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 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 15-27
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
As a result of the Hardboard Siding Defects and litigation filed by the
General Partner, 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 negligence
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 Construction Defects.
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. 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 $2,635,000 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 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.
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.
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. 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 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.
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 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.
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. 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, 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.)
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 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, 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 immediate repairs (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 uncovered a number of deficiencies, other than the
siding material. 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.
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. 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 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: March 28, 2000 By /s/ Vicki R. Mullins
Vice President
Date: March 28, 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheets and the Statements of Operations filed as part of the annual report on
Form 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,500
<SECURITIES> 0
<RECEIVABLES> 29
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,529
<PP&E> 30,288
<DEPRECIATION> 8,183
<TOTAL-ASSETS> 28,873
<CURRENT-LIABILITIES> 323
<BONDS> 0
0
0
<COMMON> 2,361
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 28,873
<SALES> 5,674
<TOTAL-REVENUES> 6,106
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,824
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,851
<INCOME-PRETAX> 1,431
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,431
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,431
<EPS-BASIC> 75
<EPS-DILUTED> 0
</TABLE>
