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, 1999 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
II, III and IV.
Exhibit index located on page 15
Table of Contents
Form 10-K/A
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 15-27
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 Construction Defects 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 104,000, 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 in the amount of $16,904,000 and $9,284,000,
respectively. The 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
None.
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, 1999, the 18,995 outstanding Units were held
by 1,090 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, Bond Purchase, LLC, an unrelated third party,
made an unsuccessful offer to purchase Units. 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
Construction Defects for discussions concerning the deferment
of distributions.
No distributions were made for 1996, 1997, 1998 and 1999.
ITEM 6. SELECTED FINANCIAL DATA
The following represent selected financial data for the Partnership
for the years ended December 31, 1999, 1998, 1997, 1996 and 1995. 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,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands, Except for Unit Data)
Rental revenues $5,674 $5,578 $5,256 $4,813 $4,188
Net income (loss) $1,431 $896 $477 $(173) $(192)
Net income (loss)
per $1,000 limited
partnership unit $75 $47 $25 $(9) $(10)
Cash and cash
equivalents per $1,000
limited partnership
unit, subsequent
to Limited Partner
distributions $101 $62 $34 $117 $32
Number of units used in
computation 18,995 18,995 18,995 18,995 18,995
Total assets $28,873 $27,830 $27,016 $25,259 $24,172
Notes payable $26,188 $26,476 $26,723 $25,248 $23,791
Cash distributions per
$1,000 limited partnership
unit, representing a
return of capital $ -- $-- $-- $20 $82
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 continue
building reserves for the potential cost of dealing with the construction
defect problems. See Construction Defects below for a more comprehensive
discussion of this matter.
Each property has a non-recourse note payable, secured by a first deed
of trust with Prudential Insurance Company of America (collectively, the
"Notes"). These Notes originated in December 1999 and bear fixed interest of
6.99% for Alderwood, and 7.09% for Timberleaf, and are due in December 2007.
Each deed of trust has been recorded with the County of Santa Clara's
Recorder's Office. These notes originated in December 1997 and refinanced
maturing first trust deeds with the same lender.
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 $2,635,000 and
$1,923,000 for Alderwood and Timberleaf, respectively, as of December 31,
1999. Until the Completion Date, as defined annually, 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
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 reasonablwe fees and expenses incurred by the lender
shall be paid by the Partnership.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
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.
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 $1,942,000, $1,183,000 and $638,000 at December 31,
1999, 1998 and 1997, respectively. The reinstatement and level of future
distributions will be dependent on several factors, including the degree of
damage caused by the Construction Defects, determination of liability for
potential costs and expenses of dealing with the Construction Defects
problems, and continued stabilized operations at the Properties.
Construction Defects
The General Partner has learned that the type of hardboard siding that
was used at both 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 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 rebuilt as part of the immediate repair
process. The General Partner has subsequently determined that additional
immediate repairs were necessary. The repairs necessitated immediately
(with the exception of roof repairs noted below) have been completed and
the General Partner continues to monitor the condition of the property.
Routine roofing inspection has uncovered failing roof substrate at dormer
roof assemblies for both Alderwood and Timberleaf. The cause has been
traced to inadequate venting of the roof space. The roof repair design and
repair bids have been received and are currently being evaluated and a
repair scope refined so this work may proceed as necessary. The passage of
time and ongoing investigations have resulted in a number of deficiencies,
other than the siding material being uncovered. Issues related to the
hardboard siding and other construction defects are currently referred to as
Construction Defects as this more accurately reflects the scope of work
being undertaken at this time. For Alderwood, the estimated cost of repair,
including siding and roof repairs and a component for projected lost rents,
but not including attorney's fees or litigation costs, range from $9 to $10
million. The total calimed damages are $11,239,280. For Timberleaf, the
estimated cost of repair, including siding and roof repairs and a component
for projected lost rents, but no litigation costs, range from $6 to $7
million. The total claimed damages are $8,352,330.
Both cases continue to be under the supervision of the 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
It is possible that a settlement can occur anytime, but it appears
unlikely, 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.
A trial date has not yet been ordered by the Special Master. The
General Partner has and is demanding a trial date be set so this matter can
be resolved. However, even if a trial date is set it will still likely take
two to three years to complete the matter. In addition, the discovery of
additional construction defect problems, as discussed above, will likely
result in additional delays.
The extent and magnitude of the construction defects continues to
worsen with time. The General Partner believes that the Partnership can no
longer wait for the cases to be settled and has authorized the start of
repairs using the cash reserve funds currently held. It is anticipated
that funds held in reserve are not adequate to repair the entire project,
so completion of the most critical projects will be prioritized.
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 construction defects. 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 construction defects, determination
of liability for potential costs and expenses of dealing with the
construction defects, and continued stabilized operations at the Properties.
Operations
For the years ended December 31, 1999, 1998, and 1997, the average rents
obtained from leased units, and the average occupancy were as follows:
Average Rental Rates
1999 1998 1997
---- ---- ----
One Bedroom Units $1,285 $1,222 $1,241
Two Bedroom Units $1,567 $1,546 $1,521
Average Occupancy
1999 1998 1997
---- ---- ----
Alderwood 97% 97% 97%
Timberleaf 97% 96% 96%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
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. Operating expenses have fluctuated between years due principally to
the destructive testing, emergency repairs and litigation fees associated
with Hardboard Siding Defects. These three expenditure components of
Hardboard Siding Defects have fluctuated based upon where in the litigation
and repair cycles the Properties happen to be. After initial owner
investigations, came the quantification phase wherein preliminary
investigations subsequently led to extensive destructive testing and
emergency repairs were undertaken to preserve the assets. Legal and expert
consultant fees increased as the cases were prepared for the ensuing
litigation. Once the cases were placed under the control of a Special Master,
further investigations are ordered for both the plaintiff and defendants,
thus reducing the costs of which are shared between the plaintiff and
defendants, thus reducing the associated costs to the Partnership.
Overall, other than the fluctuation in operating expenses between years
caused by the expenditures associated with the Hardboard Siding Defects and
related litigation, the Properties' income streams have not been adversely
impacted due to the immediate attention given to defects and the emergency
repairs undertaken. Both Properties are located in Santa Clara County, in an
area commonly referred to as Silicon Valley. the area has seen continued job
growth and low unemployment, which has in turn created a housing shortage
driving up the value of housing prices - both homes and apartment rents.
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.
Monthly principal and interest payments under these notes are $114,659 and
$63,597, respectively. (Through December 26, 1997, interest expense for the
Properties 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 1999 and
1998. Depreciation expense was $573,000 and $569,000, in 1999 and 1998,
respectively. Amortization was $30,000 each year.
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 from
1998 to 1999 increased 3%, 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 7a. QUALITATIVE AND QUANTITATIVE INFORMATION ABOUT MARKET RISK
The Company has no debt subject to variable rates of interest and does
not invest in derivatives or similar typed of instruments.
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 71. 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 more than 13,000
residential units and over 2,000,000 square feet of office space.
Vicki R. Mullins. Age 40. Vice President. Ms. Mullins' responsibilities include
supervising all property operations, 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 an 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 37. Vice President. Mr. Murphy's responsibilities
include managing all financial, accounting and reporting activities, and
insurance. 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 9.4814%, 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 and 1999, PIP Partners acquired .716%
and 1.2371% of outstanding Limited Partner Units, respectively.
As of December 31, 1999, PIP Partners owns 9.4814% 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, 1999 and 1998 17
Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 18
Statements of Partners' Capital (Deficit) for the
years ended December 31, 1999, 1998 and 1997 19
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 20
Notes to Financial Statements 21
2. FINANCIAL STATEMENT SCHEDULES:
Schedule III - Real Estate and Accumulated Depreciation 26
All other schedules are omitted because they are not required or the
required information is shown in the financial statements or notes
thereto.
3. EXHIBITS
None
(b) No report on Form 8-K was filed during the period covered by this
report.
(c) No additional exhibits are required pursuant to Item 601(b) of
Regulation S-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Prometheus Income Partners,
a California Limited Partnership:
We have audited the accompanying balance sheets of Prometheus Income Partners,
a California Limited Partnership, as of December 31, 1999 and 1998, and the
related statements of operations, partners' capital (deficit) and cash flows
for each of the three years in the period ended December 31, 1999. 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 schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and
1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The 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 part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in
our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/Arthur Andersen LLP
San Francisco, California
March 28, 2000
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
BALANCE SHEETS
As of December 31, 1999 and 1998
(In Thousands, Except for Unit Data)
1999 1998
------- ------
ASSETS
Real Estate
Land, buildings and improvements $30,288 $29,938
Accumulated depreciation (8,183) (7,610)
------- -------
22,105 22,328
Cash and cash equivalents1 1,942 1,183
Restricted cash 4,558 3,990
Deferred financing costs, net of
accumulated amortization of $60 and $30 239 268
Accounts receivable and other assets 29 61
------- -------
Total assets $28,873 $27,830
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Notes payable $26,188 $26,476
Accounts payable and accrued liabilities 323 424
------- -------
Total liabilities 26,512 26,900
Commitments and contingencies (see Note 4)
Partner Capital (Deficit)
General partner deficit (378) (392)
Limited partners' capital,
18,995 limited partnership
units issued and outstanding 2,739 1,322
------- -------
Total partners' capital (deficit) 2,361 930
------- -------
Total liabilities and partners' capital (deficit) $28,873 $27,830
======= =======
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, 1999, 1998 and 1997
(In Thousands, Except for Unit Data)
1999 1998 1997
------ ------ ------
REVENUES
Rental (including revenue from affiliates
of $0, $0 and $248, respectively) $5,674 $5,578 $5,256
Interest 250 235 165
Other 182 178 137
------ ------ ------
Total revenues 6,106 5,991 5,558
EXPENSES
Interest and amortization 1,881 1,898 2,716
Operating 1,400 1,807 1,104
Depreciation 573 569 551
Administrative 40 43 41
Payments to general partner and affiliates:
Management fees 300 303 278
Operating and administrative 481 475 391
------ ------ ------
Total expenses 4,675 5,095 5,081
------ ------ ------
NET INCOME $1,431 $896 $477
====== ====== =====
Net income per $1,000
limited partnership
unit $75 $47 $25
====== ====== =====
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, 1999, 1998 and 1997
(In Thousands)
General Limited
Partner Partners Total
-------- -------- ------
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
Net Income 14 1,417 1,431
-------- ------- ------
Balance as of December 31, 1999 $(378) $2,739 $2,361
======== ======= ======
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, 1999, 1998 and 1997
(In Thousands)
1999 1998 1997
------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,431 $896 $477
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 573 569 551
Amortization 30 30 78
Decrease (increase) in accounts
receivable and other assets 32 (42) 6
Deferral of interest on notes payable -- -- 1,559
(Decrease) increase in payables
and accrued liabilities (101) 165 (195)
------ ------ ------
Net cash provided by operating activities 1,965 1,618 2,476
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to buildings and improvements (350) (324) (194)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal additions on notes payable -- -- 26,723
Principal reductions on notes payable (288) (247) (26,807)
Additions to deferred financing costs -- (15) (284)
Increase in restricted cash (568) (487) (3,503)
------ ------ ------
Net cash used for financing activities (856) (749) (3,871)
------ ----- ------
Net increase (decrease) in cash 759 545 (1,589)
Cash and cash equivalents at beginning of year 1,183 638 2,227
------ ----- ------
Cash and cash equivalents at end of year $1,942 $1,183 $638
======= ====== ======
Supplemental disclosure of non cash transaction
Deletion of fully amortized financing costs $ 0 $ 773 $ 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, 1999 and 1998
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 income or 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.
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. At
December 31, 1999, 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 construction defect problems. (See Note 4 for further
discussion.) Emergency repairs undertaken to preserve the real estte due to
construction defects have not been capitalized. The materials affected by
emergency repairs will have to be removed and replaced when the
construction defects are permanently repaired.
Buildings and improvements are depreciated using the straight-line
method over their estimated useful lives, which range from 5 to 40 years, as
follows.
Buildings 40 years
Land Improvements 30 years
Structural improvements 30 years
Personal property 5 years
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.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
No income taxes are levied on the Partnership; rather, such taxes are
levied on the individual partners. Consequently, no provision or liability
for federal or California income taxes has been reflected in the
accompanying financial statements. The net income or loss for financial
reporting purposes differs from the net income or loss for income tax
reporting purposes primarily due to differences in useful lives and
depreciation methods for buildings and improvements and amortization of
construction period interest and taxes. Syndication costs incurred in
raising Limited Partner's 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, 1999.
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 a 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 (The "Notes") at
December 31, 1999 and 1998:
1999 1998
---- ----
(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. $16,904 $17,091
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. 9,284 9,385
------- -------
$26,188 $26,476
======= =======
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 1999, 1998 and 1997
was approximately $1,851,000, $1,787,000, and $905,000, respectively.
As of December 31, 1999, maturities on the Notes (In Thousands) are as
follows:
2000 $ 309
2001 331
2002 355
2003 381
2004 409
2005 and thereafter 24,403
-------
$26,188
=======
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 did not earn or receive
any revenues during the years ended December 31, 1999 and 1998,
respectively, but did earn and receive revenues of $248,000 during the year
ended December 31, 1997, from such affiliate.
4. COMMITMENTS AND CONTINGENCIES
Repurchase of Limited Partnership Units
Commencing on January 1, 1989, under the terms of the Limited Liquidity
Plan ("Plan"), 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. The Partnership made no repurchases under the Plan
during the years ended December 31, 1999, 1998 and 1997.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. COMMITMENTS AND CONTINGENCIES (Continued)
Construction Defects
The General Partner has learned that the type of hardboard siding that
was used at both 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 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 rebuilt as part of the immediate repair
process. The General Partner subsequently determined that additional
immediate repairs were necessary. The repairs necessitated immediately
(with the exception of roof repairs noted below) have been completed and
the General Partner continues to monitor the condition of the property.
Routine roofing inspection has uncovered failing roof substrate at dormer
roof assemblies for both Alderwood and Timberleaf. The cause has been traced
to inadequate venting of the roof space. The roof repair design and repair
bids have been received and are currently being evaluated and a repair
scope refined so this work may proceed as necessary. The passage of time
and ongoing investigations have resulted in a number of deficiencies,
other than the siding material being uncovered. Issues related to the
hardboard siding and other constructio defects are currently referred to as
Construction Defects as this more accurately reflects the scope of work
being undertaken at this time. For Alderwood, the estimated cost of repair,
including siding and roof repairs and a component for projected lost rents,
but not including attorney's fees or litigation costs, range from $9 to $10
million. The total claimed damages are $11,239,280. For Timberleaf, the
estimated cost of repair, including siding and roof repairs and a component
for projected lost rents, but no litigation costs, range from $6 to $7
million. The total claimed damages are $8,352,330.
Both cases continue to be under the supervision of the 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, but it appears
unlikely, 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.
A trial date has not yet been ordered by the Special Master. The
General Partner has and is demanding a trial date be set so this matter can
be resolved. However, even if a trial date is set it will still likely take
two to three years to complete the matter. In addition, the discovery of
additional construction defect problems, as discussed above, will likely
result in additional delays.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. COMMITMENTS AND CONTINGENCIES (Continued)
The extent and magnitude of the construction defects continues to
worsen with time. The General Partner believes that the Partnership can no
longer wait for the cases to be settled and has authorized the start of
repairs using the cash reserve funds currently held. It is anticipated
that funds held in reserve are not adequate to repair the entire project,
so completion of the most critical projects will be prioritized.
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 construction defects. 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 construction defects, determination
of liability for potential costs and expenses of dealing with the
construction defects, 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
construction defect problems, the General Partner reviewed the projected
cash flows of both Properties to ensure an adjustment of the book value was
not required in accordance with SFAS 121. Further, although the full extent
of the damage to the hardboard siding for the Properties is unknown,
management believes that the fair market value of each Property still
remains greater than its respective book value.
5. 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 $2,635,000 and $1,923,000 for Alderwood and Timberleaf,
respectively, at December 31, 1999. Until the Completion Date, as defined
annually, 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.
SCHEDULE III
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 1999
(In Thousands)
Cost Capitalized Gross Amount at Which
Subsequent Carried
To Acquisition at Close of Period (1)
Cost
to
the Build- Build-
Partn- ings and Carry- ings and
Encum- ership Improve- Improve- ing Improve- Total
Description brances Land ments ments Costs Land ments (3)
----------- ------- ------ ------- ------- ------ ------ ------ ------
Alderwood Apts.
Santa Clara,
California $16,904 $5,931 $ -- $12,950 $441 $5,931 $13,615 $19,322
Timberleaf Apts.
Santa Clara,
California 9,284 3,145 -- 6,961 510 3,145 7,596 10,616
------- ------ ----- ------- ----- ------ ------- -------
Total $26,188 $9,076 $ -- $19,911 $951 $9,076 $21,211 $30,288
======= ====== ====== ======= ===== ====== ======= =======
Accumu-
lated De- Date
preciation Date of Acquired
Description (4) Contstruction (2)
----------- ---------- ------------- ---------
Alderwood Apts.
Santa Clara,
California $5,237 11/86 12/87 (5)
Timberleaf Apts.
Santa Clara,
California 2,946 11/86 11/86
------
Total $8,183
======
SCHEDULE III
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
As of December 31, 1999
(In Thousands)
NOTES:
(1) The aggregate cost for federal income tax purposes is $28,256.
(2) Depreciation is computed on lives ranging from 5 to 40 years.
(3) Balance, December 31, 1996 $29,420
Additions 194
-------
Balance, December 31, 1997 29,614
Additions 324
-------
Balance, December 31, 1998 29,938
Additions 350
-------
Balance December 31, 1999 $30,288
=======
(4) 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
Provision charged to expense 573
-------
Balance, December 31, 1999 $8,183
=======
(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: September 6, 2000 By /s/ Vicki R. Mullins
Vice President
Date: September 6, 2000 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
