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, 1998 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 15
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 7
Item 7 Management's Discussion and Analysis of
Financial Conditions and Results of Operations 8
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 ("Alderwood") and Timberleaf Apartments
("Timberleaf"), (collectively, the "Properties"). 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 discussions 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 properties,
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 nine 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 $17,091,000 and $9,385,000, 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 Properties arising from the defective hardboard siding, but does not
specify any basis for making such an apportionment. The cross complaint further
claims that if negligence is found, that Fisher Friedman's be found to be
secondary (rather than primary) in nature, thereby obligating the primarily
liable defendants to indemnify Fisher Friedman for its liability. Again, the
cross complaint fails to state any basis for which the Partnership has primary
liability for the defective hardboard 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, 1998, the 18,995 outstanding Units were held by
1,078 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.
During 1998, an offer from Bond Purchase, LLC, an unrelated third
party, to purchase Units occurred which was unsuccessful. The offer
was for less than 5% of outstanding Units and nominal legal costs
were incurred by the Partnership. On October 16, 1998 Bond
Purchase, LLC cancelled its transfer request and no Units were
acquired.
D) Distributions to Limited Partners began with the quarter ending
September 30, 1987. Cash distributions were suspended in 1996. See
Item 7, Liquidity and Capital Resources and Hardboard Siding for a
discussion concerning the deferment of distributions.
No distributions were made for 1996, 1997 and 1998.
ITEM 6. SELECTED FINANCIAL DATA
The following represent selected financial data for the Partnership for
the years ended December 31, 1998, 1997, 1996, 1995 and 1994. 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 Conditions and Results of Operations.
For the Years Ended December 31,
1998 1997 1996 1995 1994
(In Thousands, Except for Unit Data)
Rental revenues $ 5,578 $ 5,256 $ 4,813 $4,188 $ 3,899
Net income (loss) $ 896 $ 477 $ (173) $(192) $ (382)
Net income (loss)
per $1,000 limited
partnership unit $ 47 $ 25 $ (9) $ (10) $ (20)
Cash and cash equivalents per
$1,000 limited partnership unit,
subsequent to Limited
Partner distributions $ 56 $ 34 $ 117 $ 32 $ 27
Number of units used in
computation 18,995 18,995 18,995 18,995 18,995
Total assets $27,830 $27,016 $25,259 $24,172 $24,553
Notes payable $26,476 $26,723 $25,248 $23,791 $22,477
Cash distributions per
$1,000 limited partnership
unit, representing a
return of capital $ -- $ -- $ 20 $ 82 $ 88
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 previously leased 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 Notes require that each property maintain a hardboard
siding security account. These security accounts are additional collateral for
the lender. Cash held in these security accounts was $2,307,000 and $1,683,000
for Alderwood and Timberleaf, respectively, as of December 31, 1998. 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 security accounts except to cure the siding defects.
The lender shall have the right to hire its own consultants to review,
approve and inspect the construction. All such reasonable fees and expenses
incurred by the lender shall be paid by the Partnership.
Should the litigation not be settled by December 2002, and the
Partnership has met all its obligations under the Notes, then the Completion
Date shall be extended 18 months from the earlier of the pending settlement
date or the last day for filing an appeal. Should construction not be
completed by the Completion Date due to an act of force majeure, the
Completion Date can be further extended to complete the construction work.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
Cash and cash equivalents not being held by the lender are comprised of
cash invested in market rate, checking and investment accounts. Cash balances
were approximately $1,183,000, $638,000 and $2,227,000, at December 31, 1998,
1997 and 1996, 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.
Two lawsuits have been filed, one for each property. At this time, experts
on behalf of the Partnership have concluded the initial visual inspection, the
scientific testing of the siding material and destructive investigation. The
defendants have also completed their destructive investigation. Additionally,
certain structural issues were uncovered at Timberleaf and were subsequently
rebuilt as part of the immediate repair process.
Both cases have been assigned to a Special Master who is duly appointed
and empowered by the court to assist in resolving the cases. The
investigation and other subsequent discoveries that will occur are ordered
by the Special Master on behalf of both plaintiffs and defendants in an
effort to come to a settlement. Destructive investigation completed under the
order of the Special Master has produced a preliminary issues list which the
Special Master will use in attempting to prompt a settlement from the
defendants. This information is protected by the Special Master and is not
for general distribution.
It is possible that a settlement can occur anytime under the Special
Master. It is not likely however, that this will occur in either of the cases,
as one of the primary defendants has demonstrated very little willingness to
settle. In the absence of a settlement, the Special Master will eventually
order a trial date to be set and, if necessary, the matter will be litigated
in court. A trial date assignment, if one were ordered would likely occur
between 24 to 36 months from now depending on the court's schedule.
Therefore, it is not likely that the matter will be fully concluded within
the next two to three years.
Lastly, one defendant named in the Partnership's complaint filed a cross
complaint against the Partnership. The amount of damages being sought is
unspecified at this time. See Item 3 for further discussion of this matter.
In addition to the security accounts mandated by the Partnership's lender,
the General Partner has determined that it is in the best interest of the
Partnership to continue building reserves for the potential cost of dealing
with the hardboard siding problems. At this time, the General Partner cannot
predict when distributions will resume due to the build up of reserves;
however, it is the General Partner's current intention to resume
distributions as soon as reasonably possible and prudent. The reinstatement
and level of future distributions will be dependent on several factors,
including the degree of damage caused by the hardboard siding, determination
of liability for potential costs and expenses of dealing with the hardboard
siding problem, and continued stabilized operations at the Properties.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
Operations
For the years ended December 31, 1998, 1997, and 1996, the average rents
obtained from leased units, and the average occupancy were as follows:
Average Rental Rates
1998 1997 1996
One Bedroom Units $1,222 $1,241 $1,147
Two Bedroom Units $1,546 $1,521 $1,409
Average Occupancy
1998 1997 1996
Alderwood 97% 97% 97%
Timberleaf 96% 96% 97%
Commencing in June 1997, rental income includes income from a significant
tenant, ExecuStay, Inc. (("ExecuStay") (effective March 26, 1999, a subsidiary
of Marriott International)). 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, 1998 and 1997, ExecuStay has leased 6 units
and 3 units, and 15 units and 8 units at Alderwood and Timberleaf,
respectively. The exclusivity provisions of the purchase contract may expire
by May 1999 if ExecuStay does not lease a minimum of 5% of the Properties'
units for at least 6 continuous months.
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.
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 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 1998 and 1997.
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 1996
to 1997, and from 1997 to 1998 essentially remained unchanged. 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 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
Impact of the Year 2000 Compliance Costs on Operations
The Partnership's State of Readiness. The Partnership utilizes a number
of computer software programs and operating systems across its entire
organization, including applications used in financial business systems and
various administrative functions. To the extent that the Partnership's
software applications contains source code that is unable to appropriately
interpret the upcoming calendar year "2000" and beyond, some level of
modification or replacement of such applications will be necessary. The
Partnership currently believes that its "Year 2000" issues are limited to
information technology ("IT") systems (i.e., software programs and computer
operating systems). The Partnership currently believes there are no non-IT
systems (i.e., embedded systems such as devices used to control, monitor or
assist the operation of equipment and machinery), the failure of which would
have a material effect on the Partnership's operations.
The Partnership has completed its identification of IT systems that are
not yet Year 2000 compliant and has commenced modification or replacement of
such systems as necessary. The Partnership is currently communicating with
third parties with which it does significant business, such as financial
institutions and vendors to determine their readiness for Year 2000
compliance. The Partnership has also completed its assessment of the Year 2000
compliance issues presented by its hardware components.
Cost of Addressing the Partnership's Year 2000 Issues. Given the
information known at this time about the Partnership's systems that are non-
compliant, coupled with the Partnership's ongoing, normal course-of-business
efforts to upgrade or replace critical systems, as necessary, the Partnership
does not expect Year 2000 compliance costs to have any material adverse impact
on the Partnership's liquidity or ongoing results of operations. The costs of
such assessment and remediation will be reflected as general and
administrative expenses.
Risks of the Partnership's Year 2000 Issues. In light of the
Partnership's assessment and remediation efforts to date, and the planned,
normal course-of business upgrades, the Partnership currently has no knowledge
of any critical business applications that will not be compliant. No assurance
can be given, however, that all of the Partnership's systems will be Year 2000
compliant or that compliance will not have a material adverse effect on the
Partnership's future liquidity or results of operations or ability to service
debt.
The Partnership's Contingency Plans. The Partnership is currently
developing its contingency plan for all operations to address the most
reasonably likely worst case scenarios regarding Year 2000 compliance. The
Partnership expects such contingency plans to be completed by the end of the
year.
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 70. 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 39. Vice President. Ms. Mullins' responsibilities include
supervising all property operations, insurance, information systems and
finance, 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 36. Vice President. 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 and was 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"), an
affiliate of the General Partner, which owns 8.2443 %, and Prom
Investment Partners, LLC, an unrelated third party, which owns
7.0676% 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.
PIP Partners, acquired 7.5283% of outstanding Limited Partner Units
in the Partnership during 1997. (See Item 5 for further discussion.)
During 1998, PIP Partners acquired .716% of outstanding, Limited
Partner Units, and as of December 31, 1998, owns 8.2443% of the
outstanding Units.
(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 14 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, 1998 and 1997 17
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 18
Statements of Partners' Capital (Deficit) for the
years ended December 31, 1998, 1997 and 1996 19
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 20
Notes to Financial Statements 21
2. FINANCIAL STATEMENT SCHEDULES:
Schedule III - Real Estate and Accumulated Depreciation 27
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, 1998 and 1997
and the related statements of operations, partners' capital (deficit) and
cash flows for each of the three years in the period ended December 31, 1998.
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, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, 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 19, l999
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
BALANCE SHEETS
As of December 31, 1998 and 1997
(In Thousands, Except for Unit Data)
1998 1997
ASSETS
Real Estate:
Land, buildings and improvements $29,938 $29,614
Accumulated depreciation (7,610) (7,041)
22,328 22,573
Cash and cash equivalents 1,183 638
Restricted cash 3,990 3,503
Deferred financing costs, net of
accumulated amortization of $30 and $0 268 283
Accounts receivable and other assets 61 19
Total assets $27,830 $27,016
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Notes payable $26,476 $26,723
Payables and accrued liabilities 424 259
Total liabilities 26,900 26,982
Commitments and contingencies (see Note 4)
General partner deficit (392) (401)
Limited partners' capital,
18,995 limited partnership
units issued and outstanding 1,322 435
Total partners' capital (deficit) 930 34
Total liabilities and partners'
capital (deficit) $27,830 $27,016
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, 1998, 1997 and 1996
(In Thousands, Except for Unit Data)
1998 1997 1996
REVENUES
Rental (including revenue from affiliates
of $0, $248 and $478, respectively) $5,578 $5,256 $4,813
Interest 235 165 61
Other 178 137 123
Total revenues 5,991 5,558 4,997
EXPENSES
Interest and amortization 1,898 2,716 2,621
Operating 1,807 1,104 1,310
Depreciation 569 551 553
Administrative 43 41 43
Payments to general partner and affiliates:
Management fees 303 278 265
Operating and administrative 475 391 378
Total expenses 5,095 5,081 5,170
NET INCOME (LOSS) $ 896 $ 477 $ (173)
Net income (loss) per $1,000
limited partnership
unit $ 47 $ 25 $ (9)
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
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
As of December 31, 1998, 1997 and 1996
(In Thousands)
General Limited
Partner Partners Total
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
Net Income 9 887 896
Balance as of
December 31, 1998 $ (392) $1,322 $930
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, 1998, 1997 and 1996
(In Thousands)
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 896 $ 477 $ (173)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 569 551 553
Amortization 30 78 85
(Increase) decrease in accounts
receivable and other assets (42) 6 31
Deferral of interest on notes payable -- 1,559 1,549
Increase (decrease) in payables
and accrued liabilities 165 (195) 178
Net cash provided by operating activities 1,618 2,476 2,223
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to buildings and improvements (324) (194) (132)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal additions on notes payable -- 26,723 --
Principal reductions on notes payable (247) (26,807) (92)
Additions to deferred financing costs (15) (284) --
Distributions to limited partners -- -- (375) --
Increase in restricted cash (487) (3,503) --
Net cash used for financing activities (749) (3,871) (467)
Net increase (decrease) in cash 545 (1,589) 1,624
Cash and cash equivalents at beginning of year 638 2,227 603
Cash and cash equivalents at end of year $1,183 $ 638 $2,227
Supplemental disclosure of non cash transaction
Deletion of fully amortized financing costs $ 773 $ 0 $ 0
The accompanying notes are an integral
part of these financial statements
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
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 (collectively, the "Properties"). The
General Partner is Prometheus Development Co., Inc., ("Prometheus") a
California corporation. The Partnership operates in one segment,
residential real estate.
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 partner 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.
The preparation of financial statements in conformity with
generally accepted accounting principles requires 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, 1998, 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, incurred in conjunction with the notes payable have
been deferred and will be 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.
(See Note 6 regarding significant tenant.)
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.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Syndication costs incurred in raising Limited Partners' capital were
charged to Limited Partners' capital.
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, 1998.
Cash and cash equivalents consists of amounts held in market rate,
checking and investment accounts with maturities of three months or
less.
Restricted cash is invested in either a treasury or government
fund with original maturities of three months or less. (See Note 5 for
further discussion.)
Certain prior year amounts have been reclassified to conform to
the current year presentation. These reclassifications have no impact on
net income (loss) or partner's capital (deficit).
2. NOTES PAYABLE
The Partnership had the following ("Notes") payable at December
31, 1998 and 1997:
1998 1997
(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. $17,091 $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. 9,385 9,471
$26,476 $26,723
During 1997, the Partnership paid off existing notes payable with
a balance of $25,248,000, including deferred interest.
One of the terms of notes requires that cash be set aside in a
hardboard siding security account, as additional collateral. See Notes 4
and 5 for further discussions.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. NOTES PAYABLE (Continued)
Cash paid for interest in each of the years ended 1998, 1997 and
1996 was approximately $1,787,000, $905,000 and $987,000, respectively.
As of December 31, 1998, maturities on the Notes (In Thousands)
are as follows:
1999 $ 288
2000 309
2001 331
2002 355
2003 381
2004 and thereafter 24,812
$26,476
The notes, if prepaid more than thirty (30) days from maturity, are
subject to a prepayment penalty.
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, an affiliate of
Prometheus, to provide corporate housing services. The Partnership
earned and received revenues of $0, $248,000 and $478,000 from such
affiliate during the years ended December 31, 1998, 1997 and 1996,
respectively.
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.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. COMMITMENTS AND CONTINGENCIES (Continued)
Hardboard Siding (Continued)
Two lawsuits have been filed by the Partnership, one for each
property. At this time, experts on behalf of the Partnership have
concluded the initial visual inspection, the scientific testing of the
siding material and destructive investigation. The defendants have also
completed their destructive investigation. Additionally, certain
structural issues were uncovered at Timberleaf and were subsequently
rebuilt as part of the immediate repair process.
Both cases have been assigned to a Special Master who is duly
appointed and empowered by the court to assist in resolving the cases.
The investigation and other subsequent discoveries that will occur are
ordered by the Special Master on behalf of both plaintiffs and
defendants in an effort to come to a settlement. Destructive
investigation completed under the order of the Special Master has
produced a preliminary issues list which the Special Master will use in
attempting to prompt a settlement from the defendants. This information
is protected by the Special Master and is not for general distribution.
It is possible that a settlement can occur anytime under the
Special Master. It is not likely however, that this will occur in either
of the cases, as one of the primary defendants has demonstrated very
little willingness to settle. In the absence of a settlement, the
Special Master will eventually order a trial date to be set and, if
necessary, the matter will be litigated in court. A trial date
assignment, if one were ordered would likely occur between 24 to 36
months from now depending on the court's schedule. Therefore, it is not
likely that the matter will be fully concluded within the next two to
three years.
Lastly, one defendant named in the Partnership's complaint filed
a cross complaint against the Partnership. The amount of damages being
sought is unspecified at this time.
In addition to the security accounts mandated by the
Partnership's lender, the General Partner has determined that it is in
the best interest of the Partnership to continue building reserves for
the potential cost of dealing with the hardboard siding problems. At
this time, the General Partner cannot predict when distributions will
resume due to the build up of reserves; however, it is the General
Partner's current intention to resume distributions as soon as
reasonably possible and prudent. The reinstatement and level of future
distributions will be dependent on several factors, including the degree
of damage caused by the hardboard siding, determination of liability for
potential costs and expenses of dealing with the hardboard siding
problem, and continued stabilized operations at the Properties.
Statement of Financial Accounting Standards 121 ("SFAS 121"),
Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of, requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. In connection
with the hardboard siding matter, the General Partner reviewed the
projected cash flows of both Properties to ensure an adjustment of the
book value was not required in accordance with SFAS 121. Further,
although the full extent of the damage to the hardboard siding for the
Properties is unknown, management believes that the fair market value of
each Property still remains greater than their respective book values.
NOTES TO FINANCIAL STATEMENTS (Continued)
5. RESTRICTED CASH - CASH COLLATERAL
The terms of the Notes (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 $2,307,000 and $1,683,000 for
Alderwood and Timberleaf, respectively, at December 31, 1998. 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 security accounts except to cure the siding defects. The lender
shall have the right to hire its own consultants to review, approve and
inspect the construction. All such reasonable fees and expenses incurred
by the lender shall be paid by the Partnership.
Should the litigation not be settled by December 2002, and the
Partnership has met all its obligations under the Notes, then the
Completion Date shall be extended 18 months from the earlier of the
pending settlement date or the last day for filing an appeal. Should
construction not be completed by the Completion Date due to an act of
force majeure, the Completion Date can be further extended to complete
the construction work.
The security accounts are to be invested in either a treasury or
government fund.
6. SIGNIFICANT TENANT
Commencing June 1, 1997, ExecuStay, Inc. (("ExecuStay")
(effective March 26, 1999, a subsidiary of Marriott International)) an
unrelated third party entered into 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, 1998,
ExecuStay has leased 3% and 2% of the units at both Alderwood and
Timberleaf, respectively. The exclusivity provisions of the purchase
contract may expire by May 1999 if ExecuStay does not lease a minimum of
5% of the Properties' units for at least 6 continuous months.
SCHEDULE III
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 1998
(In Thousands)
Cost Capitalized Gross Amount at Which
Initial Cost to Subsequent Carried
the Partnership To Acquisition at Close of Period (1)
Build- Build-
ings and Carry- ings and
Encum- improve- Improve- ing improv- Total
Description brances Land ments ments costs Land ments (3)
Alderwood Apts.
Santa Clara,
California $15, 359 $5,931 $-- $12,950 $441 $5,931 $13,391 $19,322
Timberleaf Apts.
Santa Clara,
California 8,432 3,145 -- 6,961 510 3,145 7,471 10,616
Total $23,791 $9,076 $-- $19,911 $951 $9,076 $20,862 $29,938
Accumu-
Lated De- Date of Date
Preciation Construc- Acquired
(4) ion (2)
Alderwood Apts.
Santa Clara,
California $4,869 11/86 12/87 (5)
Timberleaf Apts.
Santa Clara,
California 2,741 11/86 11/86
Total $7,610
SCHEDULE III
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 1998
(In Thousands)
NOTES:
(1) The aggregate cost for federal income tax purposes is $27,906.
(2) Depreciation is computed on lives ranging from 5 to 40 years.
(3) Balance, December 31, 1995 $29,288
Additions 132
Balance, December 31, 1996 29,420
Additions 194
Balance, December 31, 1997 29,614
Additions 324
Balance December 31, 1998 $29,938
(4) 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
Provision charged to expense 569
Balance, December 31, 1998 $ 7,610
(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 19, 1999 By/s/Vicki R. Mullins
Vice President
Date: March 19, 1999 By/s/John J. Murphy
Vice President
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
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,173
<SECURITIES> 0
<RECEIVABLES> 61
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,234
<PP&E> 29,938
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<TOTAL-ASSETS> 27,830
<CURRENT-LIABILITIES> 424
<BONDS> 0
0
0
<COMMON> 930
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 27,830
<SALES> 5,578
<TOTAL-REVENUES> 5,991
<CGS> 0
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<OTHER-EXPENSES> 3,227
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<INTEREST-EXPENSE> 1,868
<INCOME-PRETAX> 896
<INCOME-TAX> 0
<INCOME-CONTINUING> 896
<DISCONTINUED> 0
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