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, 1997 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:
(650) 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 16
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 13
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 13
Part III
Item 10 Directors and Executive Officers of the Registrant 14
Item 11 Executive Compensation 14
Item 12 Security Ownership of Certain Beneficial Owners and
Management 15
Item 13 Certain Relationships and Related Transactions 15
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 16
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, 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 amount
of $17,251,596 and $9,471,431, respectively. Both notes (collectively, the
"Notes") bear interest at the rate of 6.99% per annum for Alderwood and 7.09%
per annum for Timberleaf and mature in 2007. The notes, if prepaid more than
thirty (30) days from maturity, are subject to a prepayment penalty.
ITEM 3. 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 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 Item 7 for a discussion of Hardboard Siding.
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). 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.
B) At December 31, 1997, the 18,995 outstanding Units were held by
1,039 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, LLC ("Prom"), an unrelated third
party, expired in December 1996. The second tender offer from PIP
Partners-General, LLC ("PIP Partners"), an affiliate of the
General Partner, expired in January 1997. An aggregate 2,750.5
units were tendered to the competing bidders -- 1,430 to PIP
Partners and 1,320.5 to Prom, or 7.5283% and 6.9518% of the total
outstanding units, respectively. Under the terms of the
Partnership Agreement, the transfers were effective as of April
1, 1997. All units were purchased for $495 per unit.
D) 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 year
1995 were made as follows:
Total
Distribution Distribution
Period Covered Date (In Thousands)
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
No distributions were made for 1996 and 1997.
ITEM 6. SELECTED FINANCIAL DATA
The following represent selected financial data for the Partnership
for the years ended December 31, 1997, 1996, 1995, 1994 and 1993. 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,
1997 1996 1995 1994 1993
(Amounts in thousands except unit data)
Rental revenues $ 5,256 $ 4,813 $ 4,188 $ 3,899 $ 3,864
Net income (loss) $ 477 $ (173) $ (192) $ (382) $ (275)
Net income (loss)
per $1,000 unit $ 25 $ (9) $ (10) $ (20) $ (14)
Cash per $1,000
unit subsequent to partner
distributions $ 34 $ 117 $ 32 $ 27 $ 39
Number of units used in
Computation 18,995 18,995 18,995 18,995 19,000
Total assets $ 27,016 $ 25,259 $ 24,172 $ 24,553 $ 25,385
Notes payable $ 26,723 $ 25,248 $ 23,791 $ 22,477 $ 21,292
Cash distributions per
$1,000 unit, representing a
return of capital $ -- $ 20 $ 82 $ 88 $ 79
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.
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 bear fixed interest of 6.99% for Alderwood and 7.09% for
Timberleaf.
The terms of the new notes payable 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 $1,902,000
and $1,601,000 for Alderwood and Timberleaf, respectively, as of December 31,
1997. The Alderwood trust deed requires that the security account be increased
to $2,200,000 by December 1998. Thereafter, until the Completion Date, as
defined, an additional 10%, as defined, or monthly cash flow, whichever is
less, shall be deposited into each security account. Should the hardboard
siding repairs not be completed by December 2002, or every two years
thereafter, and insufficient cash has been accumulated to cure the defects
based upon the lender's determination of the cost, then all cash flow shall be
deposited into each applicable security account, as necessary, to fully fund
the cost of construction. If the projected cash flow is insufficient to satisfy
this deficiency contribution, then the Partnership has 60 days to fund the
shortage over the projected cash flow. No withdrawals are permitted from the
account except to cure the siding defects. The lender shall have the right to
hire its own consultants to review, approve and inspect the construction. All
such reasonable fees and expenses incurred by the lender shall be paid by the
Partnership.
Should the litigation not be settled by December 2002, and the
Partnership has met all its obligations under the notes payable, 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.
Cash and cash equivalents are comprised of cash invested in market
rate, checking and investment accounts. Cash balances were approximately
$638,000, $2,227,000, and $603,000, at December 31, 1997, 1996 and 1995,
respectively. The reinstatement and level of future distributions will be
dependent on several factors, including the degree of damage caused by the
hardboard siding, determination of liability for potential costs and expenses
of dealing with the hardboard siding problem, and continued stabilized
operations at the properties.
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. This expert
presented a report which indicated that the physical characteristics of the
hardboard siding at Alderwood and Timberleaf have deteriorated since the
construction of the properties
A construction consultant retained by the General Partner to
investigate the hardboard siding reported that its preliminary findings
indicated damage, which on the surface does not currently appear to be major.
However, they recommended further investigation in view of the deterioration,
since there could be significant problems, which are not evident from prior
tests that were conducted.
Several property owners are currently in litigation against the
hardboard siding manufacturer. One such case is scheduled to go to trial in
March 1998. While each case is different and the extent of the hardboard siding
damage at each property is different, the General Partner is closely following
the aforementioned case and its potential impact to the Partnership's case. In
addition, the courts recently ordered destructive testing, under court
supervision to begin at both properties. Lastly, one defendant named in the
Partnership's complaint recently filed a cross complaint against the
Partnership. The amount of damages being sought is unspecified at this time.
In addition to the security accounts mandated by the lender, the
General Partner has determined that it is in the best interest of the
Partnership to continue building reserves for the potential cost of dealing
with the hardboard siding problems. At this time, the General Partner cannot
predict when cash distributions will resume due to the build up of reserves;
however, it is the General Partner's current intention to resume distributions
as soon as reasonably possible and prudent. The reinstatement and level of
future distributions will be dependent on several factors, including the degree
of damage caused by the hardboard siding, determination of liability for
potential costs and expenses of dealing with the hardboard siding problem, and
continued stabilized operations at the properties.
Impact of the Year 2000
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities.
The General Partner believes that it will not be required to modify or
replace significant portions of its software and that the year 2000 issue will
not pose significant operational problems for its computer systems. Ultimately,
the potential impact of the year 2000 issue will depend not only on the
corrective measures the General Partner undertakes, but also on the way in
which the year 2000 issue is addressed by businesses and other entities whose
financial condition or operational capability is important to the Partnership.
Therefore, the General Partner is communicating with the parties to ensure they
are aware of the year 2000 issue, to learn how they are addressing it, and to
evaluate any likely impact on the Partnership.
Operations
For the years ended December 31, 1997, 1996 and 1995, the average
rents obtained from leased units and the average occupancy were as follows:
Average Rental Rates
1997 1996 1995
One Bedroom Units $ 1,241 $ 1,147 $ 982
Two Bedroom Units $ 1,521 $ 1,409 $ 1,193
Average Occupancy
1997 1996 1995
Alderwood 97% 97% 97%
Timberleaf 96% 97% 98%
Commencing in June 1997, rental income includes income from a
significant tenant, ExecuStay, Inc. ("ExecuStay"). ExecuStay owns and operates
a corporate housing program. ExecuStay entered into a three year agreement
whereby ExecuStay will lease for periods of at least six months, at the then
current market rent, a minimum of 5% up to a maximum of 7% of the total units
at Alderwood and Timberleaf. As of December 31, 1997, ExecuStay has leased 15
units and 8 units at Alderwood and Timberleaf, respectively.
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 1997, operating expenses include $87,912 of professional services related to
responding to the tender offer.
Interest expense on notes is at a fixed rate of 6.99% per annum for
Alderwood and 7.09% per annum for Timberleaf commencing December 26, 1997.
Through December 26, 1997, interest expense on notes payable was accrued at
10.375% with a 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 1997 and
1996.
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 1995 to
1996, and from 1996 to 1997. 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 69. 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.
Vicki R. Mullins. Age 38. Executive Vice President and Chief Financial
Officer. Ms. Mullins' responsibilities include supervising all financial,
accounting and reporting activities, as well as manages the disposition and
financial structuring of properties. 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.
John J. Murphy. Age 35. Vice President of Finance and Accounting.
Mr. Murphy's responsibilities include managing all financial, accounting and
reporting activities. Mr. Murphy came to Prometheus Development Co. from KPMG
Peat Marwick where he spent seven years as a Senior Manager. He is a
Certified Public Accountant and holds a B.S. degree in Accounting with honors
from the University of San Francisco.
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) Other than PIP Partners - General, LLC ("PIP Partners") which owns
7.5283% and Prom Investment Partners, LLC, an unrelated third
party, which owns 7.3203% of the outstanding Units, 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 no Units.
An affiliate of the General Partner, PIP Partners, acquired 7.5283%
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 17
Financial Statements:
Balance Sheets as of December 31, 1997 and 1996 18
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 19
Statements of Partners' Capital (Deficit) for the
years ended December 31, 1997, 1996 and 1995 20
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 21
Notes to Financial Statements 22
2. FINANCIAL STATEMENT SCHEDULES:
Schedule III - Real Estate and Accumulated Depreciation 28
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, 1997 and 1996 and the
related statements of operations, partners' capital (deficit) and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, 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 12, l998
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
BALANCE SHEETS
As of December 31, 1997 and 1996
(In Thousands, Except for Unit Data)
1997 1996
ASSETS
Real Estate:
Land, buildings and improvements $ 29,614 $ 29,420
Accumulated depreciation (7,041) (6,491)
22,573 22,929
Cash and cash equivalents 638 2,227
Restricted cash 3,503 --
Deferred loan fees, net of
accumulated amortization of $0 and $773 283 78
Accounts receivable and other assets 19 25
Total assets $ 27,016 $ 25,259
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Notes payable $ 26,723 $ 25,248
Payables and accrued liabilities 259 454
Total liabilities 26,982 25,702
Commitments and contingencies (see Note 4)
General partner deficit (401) (405)
Limited partners' capital (deficit),
18,995 limited partnership
units issued and outstanding 435 (38)
Total partners' capital (deficit) 34 (443)
Total liabilities and partners'
capital (deficit) $ 27,016 $ 25,259
The accompanying notes are an integral
part of these financial statements.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
STATEMENTS OF OPERATIONS
For the years ended December 31, 1997, 1996 and 1995
(In Thousands, Except for Unit Data)
1997 1996 1995
REVENUES
Rental (including revenue from affiliates
of $248, $478 and $0, respectively) $ 5,256 $ 4,813 $ 4,188
Interest 165 61 23
Other 137 123 100
Total revenues 5,558 4,997 4,311
EXPENSES
Interest 2,638 2,536 2,393
Operating 1,104 1,310 892
Depreciation and amortization 629 638 634
Administrative 41 43 42
Payments to general partner and affiliates:
Management fees 278 265 219
Operating and administrative 391 378 323
Total expenses 5,081 5,170 4,503
NET INCOME (LOSS) $ 477 $(173) $ (192)
Net income (loss) per $1,000
limited partnership unit $ 25 $ (9) $ (10)
Number of limited partnership
units used in computation 18,995 18,995 18,995
The accompanying notes are an integral
part of these financial statements.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1997, 1996 and 1995
(In Thousands)
General Limited
Partner Partners Total
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)
Net Income 4 473 477
Balance as of
December 31, 1997 $ (401) $ 435 $ 34
The accompanying notes are an integral
part of these financial statements.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
(In Thousands)
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 477 $ (173) $ (192)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 629 638 634
Decrease (increase) in accounts
receivable and other assets 6 31 (25)
Deferral of interest on notes
Payable 1,559 1,549 1,406
(Increase) decrease in payables
and accrued liabilities (195) 178 50
Decrease in due to affiliates -- -- (3)
Net cash provided by operating
Activities 2,476 2,223 1,870
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to buildings and
improvements (194) (132) (139)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal additions on notes
Payable 26,723 -- --
Principal reductions on notes
payable (26,807) (92) (92)
Increase in deferred loan fees (284) -- --
Distributions to partners -- (375) (1,550)
Increase in restricted cash (3,503) -- --
Net cash used for financing
activities (3,871) (467) (1,642)
Net (decrease) increase in cash (1,589) 1,624 89
Cash at beginning of year 2,227 603 514
Cash and cash equivalents at
end of year $ 638 $ 2,227 $ 603
The accompanying notes are an integral
part of the financial statements.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
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., (Prometheus) a California
corporation.
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, 1997,
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 4 for further discussion.)
Loan fees of $283,000 have been deferred in conjunction with the new
notes payable (See Note 2 for further discussion) and will be amortized, using
the straight-line method which approximates the effective interest method, over
the terms of the related notes payable. The previous loan fees of $851,000 have
been fully amortized using the same method.
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. (See Note 6 regarding
significant tenant.)
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, 1997.
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 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 income or loss per limited partnership unit is computed by dividing the net
income or 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.
Restricted cash is invested in either a treasury or government fund with
original maturity dates of three months or less. (See Note 5 for further
discussion.)
2. NOTES PAYABLE
The Partnership had the following notes payable at December 31, 1997 and
1996:
1997 1996
(In Thousands)
Non recourse note payable, secured
by a first deed of trust on
Alderwood; interest is payable
monthly at 6.99% interest rate; the
balance is payable at maturity,
December 2007. $ 17,252 $ --
Non recourse note payable, secured
by a first deed of trust
on Timberleaf; interest is payable
monthly at 7.09% interest rate; the
balance is payable at maturity,
December 2007. 9,471 --
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 was payable at maturity,
December 1997. -- 16,300
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 was payable at maturity,
December 1997. -- 8,948
$ 26,723 $ 25,248
One of the terms of new notes requires that cash be set aside in a
hardboard siding security account, as additional collateral. See Notes 4 and 5
for further discussions.
Cash paid for interest in each of the years ended 1997, 1996 and 1995
was approximately $905,000, $987,000 and $987,000.
Principal payments, including deferred interest on the matured notes
payable of $25,248,000 were paid in 1997. The partnership refinanced the notes
payable in December 1997.
As of December 31, 1997, maturities on the notes payable (in thousands)
are as follows:
Year ending
December 31,
1998 $ 247
1999 288
2000 309
2001 331
2002 355
2003 and thereafter 25,193
$ 26,723
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 leased apartment units through May 31, 1997 to Prom X,
Inc., dba The Corporate Living Network, ("TCLN") an affiliate of Prometheus, to
provide corporate housing services. The Partnership earned and received
revenues of $248,000 and $478,000 during the years ended December 31, 1997, and
1996, respectively. (See Note 6 regarding significant tenant.)
4. COMMITMENTS AND CONTINGENCIES
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.
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. This expert
presented a report which indicated that the physical characteristics of the
hardboard siding at Alderwood and Timberleaf have deteriorated since the
construction of the properties.
A construction consultant retained by the General Partner to
investigate the hardboard siding reported that its preliminary findings
indicated damage, which on the surface does not currently appear to be major.
However, they recommended further investigation in view of the deterioration,
since there could be significant problems, which are not evident from prior
tests that were conducted.
The General Partner has filed litigation on behalf of the Partnership
as a result of this problem. Several unrelated property owners are currently in
litigation against the hardboard siding manufacturer. One such case is
scheduled to go to trial in March 1998. While each case is different and the
extent of the hardboard siding damage at each property is different, the
General Partner is closely following the aforementioned case and its potential
impact to the Partnership's case. In addition, the court recently ordered
destructive testing, under court supervision to begin at both properties.
Lastly, one defendant named in the Partnership's complaint recently filed a
cross complaint against the Partnership. The amount of damages being sought is
unspecified at this time.
In addition to the security accounts mandated by the lender, the
General Partner has determined that it is in the best interest of the
Partnership to continue building reserves for the potential cost of dealing
with the hardboard siding problems. 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 cannot predict when cash distributions will resume due to the
build up of reserves; however, it is the General Partner's current intention to
resume distributions as soon as reasonably possible and prudent. The
reinstatement and level of future distributions will be dependent on several
factors, including the degree of damage caused by the hardboard siding,
determination of liability for potential costs and expenses of dealing with the
hardboard siding problem, and continued stabilized operations at the
properties. 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.
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 hardboard siding
matter, the General Partner reviewed the projected cash flows of both
properties to ensure an adjustment of the book value was not required in
accordance with FASB 121. Further, although the full extent of the damage to
the hardboard siding for these two properties is unknown, management believes
that the fair market value of each property still remains greater than their
respective book values.
5. RESTRICTED CASH - CASH COLLATERAL
The terms of the new notes payable (See Note 2 for further discussion)
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 $1,902,000 and $1,601,000 for Alderwood and Timberleaf,
respectively, at December 31, 1997. The Alderwood trust deed requires that the
security account be increased to $2,200,000 by December 1998 by making monthly
payments of $25,000 to the security account. Thereafter, until the Completion
Date, as defined, an additional 10%, as defined, or monthly cash flow,
whichever is less, shall be deposited into each security account. Should the
hardboard siding repairs not be completed by December 2002, or every two years
thereafter, and insufficient cash has been accumulated to cure the defects
based upon the lender's determination of the cost, then all cash flow shall be
deposited into each applicable security account, as necessary, to fully fund
the cost of construction. If the projected cash flow is insufficient to satisfy
this deficiency contribution, then the Partnership has 60 days to fund the
shortage over the projected cash flow. No withdrawals are permitted from the
account except to cure the siding defects. The lender shall have the right to
hire its own consultants to review, approve and inspect the construction. All
such reasonable fees and expenses incurred by the lender shall be paid by the
Partnership.
Should the litigation not be settled by December 2002, and the
Partnership has met all its obligations under the notes payable, 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.
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.
The security accounts are to be invested in either a treasury or
government fund.
6. SIGNIFICANT TENANT
Effective June 1, 1997, ExecuStay, Inc. ("ExecuStay"), an unrelated
third party entered in to an agreement to operate a corporate housing program
at both properties. Under the terms of the three year agreement ExecuStay will
lease for periods of at least six months, at the then current market rent, a
minimum of 5% up to a maximum of 7% of the total units at Alderwood and
Timberleaf. As of December 31, 1997, ExecuStay has leased 6% of the units at
both Alderwood and Timberleaf.
7. IMPACT OF THE YEAR 2000 (Unaudited)
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities.
The General Partner believes that it will not be required to modify or
replace significant portions of its software and that the year 2000 issue will
not pose significant operational problems for its computer systems. Ultimately,
the potential impact of the year 2000 issue, will depend not only on the
corrective measures the General Partner undertakes, but also on the way in
which the year 2000 issue is addressed by businesses and other entities whose
financial condition or operational capability is important to the Partnership.
Therefore, the General Partner is communicating with the parties to ensure they
are aware of the year 2000 issue, to learn how they are addressing it, and to
evaluate any likely impact on the Partnership.
SCHEDULE III
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 1997
(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)
Build- Accumu-
ings and lated De- Date of Date
Improve- Total preciation Construc- Acquired
Land ments (3) (4) tion (2)
Alderwood Apts.
Santa Clara,
California $5,931 $13,165 $19,096 $4,502 11/86 12/87 (5)
Timberleaf Apts.
Santa Clara,
California 3,145 7,373 10,518 2,539 11/86 11/86
Total $9,076 $20,538 $29,614 $7,041
NOTES:
(1) The aggregate cost for federal income tax purposes is $27,582.
(2) Depreciation is computed on lives ranging from 5 to 40 years.
(3) Balance, December 31, 1994 $ 29,149
Additions 139
Balance, December 31, 1995 29,288
Additions 132
Balance, December 31, 1996 29,420
Additions 194
Balance, December 31, 1997 $ 29,614
(4) Balance, December 31, 1994 $ 5,389
Provision charged to expense 549
Balance, December 31, 1995 5,938
Provision charged to expense 553
Balance, December 31, 1996 6,491
Provision charged to expense 550
Balance, December 31, 1997 $ 7,041
(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 12, 1998 By /s/Vicki R.Mullins
Executive Vice President and
Chief Financial Officer
Date: March 12, 1998 By /s/John J. Murphy
Vice President of Finance and Accounting
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
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<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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,141
<SECURITIES> 0
<RECEIVABLES> 19
<ALLOWANCES> 0
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<PP&E> 29,614
<DEPRECIATION> 7,041
<TOTAL-ASSETS> 27,016
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<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 27,016
<SALES> 5,256
<TOTAL-REVENUES> 5,558
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<OTHER-EXPENSES> 2,443
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,638
<INCOME-PRETAX> 477
<INCOME-TAX> 0
<INCOME-CONTINUING> 477
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