-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HHPsjAsZ7IaQjTLsrvDp487t1jy0fkdTHWtfZpSj6Rx5wHVtHelPMnydeNrTtwc6 9MHnO8AM3EjYZXN5+zidGw== 0000803026-00-000002.txt : 20000331 0000803026-00-000002.hdr.sgml : 20000331 ACCESSION NUMBER: 0000803026-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROMETHEUS INCOME PARTNERS CENTRAL INDEX KEY: 0000803026 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 770082138 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16950 FILM NUMBER: 587122 BUSINESS ADDRESS: STREET 1: 350 BRIDGE PKWY CITY: REDWOOD CITY STATE: CA ZIP: 94065 BUSINESS PHONE: 6505965300 FORMER COMPANY: FORMER CONFORMED NAME: PROMETHEUS DEVELOPMENT INCOME PARTNERS DATE OF NAME CHANGE: 19861229 10-K 1 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 12-MOS DEC-31-1999 DEC-31-1999 6,500 0 29 0 0 6,529 30,288 8,183 28,873 323 0 0 0 2,361 0 28,873 5,674 6,106 0 0 2,824 0 1,851 1,431 0 1,431 0 0 0 1,431 75 0
-----END PRIVACY-ENHANCED MESSAGE-----