 ======== ======= 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, 2001 AND 2000 (Unaudited and in Thousands, Except for Unit Data) 2001 2000 ---- ---- REVENUES Rental $ 1,776 $ 1,724 Other income 25 20 Interest income 80 117 --------- -------- Total revenues 1,881 1,861 --------- -------- EXPENSES Interest and amortization 458 465 Operating 369 368 Depreciation 199 173 Administrative 12 18 Payments to general partner and affiliates: Management fees 103 92 Operating and administrative 141 143 --------- -------- Total expenses 1,282 1,259 --------- -------- NET INCOME $ 599 $ 602 ========= ======== Net income per $1,000 limited partnership unit $ 31 $ 31 ========= ======== 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, 2001 AND 2000 (Unaudited and in Thousands, Except for Unit Data) 2001 2000 ---- ---- REVENUES Rental $ 5,640 $ 4,839 Other income 50 71 Interest income 309 335 --------- -------- Total revenues 5,999 5,245 --------- -------- EXPENSES Interest and amortization 1,380 1,397 Operating 1,249 1,176 Depreciation 553 531 Administrative 37 41 Payments to general partner and affiliates: Management fees 300 274 Operating and administrative 450 358 --------- -------- Total expenses 3,969 3,777 --------- -------- NET INCOME $ 2,030 $ 1,468 ========= ======== Net income per $1,000 limited partnership unit $ 106 $ 77 ========= ======== 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, 2001 AND 2000 (Unaudited and in Thousands) 2001 2000 ---- ---- CASH FLOW FROM OPERATING ACTIVITIES Net income $ 2,030 $ 1,468 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 552 531 Amortization 23 22 Increase in accounts receivable and other assets (939) (10) (Decrease)/Increase in payables and accrued liabilities (27) 65 --------- --------- Net cash provided by operating activities 1,639 2,076 --------- --------- CASH FLOW FROM INVESTING ACTIVITIES Increase in fixed asset additions (473) (347) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in restricted cash (565) (618) Principal reductions on notes payable (246) (230) --------- --------- Net cash used for financing activities (811) (848) --------- --------- Net increase in cash and cash equivalents 355 881 Cash and cash equivalents at beginning of year 3,568 1,942 --------- --------- Cash and cash equivalents at end of period $ 3,923 $ 2,823 ========= ========= 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 included herein at September 30, 2001 and for the three and nine months ended September 30, 2001 and 2000 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, 2000 was derived from the Partnership's audited annual report for 2000. 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 buildings and improvements and amortization of construction period interest and taxes. Syndication costs incurred in raising Limited Partners' capital were charged to Limited Partners' capital. 3. CONSTRUCTION DEFECTS The General Partner is pleased to announce that it has now reached settlement with all parties in the Alderwood and Timberleaf construction defect litigation. Defendants have agreed to pay Prometheus Income Partners a total of $8.5 million in the Alderwood matter and $6.1 million in the Timberleaf matter for an aggregate total of $14.6 million. Of this amount the Partnership will receive a net amount after expenses of approximately $10.6 million. The General Partner is now engaged in the process of trying to develop a repair plan in light of the anticipated recovery and will move forward with repairs estimated to occur during 2002 and 2003. NOTES TO FINANCIAL STATEMENTS 3. CONSTRUCTION DEFECTS (CONTINUED) The terms of the mortgages on the properties require that a security account be maintained for each property to cover contingent liabilities with respect to defects in the properties' hardboard siding. These restricted security accounts are additional collateral for the lender, and total, as of September 30, 2001, approximately $5,821,000. In addition to the security accounts mandated under the Partnerships' financing arrangements, the Partnership currently maintains an additional account totaling as of September 30, 2001 approximately $3,823,000, which is primarily intended to cover additional contingent liabilities related to the construction defects and other matters. While the litigation has been settled, the General Partner believes it is in the best interest of the Partnership to continue to build reserves until it can determine the actual cost to repair. Cash distributions will only resume when a determination has been made that the Partnership has adequate cash reserves (including restricted cash) to complete repairs of the construction defects in the Partnership's properties. This determination can only be made when the costs to repair construction defects to the Partnership's properties have been definitively determined. Therefore, it is uncertain when cash distributions will resume. In addition, the security accounts must be maintained until such time as the Partnership's lenders have determined that these accounts contain sufficient cash to complete the repairs of the Partnership's properties. 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. 5. SUBSEQUENT EVENTS Pursuant to settlements reached on March 26, 2001 and May 22, 2001 between the Partnership and certain other parties in the Partnership's construction defects litigation, as more fully explained in Note 3 above, the Partnership received $4,586,000 of net settlement proceeds on October 10, 2001. The remaining construction defects litigation was settled on October 3, 2001, and the Partnership will be entitled to receive the net proceeds from these additional settlements in future periods. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. SUBSEQUENT EVENTS (CONTINUED) The Partnership intends to record all of the net settlement proceeds on its Balance Sheet as deferred income. As of September 30, 2001, permanent repairs of the construction defects to which this litigation relates have not commenced, except for certain roof repairs. The permanent repairs of the construction defects, when they are completed, are expected to fully utilize all proceeds received from the legal actions. The repairs to the extent of the deferred income recorded will not be capitalized. All repairs in excess of the net settlement proceeds will be capitalized. 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 2001 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 from the construction defects is 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 $3,366,000 and $2,455,000 for Alderwood and Timberleaf, respectively, as of September 30, 2001. 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 - --------------------- The county of Santa Clara experienced an increase in unemployment during the third quarter. According to the Employment and Development Department, the unemployment rate had increased during the third quarter to 5.9%, up from 4.2% in the second quarter, and 2.2% in the first quarter of 2001. In addition, the number of wage and salary jobs decreased from June 2001 by 22,100 jobs. The number of wage and salary jobs has decreased by 36,700 from December 2000. The volatility being experienced in the high tech industry and the layoffs from local companies has caused the demand from prospective residents to drop off significantly and has caused many current residents to leave the area. Along with the drop in demand and occupancy, there has been an average decrease of 16.8% and 26.6% in market rates for the quarter and for the nine months ended September 2001, respectively. In response to the market, Alderwood and Timberleaf offered rental concessions ranging from $300 off the first month's rent to one month free for a one-year lease. In the third quarter of 2001, the Properties marketed available units at rents that averaged $1,534 for one-bedroom units and $1,806 for two-bedroom units. Average occupied rent per unit for the quarter was $1,853 and average occupancy during the quarter was 94% for Alderwood and 93% for Timberleaf. As of September 30, 2001, Alderwood was 95% occupied and Timberleaf was 94% occupied. In the third quarter of 2000, the Properties marketed available units at rents that averaged $1,832 for one-bedroom units and $2,238 for two bedroom units. Average occupied rent per unit for the quarter was $1,620 and average occupancy during the quarter was 98% for both Alderwood and Timberleaf. As of September 30, 2000, Alderwood and Timberleaf were 99% and 100% occupied, respectively. Excluding expenditures relating to quantification of the extent of construction defects and associated litigation costs, operating expenses increased 6%. The following third quarter operating expenses increased between years: Payroll, Benefits and Payroll Taxes due to salary and overtime, and benefit increases, the use of roving maintenance and temporary help; Utilities primarily due to energy rate increases; Repairs and Maintenance mainly in window cleaning, fire prevention, and plumbing and sewer expenditures; Turnover Costs due to cleaning and painting; Management Fees due principally to construction project management; Marketing due to media advertising; Insurance due to premium increases. These increases were offset by the decreases in On-site Administration primarily due to lower Corporate Training & Motivation, Telephone/Pagers and Postage/Mail/Shipping expenses. Operating expenses, inclusive of hardboard siding related costs, increased 15%. Overall, net operating income increased 5% during the three months ended September 30, 2001 when compared to the three months ended September 30, 2000. 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. The following report on Form 8-K was filed during the period covered by this report. 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: November 13, 2001 By: /s/ Vicki R. Mullins ----------------------------- Vice President Date: November 13, 2001 By: /s/ John J. Murphy ----------------------------- Vice President -----END PRIVACY-ENHANCED MESSAGE-----