SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the Year Ended December 31, 1996
Commission File No. 0-16950
Prometheus Income Partners, a California Limited Partnership
(Exact Name of Registrant as Specified in its Charter)
California 77-0082138
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
350 Bridge Parkway
Redwood City, CA 94065-1517
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(415) 596-5300
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
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
No market for the Units of Limited Partnership Interest exists and therefore a
market value for such Units cannot be determined.
DOCUMENTS INCORPORATED BY REFERENCE
Prospectus, dated February 12, 1987, and Supplement No. 1, dated September 18,
1987, incorporated into Registration Statement Form S-11 (Registration #33-
9164), thereto filed pursuant to Section 424(b) under the Securities Act of
1933, and Solicitation/Recommendation Statement pursuant to Section 14(d)(4) of
the Securities Exchange Act of 1934, Schedule 14D-9, dated November 4, 1996 and
Schedules 14D-91A, Amendments 1, 2 and 3, dated November 15, 1996, December 12,
1996 and December 20, 1996, respectively are incorporated into Parts I, II, III
and IV.
Exhibit index located on page 14.
Table of Contents
Form 10-K
Part I Page
Item 1 Business 3
Item 2 Properties 4
Item 3 Legal Proceedings 5
Item 4 Submission of Matters to Vote of Security Holders 5
Part II
Item 5 Market for Registrant's Units and Related Security Holder Matters 6
Item 6 Selected Financial Data 8
Item 7 Management's Discussion and Analysis of Financial Conditions
And Results of Operations 9
Item 8 Financial Statements and Supplementary Data 12
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 12
Part III
Item 10 Directors and Executive Officers of the Registrant 13
Item 11 Executive Compensation 13
Item 12 Security Ownership of Certain Beneficial Owners and Management 14
Item 13 Certain Relationships and Related Transactions 14
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 15
PART I
ITEM 1. BUSINESS
Prometheus Income Partners, a California Limited Partnership, (hereinafter
referred to as "Partnership" or "Registrant") was formed on April 15, 1985,
under the California Revised Limited Partnership Act. Prometheus Development
Co., Inc., a California corporation, is the General Partner of the Partnership.
The principal business of the Partnership is to invest in, construct,
hold, operate, and ultimately sell two residential rental properties in Santa
Clara, California, Alderwood Apartments and Timberleaf Apartments. The principal
investment objectives of the Partnership are to preserve and protect the
Partnership's capital, to obtain capital appreciation from the sale of the
properties, and, beginning in 1987, to provide "tax sheltered" distributions of
cash from operations due to the cost recovery and other non-cash tax deductions
available to the Partnership. See Item 7, Liquidity and Capital Resources and
Hardboard Siding discussion concerning deferment of distributions. For a further
description of the properties and the business of the Partnership, see Item 2
below and the section entitled "Business of the Partnership" (pages 24-26) and
"Properties" (pages 27-35) in the Prospectus. For financial information, see
Item 8, below.
Beginning in February 1987 through December 1987, the Partnership offered
and sold 19,000 Units of Limited Partnership Interests ("Units") for
$19,000,000. The net proceeds of this offering, together with the proceeds of
the permanent financing, were used to satisfy construction loans with respect to
Alderwood and Timberleaf and to exercise the purchase option for the Alderwood
land site.
The Partnership's investments in real property are affected by and subject
to the general competitive conditions of the residential real estate rental
market in the Santa Clara area. The Partnership's properties are located in an
area which contains numerous other competitive residential rental properties.
The Partnership is engaged solely in the business of real estate
investment. The business of the Partnership is not seasonal. The Partnership
does not engage in foreign operations or derive revenues from foreign sources.
The Partnership has no employees, officers or directors. The officers and
employees of the General Partner and its Affiliates perform services for the
Partnership.
The income of the properties may be affected by factors outside the
Partnership's control. For example, changes in the supply of rental facilities,
population shifts, the availability of mortgage funds or changes in zoning laws
could affect apartment rental rates. It is also possible that some form of rent
control may be legislated at the state or local level. Expenses of operating the
properties, such as administrative and maintenance costs and real estate taxes,
are subject to change due to inflation, supply factors or legislation. These
increases in expenses may be offset by increases in rental rates, although such
increases may be limited due to market conditions or other factors as discussed
above. Certain expenses, such as debt service, are at fixed rates and are not
affected by inflation. The General Partner is unable to predict the effect, if
any, of such events on the future operations of the Partnership. There is no
assurance there will be a ready market for the sale of the properties or, if
sold, such a sale would be made on favorable terms.
ITEM 2. PROPERTIES
The Partnership has constructed two residential income-producing
properties, Alderwood and Timberleaf, both in Santa Clara, California. The City
of Santa Clara, with a population of approximately 100,000, is the third largest
city in Santa Clara County. Santa Clara County, commonly referred to as Silicon
Valley, is approximately 47 miles south of San Francisco, encompasses 1,300
square miles and has a population of approximately 1.7 million people, making it
the most populous of the nine counties in the greater San Francisco Bay Area.
The Alderwood luxury garden apartment complex is located at 900 Pepper
Tree Lane in Santa Clara, California. Construction began in November 1985 and
was fully completed by December 31, 1986. The complex contains 234 apartment
units housed in 19 two-story buildings on a 9.4 acre site. Covered and uncovered
parking for 468 cars is provided. See Item 7, Management's Discussion and
Analysis of Financial Conditions and Results of Operations, for a discussion of
current operations.
The Timberleaf luxury garden apartment complex is located at 2147 Newhall
Street in Santa Clara, California. Construction began in November 1985 and was
fully completed by December 31, 1986. The complex contains 124 apartment units
housed in 9 buildings of two or three stories on a five acre site. Covered and
uncovered parking for 248 cars is provided. See Item 7, Management's Discussion
and Analysis of Financial Conditions and Results of Operations, for a discussion
of current operations.
Alderwood and Timberleaf are encumbered by first mortgage liens which
secure promissory notes payable to Prudential Insurance Company in the original
amount of $10,200,000 and $5,600,000, respectively. Both notes (collectively,
the "Notes") bear interest at the rate of 10.375% per annum for the entire term
of 10 years. The Notes provide for the deferral of a portion of the interest.
The portion of interest which will be paid monthly is as follows:
Rate Paid
Period Per Annum
December 1987 - November 1988 ..................6.000%
December 1988 - November 1989 ..................6.125%
December 1989 - December 1997 ..................6.250%
The unpaid interest on the Notes, as it accrues on a monthly basis, is
added to the outstanding principal balance and bears interest at 4.125%
thereafter. Payments of principal on the Notes began in December 1992 and equals
$4,928 per month on the Alderwood Note and $2,706 per month on the Timberleaf
Note. The Notes may be prepaid after December 1992, subject to certain
prepayment penalties.
ITEM 3. LEGAL PROCEEDINGS
On March 12, 1997, a limited partner owning twenty-five (25) units (.1316%
of the outstanding units), filed a class and derivative action complaint in the
Superior Court of San Mateo County against the Partnership, certain officers of
the General Partner and certain affiliates of the General Partner. The suit
alleges that the defendants used their power over the Partnership and its assets
to inhibit and discourage a tender offer for units that was commenced by an
unaffiliated third party, utilized Partnership funds and resources to facilitate
and subsidize an inferior tender offer by an affiliated party, misled and
induced limited partners who wished to sell units to tender them to the
affiliated party rather than to a third party offering more money, refused to
pursue or consider transactions that would maximize the value of the limited
partners' units, including the sale of the Partnership properties or the
preparation of a plan of liquidation. The suit also alleges that the Partnership
has reimbursed affiliated parties for costs of goods and materials used by the
Partnership and services rendered by the affiliates of the Partnership for sums
in excess of contractual limits and that the Partnership has wasted Partnership
assets and funds in subsidizing the expenses of an offer from an affiliated
entity.
The plaintiff is seeking to enjoin the Partnership from reimbursing or
indemnifying the affiliated entity for any costs or fees with respect to the
tender offer or from any further acts to thwart competing tender offers.
The plaintiff asks for compensatory and punitive damages and for reasonable
attorneys' fees. Included in the damage demand are all profits made
by the affiliated entity resulting from its offer or compensation for the use of
the Partnership assets and the alleged excessive charges and fees specified
above. Other equitable relief is sought, including an order prohibiting
defendants from voting any units obtained, and an order appointing a receiver to
protect the Partnership from any alleged further harm.
The defendants have not yet responded to the complaint as of the date of
this filing. They intend to vigorously defend the suit and believe they have
meritorious defenses; however, it is not possible to predict the outcome of
this litigation at this early stage, and therefore whether the consequences
will be material to the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the period
covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED SECURITY HOLDER
MATTERS
A) No public trading market exists or is expected to be established for
the Registrant's Units. The Units were issued by the Partnership for $1,000 per
Unit. The General Partner established a Limited Liquidity Plan which commenced
in 1989 and provides Limited Partners with the option, subject to certain
conditions, to have their Units repurchased by the Partnership (or a person
designated by the Partnership). Other than as described below, the Partnership
has not received any requests for the repurchase of Units since the inception of
this program in 1989. A further description of the repurchase terms can be found
in the section entitled "Business of the Partnership-Limited Liquidity Plan"
(pages 24-25) in the Prospectus.
Effective January 1, 1994, the Partnership acquired five units from an
investor for $1,545. The valuation method used for this re-purchase did not
follow the provisions of the Limited Liquidity Plan. Rather, the Partnership and
investor agreed to a valuation method, which is used by local real estate
brokers, based upon an estimated market value of the properties, less debt
prepayment penalties and a discount as provided in the Limited Liquidity Plan.
The alternative valuation method saved the Partnership significant costs. The
five units were permanently retired and will not be re-offered for sale.
B) At December 31, 1996, the 18,995 outstanding Units were held by
1,352 investors.
C) Tender Offers To Purchase Units
During 1996, competing tender offers were made for limited partner
interests ("Units") in the Partnership. One tender offer from Prom Investment
Partners, L.L.C. ("Prom"), an unrelated third party, expired in December 1996.
The second tender offer from PIP Partners-General, L.L.C. ("PIP Partners"), an
affiliate of the General Partner, expired in January 1997. The Partnership is
currently in the process of reviewing the documentation to process the transfers
of any limited partners who sold their units. Preliminarily, it appears that
approximately an aggregate 2,830 units were tendered to the competing bidders --
approximately 1,480 to PIP Partners and 1,350 to Prom, or 8% and 7% of
the total outstanding units, respectively. Under the terms of the Partnership
Agreement, all eligible transfers, for which all required approvals, opinions
and documentation have been satisfactorily completed and submitted prior to
March 31, 1997, will be effective as of April 1, 1997. All units were purchased
for $495 per unit.
D) The promissory notes which are secured by the properties contain no
restrictions on distributions to Limited Partners. Distributions to Limited
Partners began with the quarter ending September 30, 1987. Cash distributions
were suspended in 1996. See Item 7, Hardboard Siding for a discussion concerning
the deferment of cash distributions. Cash distributions for the years 1995 and
1994 were made as follows:
Period Covered Distribution Date Total Distribution
(In Thousands)
January 1 through March 31, 1994 05/15/94 $424
April 1 through June 30, 1994 08/15/94 $424
July 1 through September 30, 1994 11/15/94 $425
October 1 through December 31,1994 02/15/95 $425
January 1, through March 31, 1995 05/15/95 $375
April 1 through June 30, 1995 08/15/95 $375
July 1 through September 30, 1995 11/15/95 $375
October 1 through December 31, 1995 02/15/96 $375
ITEM 6. SELECTED FINANCIAL DATA
The following represent selected financial data for the Partnership for
the years ended December 31, 1996, 1995, 1994, 1993 and 1992. The data should be
read in conjunction with the financial statements and related notes included
elsewhere in this Form 10-K. The selected financial data presented below are
unaudited. Refer also to Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
For the Years Ended December 31,
1996 1995 1994 1993 1992
(Amounts in thousands except unit data)
Rental revenues $4,813 $4,188 $3,899 $3,864 $3,912
Net loss $ (173) $ (192) $ (382) $ (275) $ (100)
Net loss per $1,000
Unit $ (9) $ (10) $ (20) $ (14) $ (5)
Net cash per $1,000
unit subsequent to partner
distributions $ 117 $ 32 $ 27 $ 39 $ 40
Number of units used in
Computation 18,995 18,995 18,995 19,000 19,000
Total assets $25,259 $24,172 $24,553 $25,385 $26,034
Notes payable $25,248 $23,791 $22,477 $21,292 $20,223
Cash distributions per
$1,000 unit, representing a
return of capital $ 20 $ 82 $ 88 $ 79 $ 69
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
Introduction
The Partnership was organized in April 1985. Construction of Alderwood and
Timberleaf commenced in November 1985 and was completed by December 1986. Lease-
up activities began in November 1986 and continued through the third quarter of
1987. The Partnership Registration Statement was declared effective on February
12, 1987 and completed in December 1987. This Item should be read in conjunction
with the financial statements, footnotes and other Items contained elsewhere in
this report.
Liquidity and Capital Resources
The primary sources of funding for the Partnership's activities through
1987 were capital contributions of its Limited Partners, construction financing
and permanent financing. The Partnership obtained $15,800,000 in permanent
financing in November 1987. These proceeds, together with the Limited Partners'
capital contributions, were applied towards the various construction costs and
offering expenses as outlined in the Prospectus. In addition, proceeds from the
loan were used to purchase the Alderwood land site. Once lease-up began in 1986,
operating expenses, debt service and Limited Partner distributions were funded
from apartment rental receipts and cash reserves. In February 1996, the
Partnership distributed $375,000 to the limited partners.
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 Hardboard Siding below, 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 payable accrue interest at 10.375%; interest is payable at
6.25% on the principal balance, with the difference between the accrual and pay
rate added to principal.
Cash and cash equivalents are comprised of cash invested in market rate,
checking and investment accounts. Cash balances were approximately $2,227,000,
$603,000 and $514,000, at December 31, 1996, 1995 and 1994, respectively. The
third and final year that the General Partner guaranteed distributions to
Limited Partners was 1989. Future distributions to Limited Partners depend on
results of operations, capital expenditures, changes in cash reserves, and
resolution of the hardboard siding issue discussed below.
Hardboard Siding
The General Partner has learned that the type of hardboard siding which
was used at Alderwood and Timberleaf is failing to perform as expected in a
number of projects in various parts of the United States, including a 370 unit
apartment project that is managed by Maxim Property Management ("Maxim"), an
affiliate of the General Partner. The 370 unit project is located in the same
county as Alderwood and Timberleaf and is subject to the same general climate
conditions. A wood technology expert was retained by Maxim to test the
performance of the hardboard siding on several properties managed by Maxim,
including Alderwood and Timberleaf. On November 1, 1996, this expert presented a
preliminary verbal report to Maxim which indicated that the physical
characteristics of the hardboard siding at Alderwood and Timberleaf have
deteriorated dramatically since the construction of the properties. The expert
indicated that this deterioration is in stark contrast to the performance of
real wood.
In early September 1996, a structural engineer retained by Maxim to
investigate the hardboard siding at several properties, including Alderwood and
Timberleaf, reported that his preliminary findings indicated damage which on the
surface does not currently appear to be major. However, the engineer recommended
destructive testing in view of the deterioration, since there could be
significant problems which are not evident from the tests conducted to date.
Maxim has now retained a company to conduct destructive testing as recommended
by the structural engineer. The company is completing a non-destructive
investigation to determine the extent of the destruction testing required. Their
report is expected in May 1997. The results of the destructive testing are
expected during the third quarter of 1997.
The General Partner has filed litigation on behalf of the Partnership as a
result of this problem. A special master has been assigned and a status
conference is scheduled for June 1997. Such litigation is similar to the
litigation instituted in connection with the 370 unit project referred to above
as a result of the same hardboard siding problem. In the 370 unit project
referred to above, when the first evidence of deterioration was discovered, the
problem did not appear to be major. The problem deteriorated rapidly, however,
and is currently believed to involve structural and other damage, which
exclusive of attorney's fees and other costs of litigation, could exceed $28
million. Discovery in that litigation has involved reviewing thousands of
documents and will require the depositions of numerous experts. The General
Partner is extremely concerned about the hardboard siding used on and the extent
of damage caused to Alderwood and Timberleaf. Alderwood and Timberleaf and the
370 unit apartment project are different, and therefore exact comparisons cannot
be made in evaluating the consequences and the resulting damages from the
hardboard siding problem.
As it is uncertain at this time what the degree of damage is and who will
ultimately be liable for the cost, the General Partner has determined that it is
in the best interest of the Partnership to continue the suspension of
distributions. This will enable the Partnership to build reserves to pay for
potential repairs and/or replacement costs. However, due to the uncertainty of
the degree of damage to the hardboard siding and determination of liability for
potential costs, no provision for repairs or replacement has been made at this
time. The General Partner cannot predict when cash distributions will resume,
although it is the General Partner's intent 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 to the hardboard siding, determination of liability for potential costs
and continued stabilized operations at the properties.
Operations
Both Alderwood and Timberleaf began the lease-up phase in November 1986
and achieved stabilized occupancy, defined as 95%, by the third quarter of 1987.
For the years ended December 31, 1996, 1995 and 1994, the average rents
obtained from leased units and the average occupancy were as follows:
Average Rental Rates
1996 1995 1994
One Bedroom Units $ 1,147 $ 982 $ 874
Two Bedroom Units $ 1,409 $ 1,193 $ 1,098
Average Occupancy
1996 1995 1994
Alderwood 97% 97% 95%
Timberleaf 97% 98% 96%
Operating expenses include on-site management, maintenance, utilities,
marketing and other expenses related to earning rental revenues. Some of the
operating expenses vary as occupancy changes throughout the year. Others, such
as property taxes, do not fluctuate in response to changing occupancy levels.
In 1996, operating expenses include $397,000 of professional services related to
defending the tender offer.
Interest expense on notes payable increased due to the deferral of
interest between the accrual interest rate of 10.375% and the pay rate of 6.25%;
with the deferred interest added to principal and incurring additional interest
expense at a rate of 4.125% thereon.
Depreciation and amortization remained consistent between 1996 and 1995.
While depreciation expense decreased in 1995 from 1994, amortization expense
remained relatively stable. In 1994, a majority of the furniture and equipment
were fully depreciated, accounting for the decrease.
Although inflation impacts the Partnership's expenses, increases in
expenses can sometimes be offset by increases in rental rates. However, the
ability to affect increases in rental rates may be impacted by market conditions
such as the supply of rental housing or local economic conditions. As noted in a
preceding paragraph, average rental rates increased from 1994 to 1995, and from
1995 to 1996. Certain expenses, such as property taxes and debt service, may not
be impacted by inflation. Property taxes are affected primarily by limits placed
by legislation. Debt financing is at a fixed rate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Form
10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or executive officers. For informational
purposes only, the following are the names and additional information relating
to controlling persons, directors, executives and senior management of
Prometheus Development Co., Inc., the General Partner of the Registrant.
Sanford N. Diller. Age 68. President, Secretary and sole Director. Mr.
Diller supervises the acquisition, disposition and financial structuring of
properties. Mr. Diller founded the General Partner, and effectively controls all
of its outstanding stock. Mr. Diller received his undergraduate education at the
University of California at Berkeley and his Doctor of Jurisprudence from the
University of San Francisco. He has been an attorney since 1953. Since the mid
1960's, he has been involved in the development and/or acquisition of more than
70 properties, totaling approximately 13,000 residential units and over
2,000,000 square feet of office space.
John H. Pringle. Age 43. Vice President. Mr. Pringle is responsible for
overseeing the residential and commercial property management groups. He
received his degree in economics from Colorado State University and is a
Certified Property Manager. Prior to joining Prometheus Development Co. he was
Regional Vice President for Vestec Financial Corporation.
Vicki R. Mullins. Age 37. Chief Financial Officer. Ms. Mullins'
responsibilities include managing all financial, accounting and reporting
activities. Ms. Mullins came to Prometheus Development Co. from The Irvine
Company where she spent seven years as Vice President of Finance and Accounting,
and Director of Internal Controls. Prior to the Irvine Company, she spent six
years with Ernst & Young as audit manager. Ms. Mullins is a Certified Public
Accountant and holds a B.S. degree in Accounting with honors from the University
of Illinois.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not pay or employ directly any officers or directors.
Compensation to executives and employees of the General Partner is not based on
the operations of the Partnership. The General Partner and its affiliates
receive a management fee as compensation for services rendered and reimbursement
of certain Partnership expenses. (See Item 13. Certain Relationships and Related
Transactions.)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) No person of record owns or is known by the Registrant to own
beneficially more than 5% of the outstanding Units.
(b) The General Partner owns no Units. However, the General Partner,
pursuant to the Partnership Agreement, has discretionary control over most of
the decisions made for the Partnership. The executive officers of the General
Partner, as a group, own less than 1% of the Units.
An affiliate of the General Partner, PIP Partners-General, LLC, will
acquire approximately 8% of outstanding limited partner interests in the
Partnership on April 1, 1997. See Item 5 for further discussion.
(c) Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership pays or has paid fees to the General Partner and its
Affiliates. See Footnote 3 - Related Party Transactions of the financial
statements found in Item 8 and the Prospectus (pages 14-16 and 46-48) filed
pursuant to Rule 424(b) under the Securities Act of 1934, which is incorporated
by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS AND REPORT OF ARTHUR ANDERSEN LLP,
INDEPENDENT PUBLIC ACCOUNTANTS
Page
Report of Independent Public Accountants 16
Financial Statements:
Balance Sheets as of December 31, 1996 and 1995 17
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 18
Statements of Partners' Capital (Deficit) for the
years ended December 31, 1996, 1995 and 1994 19
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 20
Notes to Financial Statements 21
2. FINANCIAL STATEMENT SCHEDULES:
Schedule III - Real Estate and Accumulated Depreciation 26
All other schedules are omitted because they are not required or the
required information is shown in the financial statements or notes thereto.
3. EXHIBITS
None
(b) No report on Form 8-K was filed during the period covered by this report.
(c) No additional exhibits are required pursuant to Item 601(b) of Regulation
S-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Prometheus Income Partners,
a California Limited Partnership:
We have audited the accompanying balance sheets of Prometheus Income
Partners, a California Limited Partnership, as of December 31, 1996 and 1995 and
the related statements of operations, partners' capital (deficit) and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements and the schedule referred to below are the responsibility
of the Partnership's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Prometheus Income Partners, a
California Limited Partnership, as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule listed
in the index to the financial statements is presented for purposes of complying
with the Securities and Exchange Commission's Rules and is not a required part
of the basic financial statements. This information has been subjected to the
auditing procedures applied in our audits of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
/s/Arthur Andersen, LLP
San Francisco, California
March 21, l997
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
BALANCE SHEETS
As of December 31, 1996 and 1995
In Thousands, Except for Unit Data)
1996 1995
ASSETS
Real Estate:
Land, buildings and improvements $ 29,420 $ 29,288
Accumulated depreciation (6,491) (5,938)
22,929 23,350
Cash and cash equivalents 2,227 603
Deferred loan fees, net of
accumulated amortization of $773 and $688 78 163
Accounts receivable and other assets 25 56
Total assets $ 25,259 $ 24,172
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Notes payable $ 25,248 $ 23,791
Payables and accrued liabilities 454 276
Total liabilities 25,702 24,067
Commitments (see Note 4)
General partner deficit (405) (404)
Limited partners' capital (deficit),
18,995 limited partnership
units issued and outstanding (38) 509
Total partners' capital (deficit) (443) 105
Total liabilities and partners'
capital (deficit) $ 25,259 $ 24,172
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
STATEMENTS OF OPERATIONS
For the years ended December 31, 1996, 1995 and 1994
(In Thousands, Except for Unit Data)
1996 1995 1994
REVENUES
Rental (including revenue from affiliates
of $478, $0 and $0, respectively) $ 4,813 $ 4,188 $ 3,899
Interest 61 23 15
Other 123 100 90
Total revenues 4,997 4,311 4,004
EXPENSES
Interest 2,536 2,393 2,264
Operating 1,310 892 928
Depreciation and amortization 638 634 692
Administrative 43 42 29
Payments to general partner and affiliates:
Management fees 265 219 206
Operating and administrative 378 323 267
Total expenses 5,170 4,503 4,386
NET LOSS $ (173) $ (192) $ (382)
Net loss per $1,000
limited partnership unit $ (9) $ (10) $ (20)
Number of limited partnership
units used in computation 18,995 18,995 18,995
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1996, 1995 and 1994
(In Thousands)
General Limited
Partner Partners Total
Balance as of
December 31, 1993 $ (398) $ 4,301 $ 3,903
Cash distributions ($88 per limited
partnership unit, representing a
return of capital) -- (1,672) (1,672)
Repurchase of limited partner units -- (2) (2)
Net Loss (4) (378) (382)
Balance as of
December 31, 1994 (402) 2,249 1,847
Cash distributions ($82 per limited
partnership unit, representing a
return of capital) -- (1,550) (1,550)
Net Loss (2) (190) (192)
Balance as of
December 31, 1995 (404) 509 105
Cash distributions ($20 per limited
partnership unit, representing a
return of capital) -- (375) (375)
Net Loss (1) (172) (173)
Balance as of
December 31, 1996 $ (405) $ (38) $ (443)
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
(In Thousands)
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (173) $ (192) $ (382)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 638 634 692
Decrease (increase) in accounts
receivable and other assets 31 (25) 23
Deferral of interest on notes payable 1,549 1,406 1,277
Increase in payables
and accrued liabilities 178 50 36
(Decrease) increase in
due to affiliates -- (3) 3
Net cash provided by operating activities 2,223 1,870 1,649
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to buildings and improvements (132) (139) (108)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal reductions on notes payable (92) (92) (92)
Distributions to partners (375) (1,550) (1,672)
Repurchase of limited partner units -- -- (2)
Net cash used for financing activities (467) (1,642) (1,766)
Net increase (decrease) in cash 1,624 89 (225)
Cash at beginning of year 603 514 739
Cash and cash equivalents at end of year $ 2,227 $ 603 $ 514
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Prometheus Income Partners, a California Limited Partnership
(the Partnership), was formed to invest in, construct, hold, 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 (Prometheus).
The preparation of financial statements in conformity with
generally accepted accounting principles require management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", real estate, which includes development costs,
construction costs, property taxes and interest incurred during the construction
period, is valued at cost unless circumstances indicate that cost cannot be
recovered, in which case the carrying value is reduced to estimated fair value.
Buildings and improvements are depreciated using the straight-line method over
their estimated useful lives, which range from 5 to 40 years. At December 31,
1996, the Partnership's management believes that the carrying value of the
Partnership's real estate does not exceed its estimated fair value. However, no
provision has been made to record any impairment that might arise due to
defective hardboard siding. See Note 5 for further discussion.
Loan fees of $851,000 have been deferred and are being
amortized, using the straight-line method, which approximates the effective
interest method, over the terms of the related notes payable.
All leases are classified as operating leases. Rental revenues
are recognized when contractually due based on the terms of signed lease
agreements which range in duration from month-to-month to one year.
Statement of Financial Accounting Standards No. 107, "Fair
Value of Financial Instruments" requires disclosure about fair value for all
financial instruments. It is management's opinion that the carrying value of its
financial instruments approximates fair value at December 31, 1996.
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 loss for financial reporting purposes
differs from the net 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 partners' capital were
charged to partners' capital.
In accordance with the terms of the Partnership Agreement,
income or loss is allocated 1% to the General Partner and 99% to the Limited
Partners. Net loss per limited partnership unit is computed by dividing the net
loss allocable to the Limited Partners by the number of units outstanding during
the period in which the losses are allocated.
Cash and cash equivalents consists of amounts held in
operating and investment bank accounts with original maturity dates of three
months or less.
Certain items in the 1995 and 1994 financial statements
have been reclassified to conform to the 1996 presentation.
2. NOTES PAYABLE
The Partnership had the following notes payable at December 31, 1996
and 1995:
1996 1995
(In Thousands)
Non recourse note payable, secured by a first
deed of trust on Alderwood, accruing interest
at 10.375%; interest is payable monthly at 6.25%
on the original principal balance, with the
difference between the accrual rate and the
pay rate being added to principal; principal
payments of $4,928 are due monthly; the balance
is payable at maturity, December 1997. $ 16,300 $ 15,359
Non recourse note payable, secured by a first
deed of trust on Timberleaf, accruing interest
at 10.375%; interest is payable monthly at 6.25%
on the original principal balance, with the
difference between the accrual rate and the
pay rate being added to principal; principal
payments of $2,706 are due monthly; the balance
is payable at maturity, December 1997. 8,948 8,432
$ 25,248 $ 23,791
One of the terms of both notes requires that both properties
shall maintain a loan to value ratio, as defined, of no greater than 75%.
Failure to meet this ratio may, at the lender's discretion, require the
Partnership to pay a portion of the outstanding balance sufficient to meet the
loan to value ratio. It is management's opinion that the Partnership is in
compliance with this loan provision as of December 31, 1996.
Cash paid for interest in each of the years ended 1996, 1995
and 1994 was approximately $987,000.
Principal payments, including deferred interest as of December
31, 1996, on the notes payable of $25,248,000 are due in 1997. The partnership
intends to refinance or renew the notes payable upon maturity.
3. RELATED PARTY TRANSACTIONS
Prom Management Group, Inc., dba Maxim Property Management
("Maxim"), an affiliate of the General Partner, manages the properties.
Management fees and payments to the General Partner and Affiliates represent
compensation for services provided and certain expense reimbursements in
accordance with the Partnership Agreement.
The Partnership leases apartment units to Prom X, Inc., dba The Corporate
Living Network ("Prom X"), an affiliate of Promtheus, to provide corporate
housing services. The Partnership earned and received $478,000 during the year
ended December 31, 1996. The Partnership has leased 45 units to Prom X at
December 31, 1996.
4. COMMITMENTS
Repurchase of Limited Partnership Units
Commencing on January 1, 1989, the Partnership may repurchase
up to 5% in aggregate of the outstanding units from the Limited Partners, at the
Limited Partners' option, in accordance with the Partnership Agreement. The
General Partner may allocate up to 10% of the distributable cash from operations
in the current year for the purpose of making such repurchases. The price of any
units repurchased by the Partnership will be determined in accordance with the
Partnership Agreement. Effective January 1, 1994, the Partnership acquired five
units from an investor for a total of $1,545. The valuation method used for this
repurchase did not follow the provisions of the Limited Liquidity Plan. Rather,
the Partnership and investor agreed to a valuation method, which is used by
local real estate brokers, based upon an estimated market value of the
properties, less debt prepayment penalties and a discount as provided in the
Limited Liquidity Plan. The five units were permanently retired and will not be
re-offered for sale.
Hardboard Siding
The General Partner has learned that the type of hardboard
siding which was used at Alderwood and Timberleaf is failing to
perform as expected in a number of projects in various parts of the United
States. A wood technology expert was retained to test the performance of the
hardboard siding. In November 1996, this expert presented a preliminary verbal
report which indicated that the physical characteristics of the hardboard siding
at Alderwood and Timberleaf have deteriorated dramatically since the
construction of the properties. The expert indicated that this deterioration is
in stark contrast to the performance of real wood.
In September 1996, a structural engineer retained by the
General Partner to investigate the hardboard siding reported that his
preliminary findings indicated damage which on the surface does not currently
appear to be major. However, the engineer recommended destructive testing in
view of the deterioration, since there could be significant problems which are
not evident from the tests conducted to date. The General Partner has retained a
company to conduct non-destructive and destructive testing as recommended by the
structural engineer. The results of the non-destructive and destructive testing
are expected in 1997.
The General Partner has filed litigation on behalf of
the Partnership as a result of this problem. The General Partner is extremely
concerned about the hardboard siding used on and the extent of damage caused to
Alderwood and Timberleaf. As it is uncertain at this time what the degree of
damage is and who will ultimately be liable for the costs, the General Partner
has determined that it is in the best interest of the Partnership to continue
the suspension of distributions. This will enable the Partnership to build
reserves to pay for potential repairs and/or replacement costs. Due to the
uncertainty of the degree of damage to the hardboard siding and determination of
liability for potential costs, no provision for repairs or replacement has been
made at this time.
5. SUBSEQUENT EVENTS
Tender Offer
Commencing in the fourth quarter of 1996, an unrelated
third party, Prom Investment Partners, LLC, ("Prom") solicited tender offers for
limited partner interests ("Units") in the Partnership. Prom's tender offer
expired in December 1996. An affiliate of the Partnership, PIP Partners-
General, LLC, ("PIP Partners") matched the tender offers. PIP Partners
tender offer expired in January 1997. The General Partner is currently in the
process of reviewing the documentation to process the transfers of any
Prometheus Income Partners' limited partners who sold their units. Approximately
2,830 units (or 15%) were tendered to the competing bidders, including
approximately 1,480 units to PIP Partners and approximately 1,350
units to Prom. Under the terms of the Partnership Agreement, all eligible
transfers for which required approvals, opinions and documentation have been
satisfactorily completed and submitted prior to March 31, 1997, will be
effective as of April 1, 1997. Operating expenses include $397,000 of
professional services incurred in defending the tender offer.
Litigation
On March 12, 1997, a limited partner owning twenty-five (25) units (.1316%
of the outstanding units), filed a class and derivative action complaint in the
Superior Court of San Mateo County against the Partnership, certain officers of
the General Partner and certain affiliates of the General Partner. The suit
alleges that the defendants used their power over the Partnership and its assets
to inhibit and discourage a tender offer for units that was commenced by an
unaffiliated third party, utilized Partnership funds and resources to facilitate
and subsidize an inferior tender offer by an affiliated party, misled and
induced limited partners who wished to sell units to tender them to the
affiliated party rather than to a third party offering more money, refused to
pursue or consider transactions that would maximize the value of the limited
partners' units, including the sale of the Partnership properties or the
preparation of a plan of liquidation. The suit also alleges that the
Partnership has reimbursed affiliated parties for costs of goods and materials
used by the Partnership and services rendered by the affiliates of the
Partnership for sums in excess of contractual limits and that the Partnership
has wasted Partnership assets and funds in subsidizing the expenses of an
offer from an affiliated entity.
The plaintiff is seeking to enjoin the Partnership from reimbursing or
indemnifying the affiliated entity for any costs or fees with respect to the
tender offer or from any further acts to thwart competing tender offers. The
plaintiff asks for compensatory and punitive damages and for reasonable
attorneys' fees. Included in the damage demand are all profits made
by the affiliated entity resulting from its offer or compensation for the use of
the Partnership assets and the alleged excessive charges and fees specified
above. Other equitable relief is sought, including an order prohibiting
defendants from voting any units obtained, and an order appointing a receiver to
protect the Partnership from any alleged further harm.
The defendants have not yet responded to the complaint as of the date of
this filing. They intend to vigorously defend the suit and believe they have
meritorious defenses; however, it is not possible to predict the outcome of this
litigation at this early stage, and therefore whether the consequences will be
material to the Partnership.
SCHEDULE III
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 1996
(In thousands)
Initial Cost to Cost Capitalized Subsequent
the Partnership To Acquisition
Building
and
Encum- Improve- Improve- Carrying
brances Land ments ments Costs
Alderwood Apts
Santa Clara,
California $ 15,359 $ 5,931 $ -- $ 12,600 $ 441
Timberleaf Apts
Santa Clara,
California 8,432 3,145 -- 6,793 510
Total $ 23,791 $ 9,076 $ -- $ 19,393 $ 951
Gross Amount at Which
Carried at Close of Period (1)
Building Accumu-
and lated De- Date of Date
Improve- Total preciation Construc- Acquired
Land ments (3) (4) tion (2)
Alderwood Apts
Santa Clara,
California $ 5,931 $ 13,041 $ 18,972 $ 4,147 11/86 12/87 (5)
Timberleaf Apts
Santa Clara,
California 3,145 7,303 10,448 2,344 11/86 11/86
Total $ 9,076 $ 20,344 $ 29,420 $ 6,491
SCHEDULE III
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 1996
(In Thousands)
NOTES:
(1) The aggregate cost for federal income tax purposes is $27,388.
(2) Depreciation is computed on lives ranging from 5 to 40 years.
(3) Balance, December 31,1993 $ 29,041
Additions 108
Balance, December 31, 1994 29,149
Additions 139
Balance, December 31, 1995 29,288
Additions 132
Balance, December 31, 1996 $ 29,420
(4) Balance, December 31, 1993 $ 4,782
Provision charged to expense 607
Balance, December 31, 1994 5,389
Provision charged to expense 549
Balance, December 31, 1995 5,938
Provision changed to expense 553
Balance, December 31, 1996 $ 6,491
(5) The Land site was leased through November 1987 and acquired in December
1987.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date indicated.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
By PROMETHEUS DEVELOPMENT CO., INC.,
a California corporation,
Its General Partner
Date: March 21, 1997 By /s/John H. Pringle
Vice President
Date: March 21, 1997 By /s/Vicki R. Mullins
Chief Financial Officer
Supplemental Information to be furnished with Report, filed pursuant to
Section 15(d) of the Act by Registrants, which have not registered Securities
pursuant to Section 12 of the Act:
None
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheets and the Statements of Operations filed as part of the annual report on
Form 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,227
<SECURITIES> 0
<RECEIVABLES> 25
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,252
<PP&E> 29,420
<DEPRECIATION> 6,491
<TOTAL-ASSETS> 25,259
<CURRENT-LIABILITIES> 454
<BONDS> 0
0
0
<COMMON> (443)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 25,259
<SALES> 4,813
<TOTAL-REVENUES> 4,997
<CGS> 0
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<OTHER-EXPENSES> 2,634
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,536
<INCOME-PRETAX> (173)
<INCOME-TAX> 0
<INCOME-CONTINUING> (173)
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<EXTRAORDINARY> 0
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