SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Amendment No. 2
Filed by the Registrant / /
Filed by a Party other than the Registrant /X/
Check the appropriate box:
/X/ Preliminary Proxy Statement / / Confidential, for Use of the
Definitive Proxy Statement Commission Only (as permitted by
Definitive Additional Materials Rule 14a-6(e)(2))
Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
PROMETHEUS INCOME PARTNERS, a California limited partnership
(Name of Registrant as Specified in Its Charter)
PROMETHEUS DEVELOPMENT CO., INC., a California corporation
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Units of limited partner interest
(2) Aggregate number of securities to which transaction applies: 15,544
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
$1,445. The per unit price is equal to the merger consideration to
be received per limited partner unit in the registrant. The Merger
consideration is estimated based on certain financial information as
of December 31, 2000 and is subject to adjustment as set forth
herein.
(4) Proposed maximum aggregate value of transaction: $22,461,0801
(5) Total Fee Paid: $4,493
/X/ Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid: $3,731
(2) Form, Schedule or Registration Statement no.: preliminary Schedule 14A
(3) Filing Party: Prometheus Development Co., Inc.
(4) Date Filed: June 28, 2000
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PROMETHEUS INCOME PARTNERS
To the limited partners of Prometheus Income Partners-YOUR VOTE IS VERY
IMPORTANT
You are cordially invited to attend a meeting of the limited partners of
Prometheus Income Partners. At the meeting, holders of the units of limited
partner interests in Prometheus Income Partners will consider and vote on the
proposals of Prometheus Development Co., Inc., Prometheus Income Partners'
general partner, described in the accompanying notice of meeting and proxy
statement.
The primary substantive proposal to be voted upon at the meeting is the
proposed merger of PIP Acquisition, LLC with and into Prometheus Income
Partners. PIP Acquisition is a wholly owned subsidiary of PIP Partners -
General, LLC, which is an affiliate of the general partner of the partnership
and the owner of 18.2% of the outstanding units. Prometheus Income Partners, PIP
Partners and Prometheus Development Co. are all under the common control of
Sanford Diller, who is also the principal beneficial owner of these entities. As
more fully described below and in the accompanying proxy statement, in the
proposed transaction, if approved and consummated, each limited partner of
Prometheus Income Partners other than PIP Partners will be entitled to receive
an amount calculated as the effective liquidation value of the units they hold,
which amount will be at least $1,200 per unit. The calculation will be based on
an independent appraisal of the partnership's apartment properties and will
factor in the actual costs to repair existing construction defects in these
properties and the net recovery (if any) in litigation currently being pursued
by the partnership relating to these defects in these properties. A
non-refundable advance on the merger consideration will be paid to the limited
partners (other than PIP - General) in the amount of $1,200 per unit promptly
following the approval and consummation of the merger. This amount represents a
current estimate of the liquidation value of each limited partnership unit as
calculated in accordance with the partnership's agreement of limited
partnership, net of the estimated costs to repair existing defects and a reserve
of currently restricted cash. Because the actual costs to repair these defects
and the outcome of the litigation at this point is unknown, the balance of the
merger consideration (if any) will be paid promptly following completion of
repairs of the existing construction defects in the partnership's properties and
final resolution of the pending litigation. After the merger, PIP Partners will
hold all of the units. A majority of the units (50% or more), or 9,498 Units,
must be voted in favor of the merger proposal for the proposal to be approved.
The merger consideration will be fixed at the sum each limited partnership
unit would receive under the partnership's partnership agreement upon
liquidation (the "Liquidation Value") after giving effect to (i) the sale of the
partnership's rental properties for the market value thereof as determined by a
recently obtained independent appraisal, (ii) the repayment in full of the
existing mortgages on these properties (together with any prepayment penalty in
respect of such repayment), (iii) the repair of existing construction defects in
these properties for a value equal to the ultimate cost to the partnership of
these repairs and (iv) the net recovery by the partnership (if any) in
litigation being prosecuted by the partnership with respect to those
construction defects. As of the date of the attached proxy statement, any
attempt to put a value on the cost of these repairs and the associated
litigation would be mere conjecture and potentially unfair to the limited
partners. Accordingly, the ultimate amount of the merger consideration will be
fixed and paid when the defects have been repaired and the litigation has been
finally resolved.
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The date, time and place of the meeting are as follows:
March __, 2001
1:30 p.m., local time
[Location]
In connection with the proposed merger, please note that:
o Prometheus Income Partners, PIP Partners, PIP Acquisition and Prometheus
Development Co. are all under the common control of Sanford Diller. The
interests of these entities are different from and in substantial conflict
with those of the limited partners. Because of the relationship among
Prometheus Development Co. (the partnership's general partner), PIP Partners
and PIP Acquisition, the merger and all of the proposed transactions related
to the merger as discussed in this document are not the product of
arm's-length negotiation between unaffiliated parties. PIP Acquisition and
PIP Partners are making this offer with a view to ultimately making a profit
and, therefore, there is a conflict that is described more fully in the
accompanying materials between their desire to acquire your units at a
relatively lower price and your desire to sell your units at a relatively
higher price.
o The Liquidation Value was determined on the basis of an independent appraisal
of the market value of the partnership's properties. This appraised market
value could be greater than or less than the amount for which these
properties could be sold at any given time.
o If the merger occurs, you will not receive any future distributions from
operating cash flow of Prometheus Income Partners or upon any sale or
refinancing of the properties owned by it. You will, however, be entitled to
receive the deferred component of the merger consideration (if any)
calculated as set forth above and in the accompanying materials.
o Even if current cash reserves together with any recovery in pending
litigation are insufficient to cover the actual cost of repair of existing
construction defects, you will not be required to return any portion of the
$1,200 advance on the merger consideration initially to be paid to you in
respect of each unit held by you.
o Due to construction defects in the partnership's properties and pending
recovery (if any) in the litigation regarding the defects, there have been no
cash distributions since 1996, although Prometheus Income Partners has
generated income to the limited partners on which the limited partners may
have been subject to income tax. The general partner estimates that as of
September 30, 2000, these tax liabilities approximated $103 per unit owned by
each limited partner, assuming their prior use of all passive activity losses
generated by the partnership, that the maximum marginal income tax rates for
an individual resident in California would be applicable and that such income
would be treated for this purpose as ordinary income. As a result of the
merger, the limited partners will retain no interest in the partnership.
Thus, after the current fiscal year of Prometheus Income Partners, there will
be no additional tax
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liability for the limited partners with respect to the partnership, and PIP
Partners - General, as holder of all interests in the partnership, will bear
all risk of loss to the partnership's properties.
o There is only a sporadic secondary trading market in the units. To the best
of Prometheus Income Partners' knowledge, the highest sale price in the last
two years in the secondary market was $601 per unit, other than the recent
block purchase by PIP Partners and a recent tender offer for a limited number
of units at $650 per unit.
For further information on the factors considered by Prometheus
Development Co. in approving the merger, please see the disclosure beginning on
page 27 of the accompanying proxy statement.
The merger will provide you with the opportunity to liquidate your
investment in Prometheus Income Partners for cash at a price and on terms that
Prometheus Development Co. believes are fair to the limited partners. If the
transaction occurs, the reporting obligations of the partnership under the
federal securities laws are expected to cease, although you will receive
periodic status reports on the construction defects, the repairs performed and
to be performed, and the conduct of the litigation. Unlike in a liquidation of
Prometheus Income Partners, the merger will not require limited partners to
continue to hold interests in Prometheus Income Partners until all contingent
liabilities have been settled.
The merger will not happen unless limited partners holding greater than
50% of the units approve the merger proposal. PIP Partners has agreed to vote
neutrally with respect to the merger proposal, meaning that PIP Partners will
vote its units for or against the proposal in the same proportion as the total
number of units voted by unaffiliated limited partners. For example, if
unaffiliated limited partners holding 67% of the units voted in person or by
proxy vote for the merger proposal, then PIP Partners will vote only 67% of its
units for the merger proposal. PIP Partners intends to vote all of its units for
the adjournment proposal described in the accompanying notice of meeting and
proxy statement.
The enclosed Proxy Statement is dated February _, 2001 and is first being
mailed to limited partners on or about February __, 2001. Only limited partners
who held their units at the close of business on February __, 2001 will be
entitled to vote at the meeting.
Prometheus Development Co., considering, among other factors, that the
limited partners will be able to liquidate their interests in Prometheus Income
Partners, has determined that the transaction is fair to the partnership and its
limited partners and recommends that you vote for the merger proposal and for
the adjournment proposal. A vote for the merger proposal is a vote to have PIP
Acquisition merge with and into Prometheus Income Partners, and to pay the
Liquidation Value, including the advance thereon of $1,200 per unit to each
limited partner (other than PIP Partners) in respect of the units held by them.
A vote for the adjournment proposal is a vote to allow Prometheus Development
Co. the discretion, in the event that insufficient proxies or votes for the
merger proposal have been received or cast to approve the merger, to adjourn the
meeting to allow Prometheus Development Co. to continue to solicit proxies.
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The enclosed Proxy Statement explains in detail the terms of the proposed
transaction and related matters. Please carefully review and consider all of
this information.
The approval of the merger is an important decision for Prometheus Income
Partners and its limited partners. Whether or not you plan to attend the
meeting, please complete, date, sign and promptly return the accompanying proxy
in the enclosed self-addressed stamped envelope. Returning your proxy does NOT
deprive you of your right to attend the meeting and to vote in person.
Your vote is important. If you return your proxy, you do not have to
attend the meeting in order to vote your units.
On behalf of the general partner, I thank you for your support and
appreciate your consideration of these matters.
Prometheus Development Co., Inc., a California
corporation
/s/ John J. Murphy
--------------------------
By: John J. Murphy
Title: Vice President
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the transaction, passed upon the
merits or fairness of this transaction or passed upon the accuracy or adequacy
of the disclosure contained in this document. Any representation to the contrary
is a criminal offense.
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PROMETHEUS INCOME PARTNERS
NOTICE OF MEETING OF LIMITED PARTNERS
Notice is hereby given that a meeting of the limited partners of
Prometheus Income Partners, a California limited partnership, will be held at
1:30 p.m., local time, on March __, 2001, at [Location].
The purposes of the meeting are:
1. To consider and vote on a proposal to approve the Agreement and Plan of
Merger dated as of June 22, 2000 (as amended and restated as of January 31,
2001) by and among Prometheus Income Partners, PIP Partners - General, LLC, a
California limited liability company, and PIP Acquisition, LLC, a California
limited liability company and a wholly owned subsidiary of PIP Partners, each an
affiliate of Prometheus Development Co., Inc. (the general partner of Prometheus
Income Partners), pursuant to which (a) PIP Acquisition will be merged with and
into Prometheus Income Partners and (b) each outstanding limited partner unit of
Prometheus Income Partners (other than units held by PIP Partners) will be
converted into the right to receive the deemed liquidation value of the units
they hold in accordance with the partnership's partnership agreement based on an
independent appraisal of the market value of the partnership's apartment
properties and after giving effect to the repair of existing construction
defects in these properties and any recovery in litigation currently being
pursued to the partnership relating to these defects in these properties. The
merger consideration is payable in cash at the time these defects in the
partnership's properties have been repaired and this litigation has been
resolved. A non-refundable cash advance on the merger consideration in the
amount of $1,200 per unit will be payable promptly following approval and
consummation of the merger. Approval of this proposal will also constitute
approval of all of the transactions contemplated by the merger, including the
merger of PIP Acquisition with and into Prometheus Income Partners.
2. To consider and vote on a proposal to permit Prometheus Development
Co., the general partner of Prometheus Income Partners, to adjourn the meeting
to permit further solicitation of proxies in the event that there are not
sufficient votes at the time of the meeting to approve the merger proposal.
3. To transact such other business as may properly come before the meeting
or any adjournment or postponement of the meeting.
These items of business are described in this Proxy Statement. Only
limited partners of Prometheus Income Partners of record at the close of
business on February __, 2001, the record date, are entitled to notice of and to
vote at the meeting. You may vote in person at the meeting, even if you have
returned a proxy. If you return your proxy, you do not have to attend the
meeting in order to vote your units.
If the merger proposal is approved and the merger is consummated, limited
partners will have no dissenter's or appraisal rights with respect to the
merger.
By: Prometheus Development Co., Inc., a
California corporation
/s/ John J. Murphy
------------------------------
By: John J. Murphy
Title: Vice President
Redwood City, California
February __, 2001
Whether or not you plan to attend the meeting, we urge you to complete,
date, sign and promptly return the accompanying proxy in the enclosed
self-addressed stamped envelope. Returning your proxy does NOT deprive you of
your right to attend the meeting and to vote your units in person.
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PROXY STATEMENT
of
PROMETHEUS DEVELOPMENT CO., INC.
Dated February _, 2001
QUESTIONS AND ANSWERS ABOUT THE TRANSACTION
The following questions and answers are intended to provide brief answers
to some commonly asked questions. These questions and answers do not, and are
not intended to, address all questions that may be important to you.
Q: What is the transaction?
A: The transaction is a statutory merger whereby PIP Acquisition, LLC, a wholly
owned subsidiary of PIP Partners - General, LLC and an affiliate of
Prometheus Development Co., Inc., the general partner of Prometheus Income
Partners, will merge into Prometheus Income Partners. If a majority of the
units of limited partner interest of Prometheus Income Partners are voted
for transaction and the other conditions to the transaction described below
are satisfied, PIP Acquisition will merge into Prometheus Income Partners,
you will be entitled to receive merger consideration in the sum equal to the
deemed liquidation value of the units you hold in accordance with the
partnership's partnership agreement based on an independent appraisal of the
market value of the partnership's apartment properties and after giving
effect to the repair of existing construction defects in these properties
and any recovery in pending litigation being pursued by the partnership
relating to those defects. This deemed liquidation value is referred to in
this proxy statement as the "Liquidation Value." Following the merger, you
will no longer be a limited partner of Prometheus Income Partners. Instead,
PIP Partners will hold all of the outstanding units.
Q: How will the Liquidation Value be determined?
A: The Liquidation Value will be fixed at the sum each limited partnership unit
would receive under the partnership's partnership agreement upon liquidation
after giving effect to (i) the sale of the partnership's rental properties
for the market value thereof as determined by a recently obtained
independent appraisal, (ii) the repayment in full of the existing mortgages
on these properties (together with any prepayment penalty in respect of such
repayment), (iii) the repair of existing construction defects in these
properties for a value equal to the ultimate cost to the partnership of
these repairs and (iv) the net recovery by the partnership (if any) in
litigation being prosecuted by the partnership with respect to these
construction defects. As of the date of the attached proxy statement, any
attempt to put a value on the cost of these repairs and the associated
litigation would be mere conjecture and potentially unfair to the limited
partners. Accordingly, the ultimate amount of the merger consideration will
be fixed and paid when the defects have been repaired and the litigation has
been finally resolved.
Q: When will the merger consideration be paid?
A: An advance on the merger consideration will be paid to the limited partners
(other than PIP Partners) in the amount of $1,200 per unit promptly
following the approval and consummation of the merger. This amount
represents a current estimate of the Liquidation Value, net of currently
restricted cash and a reserve for the repairs in the amount estimated by the
partnership necessary to repair known defects. If the
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Liquidation Value as finally determined exceeds the amount of this advance,
a final payment of the balance of the Liquidation Value will be paid
promptly following repair of the existing construction defects in the
partnership's properties and the final resolution of the pending litigation
regarding these defects. Even if the Liquidation Value as finally
determined is less than the amount paid as an advance to the limited
partners, the limited partners will not be required to return any part of
such advance. PIP Partners, which currently holds 3,451 units (18.2% of the
outstanding units), will not receive any merger consideration in respect of
the units it holds at the time of the merger.
Q: What are the principal benefits to the limited partners of the transactions?
A: The principal benefits include:
o Upon the completion of the transaction, the limited partners, other
than PIP Partners, will receive the Liquidation Value, in cash, in
exchange for each of their units and, accordingly, those limited
partners would no longer bear the risks inherent in the ownership and
operation of real property through Prometheus Income Partners. This
price has been fixed based on an independent appraisal of the market
value of partnership's apartment properties. The minimum amount of the
merger consideration to be paid to the limited partners is more than
$500 greater than the price paid for units in recent transactions of
which Prometheus Development Co. is aware, other than a privately
negotiated purchase of a large block of units by PIP Partners.
o The merger will discontinue the recognition by the limited partners
of undistributed income for tax purposes (other than with respect to the
deferred cash portion of the merger consideration, if any, to be paid
following completion of repairs and final resolution of the pending
litigation) and will allow limited partners to receive cash to at least
partially pay tax liabilities previously incurred with respect to
undistributed income of Prometheus Income Partners. The properties of
the partnership have significant construction defects. Because of the
need to accumulate cash reserves to satisfy obligations to the
mortgageholders on Prometheus Income Partners' properties with respect
to these defects, and the need determined by Prometheus Development Co.
for additional cash reserves to fix these defects, no distributions to
limited partners have been made since 1996, yet the limited partners
have continued to recognize income with respect to the units and may
have incurred tax liabilities in respect thereof. The general partner
estimates that as of September 30, 2000, these tax liabilities
approximated $103 per unit owned by each limited partner, assuming their
prior use of all passive activity losses generated by the partnership,
that the maximum marginal income tax rates for an individual resident in
California would be applicable and that such income would be treated for
this purpose as ordinary income. The property manager of the
partnership's properties, an affiliate of the general partner, has been
paid certain fees and reimbursed certain expenses under its management
contract during this period.
o You will no longer bear the risk that the cost to repair
construction defects in the partnership's properties will exceed current
estimates of, and cash reserves for, these amounts.
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o You will not longer bear the risk of loss of the partnership's
properties through fire, earthquake or condemnation.
o You will retain the potential benefit of recovery in pending
litigation.
o You will receive at least $1,200 in cash for each unit you hold,
regardless of any adverse outcome in pending litigation, costs in excess
of current estimates to repair existing defects, any adverse outcome in
certain claims currently being pursued against the partnership and any
reduction in the value of the partnership's properties.
Q: What are the principal detriments to the limited partners of the
transactions?
A: The principal detriments include:
o No representative unaffiliated with Prometheus Development Co. (the
general partner) has been retained to act solely on behalf of limited
partners for the purposes of negotiating the terms of the merger.
Prometheus Income Partners, PIP Partners, PIP Acquisition and Prometheus
Development Co. are all under the common control of Sanford Diller. The
interests of these entities are different from and in substantial
conflict with those of the unaffiliated limited partners. Because of the
relationship among Prometheus Development Co., PIP Partners and PIP
Acquisition, the merger and all of the proposed transactions related to
the merger as discussed in this document are not the product of
arm's-length negotiation between unaffiliated parties. PIP Acquisition
and PIP Partners are making this offer with a view to ultimately making
a profit and, therefore, there is a conflict that is described more
fully below between their desire to acquire your units at a relatively
lower price and your desire to sell your units at a relatively higher
price.
o Following the merger, the limited partners, other than PIP
Partners, will cease to participate in future earnings or growth, if
any, of Prometheus Income Partners or benefit from increases, if any, in
the value of the partnership or its properties.
o Limited partners do not have any dissenters' rights or other rights
of appraisal under the state law which governs Prometheus Income
Partners, the partnership agreement of Prometheus Income Partners or
otherwise in connection with the merger proposal. Therefore, dissenting
limited partners do not have the right to have their units independently
appraised if they disapprove of the merger.
o The limited partners will forego alternatives to the merger. These
alternatives might include a separate sale of all of the assets of
Prometheus Income Partners (which could be for more or less than the
appraised market value of the partnership's properties on the basis of
which the merger consideration was calculated) and subsequent
liquidation of Prometheus Income Partners, other possible PIP Partners
acquisitions of units or the continuation of Prometheus Income Partners
under its current ownership structure.
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o There is no assurance that there will be any recovery in pending
litigation, that any such recovery will exceed actual costs to repair
existing construction defects, or that any further merger consideration
will be distributed beyond the initial advance of $1,200 per unit.
Q: Why doesn't Prometheus Income Partners just sell all of its properties and
liquidate?
A: Prometheus Development Co. believes that the merger provides the limited
partners with an opportunity to dispose of their investment in Prometheus
Income Partners more quickly than would likely occur in a liquidation of
Prometheus Income Partners' properties. Unlike in a liquidation, the merger
proposal will not require limited partners to continue to hold interests in
Prometheus Income Partners until all contingent and other liabilities of
Prometheus Income Partners have been settled.
In addition, in a liquidation it is uncertain what price the limited
partners would receive. Prometheus Development Co. does not believe that the
underlying properties would be fairly valued in the market due to the
current construction defects affecting the properties and the uncertainty of
recovery in litigation with respect to these construction defects.
Prometheus Development Co. and PIP Partners believe that a third-party would
apply a greater discount to the value of the units as a result of pending
litigation than that applied by PIP Partners, in part because PIP Partners
and Prometheus Development Co. believe they are in a better position to
prevail in this litigation than a third party would likely be, in part
because Prometheus Development Co. and its affiliates have more experience
and knowledge about this litigation and the underlying properties and can
better estimate the risks inherent in this litigation and the likelihood of
the partnership prevailing.
Q: How was the amount that I will receive for my units determined?
A: Prometheus Development Co., and PIP Partners, PromHill, The DNS Trust, Helen
Diller and Sanford Diller, as the acquiring parties, obtained an independent
appraisal of the partnership's properties based on sales comparisons of
similar properties and capitalization of the income generating capabilities
of these property and without regard to existing defects. This appriasal
determined the combined market value of these properties to be $68,900,000.
The merger consideration was fixed at the value the holder of each limited
partnership unit would be entitled to receive for each unit if the
partnership were liquidated immediately following a sale of these properties
at the appraised market value after giving effect to each of the following:
o the repayment (including prepayment penalties) of existing mortgages on
these properties.
o the cost to repair existing construction defects in these
properties.
o the net recovery (if any) by the partnership in litigation being
pursued in respect of these construction defects.
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o reconciliation of other assets and liabilities of the partnership
on the date of the merger.
Prometheus Development Co. and the acquiring parties considered this
methodology to be the fairest way to determine the merger considering given
the inherent uncertainties in determining the actual cost to repair existing
defects and in determining the value of pending litigation. This calculation
retains for the limited partners their economic interest in any recovery in
pending litigation, and also retains for them the benefit if the cost of
repairs proves to be less than current estimates.
Q: What do I get if the merger takes place?
A: Following the merger of Prometheus Income Partners and PIP Partners, you
will be entitled to receive the Liquidation Value for each unit you hold.
Beyond this amount you will have no right to receive additional
distributions from Prometheus Income Partners, including any distributions
of current cash reserves if these reserves were to become available for
distribution at some point in the future or the proceeds the partnership
will receive it if prevails in the pending litigation. If Prometheus Income
Partners does not participate in the merger, you will continue to have the
current right to receive distributions, if any, in accordance with the
partnership agreement of Prometheus Income Partners when cash becomes
available for distribution.
Please note that cash distributions to limited partners were suspended in
1996. The terms of the mortgages on Prometheus Income Partners' properties
require that a security account be maintained for each property to cover
contingent liabilities with respect to construction defects in these
properties. These security accounts are additional collateral for the
lender, and total, as of December 31, 2000, approximately $5,256,000.
Because Prometheus Development Co. believes there is no current prospect for
settling the construction defect litigation or of refinancing the properties
to remove these covenants, there are no current prospects for the
liquidation and distribution of these accounts to limited partners. In
addition, pursuant to its discretion under the partnership agreement of
Prometheus Income Partners, Prometheus Development Co. currently maintains
an additional reserve account totaling as of December 31, 2000 approximately
$3,472,000 to cover additional contingent liabilities related to
construction defects. After the merger, the limited partners will have no
rights to any eventual liquidation of these accounts other than as such
accounts are considered in the calculation of the Liquidation Value on the
effective date of the Merger.
Q: What is the status of the and construction defects and the related
litigation?
A: The hardboard siding used at both properties owned by Prometheus Income
Partners is failing to perform as expected. Moisture has accumulated in the
walls of the apartment projects through a combination of construction
defects and endemic problems with the hardboard siding, causing rot and
decay in the wood, framing and siding. In addition to the hardboard siding
problems, routine roofing inspection has uncovered failing roof substrate at
dormer roof assemblies for both properties owned by Prometheus Income
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Partners. This has been sufficient to cause deflection and decay of the roof
and its structural support, requiring replacement.
Two lawsuits have been filed by Prometheus Income Partners, one for each
property. Although settlement discussions have been ongoing for the past two
years, Prometheus Development Co. does not believe there is any present
prospect for the imminent settlement of this litigation. The total claimed
damages for both properties currently is approximately $19.6 million. A
claim has also been filed by one of the defendants in these lawsuits against
the partnership. The general partner does not believe there is a substantial
risk of recovery against the partnership on this claim, but there is no
assurance a judgment will not be rendered against the partnership based on
this claim.
PIP Partners and Prometheus Development Co. believe that the general partner
is in a better position to litigate these lawsuits than an unaffiliated
third party because of its experience in similar disputes. Affiliates of the
general partner are owners of properties involved in five other similar
lawsuits. One of these suits was successfully litigated. Despite this
experience, there is a significant risk that Prometheus Income Partners will
be unsuccessful in its lawsuits.
Q: Does the transaction require the vote of the limited partners?
A: Yes. Approval of the merger proposal by the limited partners is a condition
to Prometheus Income Partners' participation in the merger. The affirmative
vote of the limited partners holding more than 50% of the units outstanding
as of February __, 2001, is required to approve the merger proposal. The
record date is the date fixed by Prometheus Development Co. to determine the
limited partners entitled to vote at the meeting.
PIP Partners has agreed to vote neutrally with respect to the merger
proposal, meaning that PIP Partners will vote its units for or against the
proposal in the same proportion as the total number of units voted by
unaffiliated limited partners. For example, if unaffiliated limited partners
holding 67% of the units voted in person or by proxy vote for the merger
proposal, then PIP Partners will vote only 67% of its units for the merger
proposal. PIP Partners intends to vote all of its units for the adjournment
proposal described in the accompanying notice of meeting and this proxy
statement.
Q: If the limited partners approve the merger, is it certain that Prometheus
Income Partners will participate in the merger?
A: No. Prometheus Income Partner's participation in the merger is subject to
several other closing conditions, including: obtaining any required consent
to the merger from the partnership's lender on terms satisfactory to PIP
Acquisition and PIP Partners, if necessary; the partnership's and its
properties having generally unencumbered title to its properties except for
known existing encumbrances; and no material adverse effect of any recent
occurrences on the properties or the partnership. In addition, PIP Partners
must have adequate resources to pay the merger consideration. PIP Partners
believes that it has or will have such resources.
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Limited partners should be aware that the satisfaction or waiver of each of
the closing conditions is a condition to Prometheus Income Partners'
participation in the transaction. Therefore, it is possible that the failure
of the partnership to satisfy a condition could cause the transaction to
fail to close. The parties to the Second Amended and Restated Agreement and
Plan of Merger dated as of January 31, 2001 by and among Prometheus Income
Partners, PIP Partners and PIP Acquisition also have the right to terminate
the transaction in its entirety by mutual agreement, but do not have any
current intention of doing so.
Q: What happens if I vote against the merger proposal?
A: If you vote against the merger proposal, but holders of more than 50% of the
units in Prometheus Income Partners outstanding as of the record date vote
for the merger proposal and Prometheus Income Partners participates in the
transaction, you will be required to give up your units and entitled to
receive the Lquidation Value in cash (including an immediate non-refundable
advance of $1,200 per unit thereon) for each of your units. If you fail to
return your proxy or mark "ABSTAIN" on your proxy, the effect will be the
same as a vote against the merger proposal.
Q: Do limited partners have dissenters' or appraisal rights in connection with
the merger?
A: No. Limited partners are not entitled to exercise dissenters' rights or
other rights of appraisal in connection with the merger.
Q: When do you expect the merger to be completed?
A: We are working to complete the merger as quickly as possible. We expect to
complete the merger as soon as practicable following the meeting, or within
ten days of the meeting, on March __, 2001.
Q: What are the tax consequences of the merger to the limited partners?
A: In general, a limited partner will recognize gain or loss on the conversion
of units into cash as a result of the merger. This gain or loss will be
equal to the difference between the limited partner's "amount realized" from
the merger and the limited partner's adjusted tax basis in the units
converted. The "amount realized" will be a sum equal to the amount of the
initial advance payment ($1,200 per unit) on the merger consideration, the
amount of the deferred payment of the merger consideration with respect to
the litigation and construction defect repairs (if any), plus the amount of
Prometheus Income Partners' liabilities allocable to the units as determined
under Section 752 of the Internal Revenue Code.
This gain or loss should be treated as capital gain or loss. However, a
portion of this gain or loss that is attributable to "unrealized
receivables" (which includes recapture of some previous depreciation
deductions) and "inventory items" (as defined in section 751 of the Internal
Revenue Code of 1986 as amended) may be treated as ordinary income or
ordinary loss.
-7-
Because the merger consideration is uncertain as to the ultimate amount, the
timing of the gain or loss associated with the deferred payment (if any) and
ultimately the overall tax treatment of the amount realized is uncertain.
Under the so-called "open transaction" doctrine, no current tax consequence
attaches to the receipt of an item of property whose fair market value
cannot be reasonably determined. Limited partners may wish to consult their
tax advisors concerning the possible applicability of the open transaction
doctrine to the receipt of the deferred payment. If the open transaction
doctrine were applicable to this deferred payment, (i) the payment would not
be taken into account in determining a limited partner's gain upon receipt
of the merger consideration and any gain would be limited to the extent the
amount realized with respect to the advance payment exceeds the limited
partner's tax basis; (ii) the limited partner would take no tax basis in the
deferred payment; and (iii) amounts thereafter received by virtue of the
deferred payment will be treated partially as interest and the balance as
capital gain or loss to the extent it differs from any remaining basis in
the limited partner's units.
It is the position of the Internal Revenue Service, reflected by Treasury
Regulations, that only in "rare and extraordinary cases" is the value of the
property so uncertain that open transaction treatment is available.
Accordingly, the Internal Revenue Service may require a limited partner to
allocate his tax basis in the Partnership units, in general, over a 15 year
period (or a shorter period if it is certain that no further payments will
be received). Under this scenario, it would be possible for a limited
partners to recognize significant capital gain upon the receipt of the
advance payment and potentially recognize a significant capital loss
(subject to significant limitations as to usage) in the year the deferred
payment is actually received.
Due to the lack of available precedent and the inherently factual nature of
the question, tax counsel are not able to express any view as to the
availability of open transaction reporting in respect of the deferred
payment. Accordingly, holders are urged to consult their tax advisors
regarding the issue.
-8-
Q: What other matters will be voted on at the meeting?
A: In addition to asking you to vote on the merger proposal, we are asking you
to consider and vote on a proposal to permit Prometheus Development Co. to
adjourn the meeting to permit further solicitation of proxies in the event
that there are not sufficient votes at the time of the meeting to approve
the merger proposal.
A vote for the merger proposal is not also a vote for the adjournment
proposal. You must vote separately on each proposal. The affirmative vote of
limited partners holding more than 50% of the units present in person or by
proxy at the meeting is required to approve the adjournment proposal. If you
fail to return your proxy and do not vote in person at the meeting, it will
have no effect on the adjournment proposal. If you mark "ABSTAIN" on your
proxy and do not vote in person at the meeting, the effect will be the same
as a vote against the adjournment proposal. Approval of the adjournment
proposal by the limited partners is not a condition to Prometheus Income
Partners' participation in the merger. Approval of the adjournment proposal
by the limited partners will permit the adjournment of the meeting to
solicit additional proxies in the event that there are not sufficient votes
at the time of the meeting to approve the merger proposal.
Prometheus Development Co. recommends that you vote for the adjournment
proposal. PIP Partners intends to vote all of its units in favor of the
adjournment proposal.
Other than the merger proposal and the adjournment proposal, Prometheus
Development Co. does not expect to ask you to vote on any other matters at
the meeting. However, if matters other than the merger proposal and the
adjournment proposal are properly brought before the meeting, or any
adjournments or postponements of the meeting, the persons appointed as
proxies will have discretion to vote or act on those matters according to
their best judgment.
Q: What do I need to do now?
A: Please complete, date and sign your proxy and then return it in the enclosed
envelope as soon as possible so that your units may be represented at the
meeting.
Q: Can I fax my proxy vote?
A: Yes. First complete, date and sign your proxy. Then fax the proxy to [Fax
Number].
Q: May I change my vote after I have mailed my signed proxy?
A: Yes. Just send in a later dated, signed proxy prior to the meeting or attend
the meeting and vote in person. Taking either of these steps will revoke any
previously submitted proxy. You may also revoke any previously submitted
proxy by written notice to Prometheus Development Co. prior to the meeting.
Additional proxy cards are available from MacKenzie Partners, Inc.,
Prometheus Development Co.'s proxy solicitor for the meeting.
-9-
Q: When can I expect to receive payment for my units?
A: After the consummation of the merger, Prometheus Income Partners will send
you a letter of transmittal. Upon receipt of a completed letter of
transmittal from you, a check for $1,200 per unit you own at that time will
be mailed to you. A check for the balance of the Liquidation Value (if any)
will be mailed to you promptly following the completion of the repairs of
the construction defects and the final resolution of pending litigation.
-10-
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have more questions about the transaction or would like additional
copies of this Proxy Statement, you should contact:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, NY 10010
(800) 322-2885
proxy@mackenziepartners.com
-11-
SUMMARY
This summary highlights selected information included in this Proxy
Statement. This summary may not contain all of the information that is important
to you. To understand the merger proposal and the proposed merger fully and for
a more complete description of the legal terms of the merger and other
considerations that may be important to you, you should read carefully this
entire document and the other documents to which we have referred you. The terms
of the merger are contained in the merger agreement, a copy of which is attached
to this Proxy Statement as Appendix A, and which is incorporated in this Proxy
Statement by reference.
Parties to the Transaction
Prometheus Income Partners
Background. Prometheus Income Partners, a California limited partnership,
was formed on April 15, 1985. Prometheus Development Co., Inc., a California
corporation, is the general partner of the partnership. The principal business
of Prometheus Income Partners is to invest in, construct, hold, operate, and
ultimately sell two residential rental properties in Santa Clara, California:
Alderwood Apartments and Timberleaf Apartments. Prometheus Income Partners is
governed by the California Revised Limited Partnership Act and its Second
Amended and Restated Limited Partnership Agreement, dated October 1, 1992, a
copy of which is attached to this Proxy Statement as Appendix B.
The principal investment objectives of Prometheus Income Partners are to
preserve and protect Prometheus Income Partners' capital, to obtain capital
appreciation from the sale of its 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 Prometheus Income Partners.
No public trading market exists or is expected to be established for the
units, although an informal secondary market for trading in units has developed.
Prometheus Development Co. is aware of three brokers who quote prices in units,
and through which a small number of units, usually less than 1% of issued and
outstanding units, are traded each year. Historically, limited liquidity has
been provided in this market due to occasional purchases of units by PIP
Partners - General, an affiliate of the General Partner of the partnership, and
others unaffiliated with the general partner directly from limited partners and
through these brokers. PIP Partners has purchased these units to increase its
equity stake in Prometheus Income Partners. Other than the tender offer
disclosed below under the caption "Recent Tender Offers" beginning on page 50,
PIP Partners never solicited offers from others to sell their units, but instead
responded from time to time to limited partners who expressed interest in
selling their units. PIP Partners has acquired a total of 3,451 units, all since
January 1, 1997.
The principal executive offices of Prometheus Income Partners are located
at 350 Bridge Parkway, Redwood City, California 94065-1517, telephone number
650-596-5393.
Construction Defects; Reserve Accounts. The hardboard siding used at both
Alderwood and Timberleaf is failing to perform as expected. This has resulted in
certain construction
-12-
defects in the partnership's properties. Prometheus Development Co. has learned
that this has occurred in a number of similar projects throughout the United
States. Two lawsuits, one for each property, have been filed by Prometheus
Income Partners against parties it believes to be responsible for these and
other construction defects. Although settlement discussions have been ongoing
for the past two years, Prometheus Development Co. does not believe there is any
present prospect for the imminent settlement of this litigation.
Under Prometheus Income Partners' financing arrangements, it is required
to maintain a security account with respect to each property to fund correction
of defects in the properties. Prior to the refinancing, quarterly cash
distributions to the limited partners were suspended in 1996, and this cash was
reserved for contingent liabilities with respect to construction defects. This
cash was then deposited into security accounts as additional collateral for the
lender who provided the funds for the refinancing. Cash held in these security
accounts was $3,039,000 and $2,217,000 for Alderwood and Timberleaf,
respectively, as of December 31, 2000.
Principal Unitholders. Other than PIP Partners, which owns 18.2% of the
outstanding units, no person of record owns or is known by Prometheus Income
Partners to own beneficially more than 5% of the outstanding units.
Prometheus Development Co., Inc. a California corporation, is the general
partner of Prometheus Income Partners. The principal business of Prometheus
Development Co. is acting as general partner of limited partnerships and
managing their real estate. All of the outstanding shares of capital stock of
Prometheus Development Co. are held by Sanford N. Diller and Helen P. Diller as
Trustees of The DNS Trust. Although Helen Diller has the same rights as Sanford
Diller with respect to the management of The DNS Trust and Prometheus
Development Co., Ms. Diller is not involved in the operations of The DNS Trust
or any of the other entities described in this document. Instead, Mr. Diller
ultimately controls and manages these entities.
The principal executive offices of Prometheus Development Co. are located
at 350 Bridge Parkway, Redwood City, California 94065-1517, telephone number
650-596-5393.
PIP Partners - General, LLC
PIP Partners - General, LLC was formed in 1996 to acquire and hold units.
PIP Partners - General conducts no other business. PromHill, Inc., a corporation
owned and controlled by Sanford N. Diller, is the Manager of PIP Partners. 99%
of the member interests of PIP Partners - General are held by Sanford N. Diller
and Helen P. Diller as Trustees of The DNS Trust, and 1% of these interests are
held by Jaclyn Safier, the Dillers' daughter. The DNS Trust is also the sole
shareholder of Prometheus Development Co. Thus, Mr. Diller controls Prometheus
Development Co., PromHill, The DNS Trust and PIP Partners - General.
PIP Partners - General initially acquired units in a tender offer
described below. Since that time, PIP Partners -General has acquired additional
units. In June 2000, PIP Partners - General purchased 1,487.5 units from Prom
Investment Partners, a third party unaffiliated with Prometheus Development Co.,
PIP Partners - General or Mr. Diller, and two investment funds (Liquidity Fund
Growth--Plus Partners, a California limited partnership and Liquidity Fund
Appreciation and Income Partners, a California limited partnership) affiliated
with Prom
-13-
Investment Partners but also unaffiliated with Prometheus, PIP Partners -
General or Mr. Diller for $1,200 per unit. The similarity of the name of Prom
Investment Partners does not reflect any affiliation with Prometheus Development
Co. or any of its affiliates; the use of such nomenclature is common in the
investment community. This purchase price was arrived at pursuant to
arm's-length negotiations. Under its agreement with Prom, if PIP Partners -
General acquires additional units prior to June 2002 for a price greater than
$1,200 per unit, PIP Partners has agreed to pay Prom such excess with respect to
each unit purchase by PIP Partners - General from Prom.
The principal executive offices of PIP Partners - General are located at
350 Bridge Parkway, Redwood City, California 94065-1517, telephone number
650-596-5393.
PIP Acquisition
PIP Acquisition, LLC is a newly formed California limited liability
company which was organized by PIP Partners in connection with the merger. PIP
Partners owns all of the member interests in PIP Acquisition. Thus, The DNS
Trust and Sanford Diller ultimately control PIP Acquisition. The principal
executive offices of PIP Acquisition are located at 350 Bridge Parkway, Redwood
City, California 94065-1517, telephone number 650-596-5393.
For a more complete description of the parties involved in the merger and the
construction defects and the litigation related to them, please see the
disclosure under the caption "The Parties" beginning on page 46.
Effects of the Transaction
In the merger, if approved and consummated, PIP Acquisition will merge
with and into Prometheus Income Partners. Each unit in Prometheus Income
Partners will be converted at the effective time of the merger into the right to
receive merger consideration. The merger consideration will be fixed at the sum
each limited partnership unit would receive under the partnership's partnership
agreement upon liquidation after giving effect to (i) the sale of the
partnership's rental properties for the market value thereof as determined by a
recently obtained independent appraisal, (ii) the repayment in full of the
existing mortgages on these properties (together with any prepayment penalty in
respect of such repayment), (iii) the repair of existing construction defects in
these properties for a value equal to the ultimate cost to the partnership of
these repairs and (iv) the net recovery by the partnership (if any) in
litigation being prosecuted by the partnership with respect to these
construction defects. As of the date of this proxy statement, any attempt to put
a value on the cost of the repairs and the associated litigation would be mere
conjecture and potentially unfair to the limited partners. Accordingly, the
ultimate amount of the merger consideration will be fixed and paid when the
defects have been repaired and the litigation has been finally resolved. The
liquidation value per limited partnership unit calculated as set forth above is
referred to in this proxy statement as the "Liquidation Value."
An advance on the Liquidation Value will be paid to the limited partners
(other than PIP Partners- General) in the amount of $1,200 per unit promptly
following the approval and consummation of the merger. This amount represents a
current estimate of the Liquidation Value, net of currently restricted cash and
a reserve for the repairs in the amount estimated by the
-14-
partnership to be necessary to repair known defects. If the Liquuidation Value
as finally determined exceeds the amount of this advance, a final payment of the
balance of the Liquidation Value will be paid promptly following repair of the
existing construction defects in the partnership's properties and the final
resolution of the pending litigation regarding these defects. If the Liquidation
Value as finally determined is less than the amount paid as an advance to the
limited partners, the limited partners will not be required to return such
advance. PIP Partners - General, which currently holds 3,451 units (18.2% of the
outstanding units), will not receive any merger consideration in respect of the
units it holds at the time of the merger.
Following completion of the transaction, the current limited partners
other than PIP Partners will no longer have any interest in, and will not be
limited partners of, Prometheus Income Partners and, therefore, will not
participate in Prometheus Income Partners' future earnings and potential growth.
PIP Partners will become the owner of all outstanding units. Following the
completion of the transaction, Prometheus Income Partners expects to cease to be
a reporting company and the units will cease to be registered under the
Securities Exchange Act of 1934, although you will receive periodic status
reports on the construction defects, the repairs performed and to be performed,
and the conduct of the litigation.
Fairness of the Merger
Each of Prometheus Development Co., PIP Partners, PromHill, PIP
Acquisition, The DNS Trust, and the Dillers believes the terms of the merger to
be fair to the partnership and its limited partners. For a discussion of the
fairness of the merger, please see the discussion under the caption "Fairness of
the Transaction" beginning on page 29.
The Meeting
The meeting of limited partners of Prometheus Income Partners will be held
at 1:30 p.m., local time, on March __, 2001, at [location]. At the meeting,
limited partners will be asked to consider and vote on the merger proposal. In
addition, Prometheus Development Co. is asking the limited partners to consider
and vote on a proposal to permit Prometheus Development Co. to adjourn the
meeting to permit further solicitation of proxies in the event that there are
not sufficient votes at the time of the meeting to approve the merger proposal.
The merger agreement provides that Prometheus Development Co. will recommend the
adjournment of the meeting for ten days if on the date of the meeting Prometheus
Income Partners has not received duly executed proxies that constitute a
sufficient number of votes to approve the merger proposal. However, if proxies
representing enough votes to defeat the merger proposal regardless of the number
of additional votes later cast in favor of the proposal have been submitted, the
meeting will not be adjourned to permit further solicitation.
Other than the merger proposal and the adjournment proposal, Prometheus
Development Co. does not expect to ask the limited partners to vote on any other
matters at the meeting. However, if matters other than the merger proposal and
the adjournment proposal are properly brought before the meeting, or any
adjournments or postponements of the meeting, the persons appointed as proxies
will have discretion to vote or act on those matters according to their best
judgment.
-15-
As of the record date, PIP Partners beneficially owned an aggregate of
3,451 units, representing in the aggregate approximately 18.2% of the units
outstanding on the record date. Pursuant to the Amended and Restated Agreement
and Plan of Merger entered into among the partnership, PIP Partners and PIP
Acquisition, PIP Partners has agreed to vote neutrally with respect to the
merger proposal, meaning that PIP Partners will vote its units for or against
the proposal in the same proportion as the total number of units voted by the
other limited partners. For example, if unaffiliated limited partners holding
67% of the units voted in person or by proxy vote for the merger proposal, then
PIP Partners will vote 67% of its units for the merger proposal. PIP Partners
intends to vote all of its units for the adjournment proposal described in the
accompanying notice of meeting and proxy statement.
To be approved, a majority of units, or 9,498 units, must be voted in
favor of the merger proposal. Based on the following computations, limited
partners unaffiliated with PIP Partners holding a minimum of 6,047 units must be
cast in favor of the proposal for it to be possible that the proposal will be
approved, and if limited partners unaffiliated with PIP Partners holding at
least 7,772 units (a majority of the units held by limited partners not
affiliated with PIP Partners) are cast in favor of the proposal then the
proposal will be approved.
o If limited partners unaffiliated with PIP Partners holding only 6,047
units vote at the Meeting, and all of these votes are cast for the
merger proposal, then pursuant to the Agreement and Plan of Merger, PIP
Partners will be obligated to vote all of its 3,451 units in favor of
the proposal. Thus, a total of 9,498 votes will be cast in favor of the
proposal, and the proposal will be approved.
o If limited partners unaffiliated with PIP Partners holding 15,544 units
(all of the outstanding units held by unaffiliated limited partners)
vote at the Meeting, and 7,772 of these votes are in favor of the
proposal, PIP Partners will be obligated to vote 1,726 units in favor
of the proposal and 1,725 units against the proposal. Thus, a total of
9,498 votes will be cast in favor of the proposal, and the proposal
will be approved.
Record Date; Voting Power
Prometheus Development Co. has fixed the close of business on February __,
2001, as the record date for determination of the limited partners entitled to
notice of and to vote at the meeting and any adjournment or postponement of the
meeting. As of the record date, there were 18,995 units, including those units
held by PIP Partners, issued and outstanding and held of record by ______
holders. Holders of record of units are entitled to one vote for each unit that
they hold on the merger proposal, the adjournment proposal and any other matter
that may properly come before the meeting.
Quorum; Vote Required
The necessary quorum for the transaction of business at the meeting is the
presence in person or by proxy of limited partners holding a majority of the
units outstanding on the record date. For purposes of determining the presence
of a quorum, proxies marked "ABSTAIN" will be counted as present at the meeting.
-16-
The affirmative vote of limited partners holding greater than 50% of the
units outstanding on the record date is required to approve the merger proposal.
The affirmative vote of limited partners holding more than 50% of the units
present in person or by proxy at the meeting is required to approve the
adjournment proposal. Because PIP Partners has agreed to vote its shares in the
same proportion as the other limited partners, the merger can be approved
without the affirmative vote of at least a majority of the units held by the
limited partners unaffiliated with Prometheus Development Co., PIP Partners and
Mr. Diller if a number of these holders do not vote in person or by proxy at the
meeting. For example, if unaffiliated limited partners holding 33% of the units
(and no others), which constitute less than a majority of the units held by
non-affiliates, were to vote at the meeting and all such units were voted in
favor of the merger, these votes, together with the affirmative vote of the
units held by PIP Partners, would be sufficient to approve the merger.
A vote for the merger proposal is not also a vote for the adjournment
proposal. You must vote separately on each proposal.
If you mark "ABSTAIN" on your proxy and do not vote in person at the
meeting, the effect will be the same as a vote against the merger proposal. If
you fail to return your proxy and do not vote in person at the meeting, as a
result of the agreement of PIP Partners to vote as have the voting limited
partners, the effect on the merger proposal will depend on how other limited
partners vote. If you fail to return your proxy, your units will have no effect
on the outcome of the adjournment proposal. If you mark "ABSTAIN" on your proxy
and do not vote in person at the meeting, the effect will be the same as a vote
against the adjournment proposal. If you sign and return your proxy but do not
give instructions on your proxy, your units will be voted for the merger
proposal and for the adjournment proposal.
Approval of the merger proposal by the limited partners is a condition to
Prometheus Income Partners' participation in the merger. Therefore, if we do not
receive votes for the merger proposal from limited partners holding greater than
50% of the units (including those units held by PIP Partners and voted as
described above), the merger proposal will not be approved and Prometheus Income
Partners will not participate in the merger. Approval of the adjournment
proposal by the limited partners is not a condition to Prometheus Income
Partners' participation in the merger. Approval of the adjournment proposal by
the limited partners will permit the adjournment of the meeting to solicit
additional proxies in the event that there are not sufficient votes at the time
of the meeting to approve the merger proposal.
Changing Your Vote
You may revoke your proxy at any time before it is voted at the meeting
(1) by sending in a later dated, signed proxy, (2) by written notice of
revocation to Prometheus Development Co., or (3) by attending the meeting and
voting in person.
-17-
Structure of the Transaction
The following depicts the current ownership and control structure of the
partnership:
Pre-Transaction
Pre-Transaction
---------------
- - - - - - - - - - - - -
| |
| Sanford Diller and |
| Helen Diller |
| _ _ _ _ _ _ _ _ _ _ _ _|
|
|
| 100%, as trustees
|
- - - - - - - -|- - - -
| |
| DNS Trust |
| And Family |
| | ________________
| _ _ _ _ _ _ _ _ _ _ _| | |
| |
100% | | Jaclyn Safier |
| | |
---------------------------------------| |________________|
| | 99% | 1%
| | |
| | |-------------------
- - - - - - -|- - - - - - |- - - - - -| - - -| - |
| | | |
| Prometheus | | PIP Partners |
| Development Co. | | General |
| - - - - - - - - - - - - | |- - - - - - - - - - - |
| |
| |
| | 100%
| - - - - - - |- - - - - - - - - - - - - - - - - - -
| | | | | | |
| | PIP Acquisition | | Limited | | Limited |
| | | | Partner(1) | . . . . . | Partner(x_ |
| |- - - - - - - - - -| | - - - - - - - | | - - - - - - -|
| | | |
| | | |
| | 18% | 81% |
| | | |
----------------------------- -------------------------------------------------------
| |
| 1%* | 99%
| |
- - -|- - - - - - - - - - -
| |
| Prometheus Income |
| Partners |
| - - - - - - - - - - - - -|
* Prometheus Development Co.'s interest
is a general partner interest, as more
fully described under the caption "The
Partnership Agreement of Prometheus
Income Partners" beginning on page 51.
-18-
Assuming Prometheus Income Partners approves the merger proposal and
participates in the merger, the following figures depict the structure of the
transaction and the ownership interest of the parties to the transaction:
Post-Transaction
----------------
- - - - - - - - - - - -
| |
| Sanford Diller and |
| Helen Diller |
| _ _ _ _ _ _ _ _ _ _ _|
|
|
| 100%, as trustees
|
- - - - - - - -| - - -
| |
| DNS Trust |
| And Family |
| _ _ _ _ _ _ _ _ _ _ _|
| _________________
| | |
| | Jaclyn Safier |
________________________________________|_________________________________ |________________|
| | |
| 100% | 99% | 1%
| | |
- - - - -|- - - - - - | - - - - - - - - - |
| | | |
| Prometheus | | PIP Partners - |
| Development Co. | | General |
| _ _ _ _ _ _ _ _ _ _ _| |_ _ _ _ _ _ _ _ _ _|
| |
| |
| 1%* | 99%
| |
___________________________________ __________________________________
| |
| |
|- - - - - - - - - - - |
| |
| Prometheus Income |
| Partners |
|- - - - - - - - - - - |
* Prometheus Development Co.'s
interest is a general partner
interest, as more fully described
under the caption "The Partnership
Agreement of Prometheus Income
Partners" beginning on page 51.
-19-
Conflicts of Interest
In considering the recommendations of each of Prometheus Development
Co., Prometheus Income Partners, PIP Partners, PromHill, The DNS Trust, Helen
Diller and Sanford Diller, limited partners should be aware that PIP Partners,
PromHill, The DNS Trust, Helen Diller and Sanford Diller, as the acquiring
parties of units, have interests in the transaction or relationships that
present actual or potential conflicts of interest in connection with the
transaction. Prometheus Income Partners, PIP Partners, PIP Acquisition,
PromHill, The DNS Trust and Prometheus Development Co. are all under the common
control of Sanford Diller. The interests of these entities are different from
and in substantial conflict with those of the limited partners. Because of the
relationship among Prometheus Development Co., PIP Partners and PIP Acquisition,
the merger and all of the proposed transactions related to the merger as
discussed in this document are not the product of arm's-length negotiation
between unaffiliated parties. PIP Acquisition and PIP Partners are making this
offer with a view to ultimately making a profit and, therefore, there is a
conflict that is described more fully in the accompanying materials between
their desire to acquire your units at a relatively lower price and your desire
to sell your units at a relatively higher price.
The transaction has been initiated and structured by Prometheus
Development Co. and individuals who are managers of Prometheus Development Co.
The transaction provides some benefits to the affiliates of Prometheus
Development Co. that are in conflict with the benefits provided to the limited
partners. Sanford Diller, as the natural person ultimately controlling both
Prometheus Development Co. and PIP Partners, has an economic interest separate
from that of the limited partners in structuring the transaction to maximize the
benefits to PIP Partners in seeking to realize future profits from the
partnership that the current limited partners will not participate in if the
merger is consummated, although PIP Partners will not receive the merger
consideration.
Prometheus Income Partners currently has no officers. After the merger,
Prometheus Development Co. believes that all of the persons who currently are
officers and employees of Prometheus Development Co. will continue to be
officers and employees of Prometheus Development Co., although none of these
individuals has entered into a written agreement to remain with Prometheus
Development Co.
Conditions to the Transaction
The obligations of PIP Acquisition, PIP Partners and Prometheus Income
Partners to effect the merger are subject to the fulfillment or waiver of the
following conditions:
o No court or other governmental entity shall have issued an order
that prohibits consummation of the merger, restricts the operations of
Prometheus Income Partners or PIP Acquisition which would result in a
material adverse effect, or instituted any proceeding seeking any
similar type of order.
o All material approvals from governmental entities necessary for
the consummation of the merger shall have been obtained.
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o PIP Partners having obtained the financing necessary to pay the
merger consideration.
The obligations of Prometheus Income Partners are further subject to the
condition or waiver by Prometheus Income Partners at or prior to the effective
date of the merger that the representations and warranties of PIP Partners shall
be true and correct.
The obligations of PIP Acquisition and PIP Partners are further subject to
the conditions or waiver at or prior to the effective date of the merger that:
o the representations and warranties of Prometheus Income Partners
are true and correct at and as of the closing date;
o if necessary, the holder of indebtedness of Prometheus Income
Partners consents to the merger on terms acceptable to PIP Partners;
and
o there is no material adverse change in the assets, business,
financial condition or prospects of Prometheus Income Partners.
The merger may be terminated at any time prior to the effective date of
the merger:
o by the mutual written consent of Prometheus Income Partners and
PIP Partners;
o in the event of a material breach of the Agreement if not cured
within thirty (30) days; or
o by PIP Partners or Prometheus Income Partners if the merger has
not yet been consummated on or before April 30, 2001.
Consideration and Financing
All costs and expenses incurred in connection with the transaction will be
paid by PIP Partners. These include an estimated $4,000 in SEC filing fees,
$250,000 in legal fees, $15,000 in accounting fees, $20,000 in solicitation
costs and fees, and $15,000 in printing costs. In addition:
o PIP Partners will pay cash consideration to the limited partners
other than PIP Partners in the amount of the Liquidation Value,
including a non-refundable advance thereon of $1,200 per unit; and
o PIP Partners may be required to pay certain fees relating to
mortgage debt of Prometheus Income Partners. Under the terms of its
current financing, the partnership may have to pay to its lenders an
assumption fee of approximately $261,000 upon consummation of the
merger if the merger is deemed to be a transfer of the partnership's
properties under the applicable loan documents. Any consent or other
fees to be paid by the partnership as a result of the merger will not
be deducted from the consideration to be paid to the limited partners
in the merger.
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The source of the merger consideration to be paid by PIP Partners to the
limited partners will be a contribution of funds from Sanford N. Diller, who
ultimately controls PIP Partners, or an entity controlled by Mr. Diller. Mr.
Diller intends to use cash available on hand, or, if insufficient cash is
available, he intends to borrow such funds from an entity controlled by Mr.
Diller from existing capital resources of such entity which has agreed to make
the funds available without recourse to the consideration paid to the limited
partners in the merger. Such borrowing, if needed, will be personally guaranteed
by Mr. Diller. Such borrowings will be repaid upon maturity out of current
resources of Mr. Diller and the DNS Trust.
Proxy Solicitation
Proxies are being solicited by and on behalf of Prometheus Development
Co., as general partner of Prometheus Income Partners. In addition to
solicitation by mail, Prometheus Development Co. and the officers and directors
of Prometheus Development Co. may solicit proxies by telephone, facsimile,
electronic mail, regular mail or delivery service. No additional compensation
will be paid to these persons for these solicitation services. Pursuant to a
letter agreement dated February __, 2001 between MacKenzie Partners, Inc. and
Prometheus Development Co., MacKenzie agreed to distribute this Proxy Statement
to limited partners, provide information with respect to the merger to limited
partners, and provide advisory services to Prometheus Development Co. with
respect to the merger. Prometheus Development Co. agreed to pay MacKenzie a fee
of $ _________ plus out-of-pocket expenses incurred by MacKenzie in rendering
these services.
Accounting Treatment
PIP Partners will account for the transaction under the "purchase" method
of accounting in accordance with generally accepted accounting principles.
Federal Income Tax Consequences
In general, a limited partner will recognize gain or loss on the
conversion of units into cash as a result of the merger. This gain or loss will
be equal to the difference between the limited partner's "amount realized" from
the merger and the limited partner's adjusted tax basis in the units converted.
The "amount realized" will be a sum equal to the amount of the initial advance
payment ($1,200 per unit) on the merger consideration, the amount of the
deferred payment of the merger consideration with respect to the litigation and
construction defect repairs (if any), plus the amount of Prometheus Income
Partners' liabilities allocable to the units as determined under Section 752 of
the Internal Revenue Code.
This gain or loss should be treated as capital gain or loss. However, a
portion of this gain or loss that is attributable to "unrealized receivables"
(which includes recapture of some previous depreciation deductions) and
"inventory items" (as defined in section 751 of the Internal Revenue Code of
1986 as amended) may be treated as ordinary income or ordinary loss.
Because the merger consideration is uncertain as to the ultimate amount,
the timing of the gain or loss associated with the deferred payment (if any) and
ultimately the overall tax treatment of the amount realized is uncertain.
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Under the so-called "open transaction" doctrine, no current tax
consequence attaches to the receipt of an item of property whose fair market
value cannot be reasonably determined. Limited partners may wish to consult
their tax advisors concerning the possible applicability of the open transaction
doctrine to the receipt of the deferred payment. If the open transaction
doctrine were applicable to this deferred payment, (i) the payment would not be
taken into account in determining a limited partner's gain upon receipt of the
merger consideration and any gain would be limited to the extent the amount
realized with respect to the advance payment exceeds the limited partner's tax
basis; (ii) the limited partner would take no tax basis in the deferred payment;
and (iii) amounts thereafter received by virtue of the deferred payment will be
treated partially as interest and the balance as capital gain or loss to the
extent it differs from any remaining basis in the limited partner's units.
It is the position of the Internal Revenue Service, reflected by Treasury
Regulations, that only in "rare and extraordinary cases" is the value of the
property so uncertain that open transaction treatment is available. Accordingly,
the Internal Revenue Service may require a limited partner to allocate his tax
basis in the Partnership units, in general, over a 15 year period (or a shorter
period if it is certain that no further payments will be received). Under this
scenario, it would be possible for a limited partners to recognize significant
capital gain upon the receipt of the advance payment and potentially recognize a
significant capital loss (subject to significant limitations as to usage) in the
year the deferred payment is actually received.
Due to the lack of available precedent and the inherently factual nature
of the question, tax counsel are not able to express any view as to the
availability of open transaction reporting in respect of the deferred payment.
Accordingly, holders are urged to consult their tax advisors regarding the
issue.
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You should consult your tax advisor as to the particular tax consequences
of the transaction.
The transaction, as structured, will permit PIP Partners, and its members
(the DNS Trust and Ms. Safier), to defer substantial tax liability that would be
incurred if the partnership's properties were disposed of in a taxable sale
followed by a liquidation of the partnership. This tax liability will be
deferred until these properties are eventually sold or PIP Partners sells its
equity interests in the partnership.
Counsel to Prometheus Development Co. has not opined on any tax-related
matters related to the merger.
Prometheus Development Co. believes that a limited partner who held units
from the date of initial of offering of the units, where there are no unusual
circumstances, will have funds sufficient to pay any tax liability assessed as a
result of the merger and other tax liabilities previously incurred with respect
to which no distributions have been made.
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SUMMARY SELECTED FINANCIAL DATA OF THE PARTNERSHIP
The following table sets forth a summary of certain financial data for
Prometheus Income Partners.
The selected financial and operating data of Prometheus Income Partners
for the nine months ended September 30, 2000 and September 30, 1999 are derived
from unaudited financial statements of Prometheus Income Partners which, in the
opinion of Prometheus Development Co., include all adjustments (consisting only
of normal recurring items) necessary for a fair presentation of Prometheus
Income Partners' financial position and results of operations. The results set
forth for the nine months ended September 30, 2000 and September 30, 1999 are
not necessarily indicative of results to be expected for a full year.
This summary should be read in conjunction with Prometheus Income
Partners' financial statements and notes thereto appearing in Prometheus Income
Partners' Quarterly Report on Form 10-Q for the quarter ended September 30,
2000, and in Prometheus Income Partners' Annual Report on Form 10-K for the year
ended December 31, 1999 each of which is included with this Proxy Statement and
incorporated by reference.
As of and For the
Nine Months Ended
As of and For the Year Ended December 31, September 30
----------------------------------------- ------------------
1999 1998 1997 1996 1995 2000 1999
---- ---- ---- ----- ---- ---- ----
(Unaudited, In thousands, except per unit amounts)
Income Statement Data:
Total revenues(1)........... $6,106 $5,991 $5,558 $4,997 $4,311 $5,245 $4,540
Operating expenses ......... 1,400 1,807 1,104 1,310 892 1,176 946
------ ----- ----- ----- --- ----- ---
Gross profit................ 4,706 4,184 4,454 3,687 3,419 4,069 3,594
Other expenses(2)(3)(4)..... 3,275 3,288 3,977 3,860 3,611 2,601 2,382
------ ----- ----- ----- ----- ----- -----
Net income.................. $1,431 $ 896 $ 477 ($173) ($192) $1,468 $1,212
====== ====== ====== ====== ====== ====== ======
Net income allocated to
limited partners ........... $1,417 $ 887 $ 472 $(171) $(190) $1,453 $1,200
====== ====== ====== ====== ====== ====== ======
Net income per limited
partnership unit (5)........ $ 75 $ 4 $ 2 $ (9) $(10) $ 77 $ 63
===== ==== ==== ===== ====== ===== ====
Balance Sheet Data:
Real estate(6).............. 22,105 22,328 22,573 22,929 23,350 21,921 22,105
Total Assets(7)............. 28,873 27,830 27,016 25,259 24,172 30,176 28,873
Total Liabilities(8)........ 26,512 26,900 26,982 25,702 24,067 26,347 26,511
Partners' equity............ 2,361 930 34 (443) 105 3,829 2,362
limited partners'
equity ..................... 2,739 1,322 435 (38) 509 4,192 2,740
limited partners' equity per
limited partner unit(5)..... $144 $70 $23 ($2) $27 $221 $144
(1) Consists principally of rental and interest income.
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(2) Includes payments to general partner and affiliates of $300,000, $303,000,
$278,000, $265,000 and $219,000 for 1999, 1998, 1997, 1996 and 1995,
respectively, consisting principally of property management and construction
management fees.
(3) Includes payments to general partner and affiliates of
$481,000, $475,000, $391,000, $378,000 and $323,000 for 1999, 1998, 1997, 1996
and 1995, respectively, consisting principally of reimbursements for operating
and administrative expenses incurred by such persons, consisting principally of
property payroll taxes, insurance and payroll processing fees, postage, copying
costs, professional services, personnel training and marketing costs.
(4) Includes interest and amortization expense, depreciation and general and
administrative expense.
(5) Based on weighted average number of units outstanding during the applicable
period.
(6) Consists of land, buildings and improvements and accumulated depreciation.
(7) Includes cash and cash equivalents, restricted cash, and deferred financing
costs, net of accumulated amortization.
(8) Includes notes payable.
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BACKGROUND
Reasons for the Merger
Since at least as early as 1997, limited partners from time to time have
been contacting Prometheus Development Co. to express dissatisfaction with the
economic situation of Prometheus Income Partners, including the lack of current
distributions, the current recognition of taxable income and the lack of
appreciation of the saleable value of the limited partnership units. These
contacts became increasingly frequent throughout 2000, such that the general
partner was being contacted by limited partners regarding these issues at least
weekly. Many of these limited partners have informed Prometheus Development Co.
that they (or the beneficial owners they represent) are individuals who invested
in Prometheus Income Partners as part of their retirement planning, and that
these limited partners believe that the recent economics of the units are
unsatisfactory for this purpose. Several limited partners also have expressed
concern over the potential impact of construction defects and the related
litigation. These contacts always have been initiated by or on behalf of the
limited partners and have not included any general or specific proposal by the
limited partners for providing liquidity. The general partner has felt
constrained in discussing various matters with the limited partners because it
is limited as a practical matter in the information it can provide to limited
partners due to the regulation of disclosure under the Securities Exchange Act
and the pendency of litigation involving the partnership.
Increasingly, limited partners were asking for information on how to sell
their units; and while trading activity in the units in secondary markets had
been increasing, volume remained and remains low. While the general partner and
the acquiring parties believe in the long-term profitability of the business of
Prometheus Income Partners, they recognize the risks involved and the expressed
interests of many limited partners to sell their units. PIP Partners and other
unaffiliated parties periodically have purchased units in the secondary trading
market. Please see the discussion under the caption "The Parties - Prometheus
Income Partners - Recent Transactions" beginning on page 58. As a practical and
regulatory matter, the number of units that can be purchased by PIP Partners and
other parties in these sporadic transactions is severely limited. Thus despite
these occasional purchases, the current market for units is thin and illiquid.
See the discussion under the caption "Additional Information Concerning Units"
beginning on page 72 for the details of these purchases in the secondary market.
While the general partner can not value the units with accuracy or precision due
to uncertainties related to substantial construction defects and the uncertainty
of pending litigation, the general partner believes that private and market
purchases from limited partners had and would continue to involve a substantial
discount from the value of the units as derived from the underlying market value
of the partnership's property given the substantial defects therein, even
without ascribing any value to the pending litigation. In reaching such
conclusion, the general partner also considered its experience as to the
substantial discount real estate professionals impose in instances where
substantial construction defects exist and the relatively little value these
professionals ascribe to the potential for litigation recoveries. For these
reasons, in July 1999 the general partner began investigating available
alternatives to provide liquidity for the limited partners at a fair price. At
that time, the general partner considered a variety of options for achieving
liquidity for the limited partners, including principally those discussed below.
In general, discussion regarding these matters involved Mr. Diller, John Murphy,
a Vice President of the general partner, and
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Vicki Mullins, also a Vice President of the general partner. In reviewing these
options, the general partner deemed it important to reduce the substantial costs
associated with managing an entity that is a reporting company under the
Exchange Act with over 1,000 limited partners. By reducing the number of limited
partners to one and ultimately eliminating the need of quarterly and annual
filings under the Exchange Act, the partnership estimates it will save $100,000
annually in legal, accounting, administrative and other costs. This savings was
factored in to the determination of the price PIP Partners is willing to pay for
units and the structure of potential transactions PIP was willing to consider.
In considering acceptable transaction structures, PIP Partners also considered
the elimination of fiduciary duties of the General Partner to unaffiliated
parties.
In June 1999, Prom Investment Partners, LLC, a limited partner not
affiliated with the general partner or any of the acquiring parties, contacted
the partnership by requesting pleadings and other court filings regarding the
construction defect litigation and copies of the mortgage notes for each of the
partnership's properties. Prometheus Development Co. sent to Prom Investment
Partners the mortgage notes, but directed it to the public record for the court
filings, and shortly thereafter it inquired whether Prom Investment Partners
would be interested in selling its units. In or about October 1999, Prom
Investment Partners contacted Mr. Murphy regarding the interest of the general
partner or its affiliates in buying Prom Investment Partners' units. No
agreement as to the possible terms of the proposed sale was reached at that
time.
In January 2000, the general partner began investigating in greater detail
potential alternatives for providing limited partner liquidity involving an
acquisition of units by an affiliate of the general partner.
In or about March 2000, PIP Partners contacted Prom Investment Partners
regarding a possible sale of units. Prom Investment Partners proposed a sale at
a price per unit higher than the price per unit to which Prom Investment
Partners and PIP Partners eventually agreed. PIP Partners evaluated this
proposal in light of internal valuations and forecasts. In April 2000, Prom
Investment Partners agreed with PIP Partners that Prom Investment Partners,
together with certain of its affiliates, would sell all of their units to PIP
Partners at a price of $1,200 per unit. However, pursuant to this agreement, if
PIP Partners acquires any units from any other person within two years following
the date of this purchase at a purchase price greater than $1,200 per unit, PIP
Partners agreed to pay Prom Investment Partners and its affiliates the excess of
the price paid over $1,200 per unit for each unit purchased from them by PIP
Partners. PIP Partners completed its purchase of 1,487.5 units from Prom
Investment Partners and two of its affiliated investment funds on June 20, 2000.
In May 2000, Prometheus Development Co., PIP Partners, Messrs. Diller and
Murphy and Ms. Mullins, on behalf of the various affiliates they represented,
revisited the alternatives discussed below and for the reasons set forth below
decided to proceed with a merger in structure identical to the merger but in
which the consideration to be paid with respect to each unit would be fixed at
$1,200. They based the $1,200 in cash to be offered by PIP Partners for each
unit each limited partner holds on various factors including their estimate of
the fair market value of the underlying real estate properties, the potential
for an increase or decrease in that value, the effects of the pending litigation
and the likelihood of success in that litigation on the value of Prometheus
Income Partners, the transaction costs incurred as part of the merger, the tax
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consequences of the merger to PIP Partners and the illiquidity of the units.
They also gave substantial weight to the fact that Prom Investment Partners, an
unaffiliated third party with substantial real estate experience, agreed to
accept $1,200 per unit for a substantial block of units.
In June 2000 and September 2000, Prometheus Development Co. and the
acquiring parties filed preliminary proxy solicitation and related materials
with the Securities and Exchange Commission relating to a proposed merger
involving merger consideration fixed at $1,200 per unit.
In October 2000, the general partner and the acquiring parties reviewed
the partnership's financial performance for the nine months ended September 30,
2000 and compared these results to previously projected results upon which they
based in part their original evaluation of the fairness to the limited partners
of the orginally proposed fixed consideration of $1,200 per share. In fact,
actual results for this period materially exceeded projected performance.
Because of this, in order to establish a more fair and independent basis upon
which to value the limited partnership units, the general partner and the
acquiring parties determined to obtain an independent appraisal of the market
value of the partnership's real estate properties. By letter dated November 22,
2000, the general partner informed the limited partners that it was seeking such
appraisal and would reevaulate the merger and the merger consideration in light
of this appraisal.
In December 2000, the general partner and the acquiring parties received
an appraisal of the partnership's real estate properties, a copy of which is
attached hereto as Appendix C. For a more complete description of this
appraisal, please see the disclosure under the caption "Appraisal" beginning on
page 67. This appraisal valued these properties at $68,900,000. The acquiring
parties then determined to offer, and the general partner decided to recommend
to the limited partners, the merger in which the Lquidation Value, calculated
based upon this appraised market value, would be offered to the limited
partners.
Fairness of the Transaction
For the reasons set forth below, each of Prometheus Development Co., Inc.,
PromHill, Inc., PIP Partners - General, LLC, PIP Acquisition, LLC, The DNS Trust
and the Dillers has separately concluded that the transaction is both
substantively and procedurally fair to the limited partners, notwithstanding
that no unaffiliated purchaser of the units or the partnership's properties was
sought. In reaching such conclusion, as discussed more fully below, these
parties considered principally the following factors:
o Appraised Value. The merger consideration is derived from the market
value of the partnership's properties, as determined based on an independent
third-party appraisal of these properties.
o Historical Market Prices. Since January 1, 1998, the maximum price paid
for units in the secondary market was $601. This does not include the sale of
units pursuant to a recent tender offer at $650 per unit or PIP Partners' recent
block purchase for $1,200. Please see the disclosure under the captions "Recent
Transactions" beginning on page 58 and "Additional
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Information Concerning Units" beginning on page 72. Prometheus Development Co.
and the acquiring parties believe the there has been no significant change in
the trading price of the units despite the improved financial condition of
Prometheus Income Partners because the market for the units is not liquid and
due to the uncertain status of the construction defects and related litigation.
o Net Book Value. As of September 30, 2000, limited partners' equity per
unit was $190. See "Summary Selected Financial Data of the Partnership"
beginning on page 25.
o Liquidation Value. The merger consideration constitutes an approximation
of the liquidation value of the units based on a deemed sale of the
partnership's properties at their appraised market value, after giving effect to
the net proceeds (if any) realized from the litigation and the costs to repair
existing construction defects, which the general partner and the acquiuring
parties believe would be discounted from the purchase price any potential
purchaser of the partnership's properties would pay for them. In fact, the
payment of the non-refundable advance protects the limited partners against
having the liquidation value reduced if the actual cost to repair existing
defects would be greater than current estimates and no recovery of such costs is
obtained in the litigation. The general partner and each of the acquiring
parties believes, as discussed below, that it is impossible to quantify the
present value of the litigation with any accuracy, and thus preserving for the
limited partners the right to participate in any net proceeds from such
litigation in excess of the actual costs to repair the defects is the fairest
way to deal with this issue.
o Recent Block Sale. The merger consideration will be not less than the
$1,200 per unit accepted by a sophisticated unaffiliated third parties in a
recent block purchase of shares by PIP General.
Each of the general partner and the acquiring parties believe that the
transaction is procedurally and substantively fair to the limited partners
because the merger consideration is based on an independent appraisal of the
partnership's properties and gives due effect to the two principal circumstances
further affecting the value of units, those being the construction defects and
the outcome of pending litigation, and not accounted for in such appraisal.
These parties believe that these factors are central to a determination of the
fair value of the units. Any attempt to put a value at this time on the ultimate
cost of these repairs and the associated litigation would be mere conjecture and
potentially unfair to the limited partners.
The uncertainty of recovery in litigation is particularly significant to a
valuation of the units and the price an unaffiliated third party would be
willing to pay for units. The general partner and the acquiring parties believe
that the uncertainty of recovery (and the uncertainty of the partnership being
made whole for all costs of repair it has and continues to incur), together with
the existence of known and potentially unknown construction defects in the
partnership's properties, substantially decrease the price an unaffiliated party
would pay for a substantial block of units. While the partnership is seeking
full recovery for known defects, the value of such litigation is speculative.
With respect to any litigation, there ultimately are questions as to probability
of success, issues regarding proof of damages, and, ultimately, the cost of
litigation, including attorneys' fees (including, in this case, contingent
attorneys' fees to be paid out of any recovery). In addition, due to the time
necessary for the process to run its course (including the
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possibility of appeal), any potential recovery must be discounted to present
value. Given all of these uncertainties, the general partner and the acquiring
parties believe that the most fair course of action would be to preserve for the
limited partners the economic benefit of the net recovery (if any) in the
litigation.
By virtue of having obtained an independent appraisal of the market value
of the partnership's real estate properties and considered alternatives for
realizing upon that market value, the general partner and the acquiring parties
believe that the determination of the merger consideration to be paid is
procedurally fair to the limited partners. They also believe the merger
consideration to be substantively fair to the limited partners by virtue of
having used this appraisal to determine a liquidation value of the partnership
and basing the merger consideration thereon, while preserving for the limited
partners the economic benefits of any net litigation recovery and limiting their
exposure to the risk that the costs to repair the partnership's properties could
exceed current estimates or available resources or that such defects or other
circumstances could adversely affect the partnership or the use of its
properties.
In concluding that the transaction is fair to the limited partners, the
general partner and the acquiring parties further considered in detail the
positive and negative factors discussed below, the evaluation of which, in the
view of each of the general partner and the acquiring parties, supported its
conclusions regarding the fairness of the transaction. The general partner and
the acquiring parties also considered the positive and negative factors
discussed below with respect to the alternatives to the transaction. In the view
of the general partner and the acquiring parties, the negative factors were not
sufficient, either individually or in the aggregate, to outweigh the benefits of
the proposed transaction in the form of the merger to the limited partners.
Positive Factors Considered
In determining that the merger is fair to the limited partners and in
recommending approval of the merger, the general partner and the acquiring
parties each considered the following factors which they believe support their
respective determinations regarding the fairness of the transaction and
recommendations:
o The limited partners will be able to liquidate their investments.
No significant market for the sale of units currently exists or is
expected to develop in which limited parties can liquidate their
investments. Upon the completion of the transaction, the limited
partners, other than PIP Partners, will be entitled to receive cash
approximating the fair value of the units in exchange for their units
and, accordingly, those limited partners will no longer bear the risks
inherent in the ownership of the properties through the partnership.
o The merger consideration each limited partner will receive is based
on the market value of the partnership's properties as determined by
independent appraisal. The general partner and the acquiring parties
believe this validates the fairness of the price to be paid in the
merger. The true market value of the partnership's properties could be
greater than the appraised market value.
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o The merger consideration being offered is substantially equivalent
to the amount the limited partners would receive upon the liquidation of
the partnership's underlying properties at current market values. It
also preserves for the limited partners the economic benefits of any net
litigation recovery and limits their exposure to the risk that the costs
to repair the partnership's properties could exceed current estimates or
available resources or that such defects or other circumstances could
adversely affect the partnership or the use of its properties.
o Based on their experience as to the substantial discount real
estate professionals impose in instances where substantial construction
defects exist and the relatively low value these professionals ascribe
to the potential for litigation recoveries, the general partner and the
acquiring parties believe that the presence of significant construction
defects and the uncertainty of success in litigation in which Prometheus
Income Partners is involved would cause the partnership and/or its
properties to be sold at a price less than the merger consideration. The
general partner believes that because of its experience in pursuing
construction defect litigation and its familiarity with the
partnership's properties, it is in a better position to achieve a better
result in these matters than unaffiliated third parties--and thus it
discounts the value of the properties less than would these other
parties. Because of the possibility of an additional deferred payment of
the merger consideration, this experience ultimately will inure to the
benefit of the limited partners.
o Ultimately, the known and unknown construction defects will have to
be repaired to maintain the continued viability of the partnership's
properties as income producing assets. There can be no assurance that
the partnership will be successful in litigation to recover the costs of
these repairs, or that it will be so in a timely manner. As a result,
established reserves, together with the amounts recovered in this
litigation, if any, may be insufficient to fund these repairs in a
timely manner. If the partnership does not have sufficient cash to fund
these repairs as required, the partnership would have to obtain
additional capital resources to fund these repairs. This could result in
substantial cost to the partnership or substantial dilution of the
limited partners' interests in the partnership. There is no assurance
capital resources would be available to the partnership on commercially
reasonable terms. If not, then the partnership would have to consider
other alternatives, such as a sale of the properties at what the general
partner believes would then be substantially depressed prices. If the
merger is consummated, the limited partners would no longer bear the
risks of these uncertainties.
o The minimum cash price to be received by the limited partners per
unit is over $500 greater than the highest price paid in open market
transactions for units over the past two years.
o PIP Partners did not require Prometheus Income Partners to make
significant representations, warranties or covenants with respect to its
past, present or future operations or profitability, the construction
defect litigation or the construction defects themselves. Accordingly,
there is little risk that the merger will not be consummated if approved
by the unit holders.
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o Pursuant to the Agreement and Plan of Merger, PIP Partners has
agreed to vote its units for or against the merger in the same
proportion as the unaffiliated limited partners who vote on the merger
at the meeting. This means that the merger will be approved only if a
majority of those unaffiliated limited partners voting on the
transaction vote for the merger.
o The merger will allow limited partners to receive cash to at least
partially pay tax liabilities related to income recognized since 1997
(the partnership having recognized a loss in 1996) with respect to
undistributed partnership income that has been reserved for conditional
liabilities related to the construction defects. It is uncertain whether
and when Prometheus Income Partners will be able to make distributions
of income to the limited partners under its credit agreements or
otherwise, given the status of construction defects in its properties
and the construction defects litigation. Commencing with the tax year
following the tax year in which the closing of the transaction occurs,
the limited partners will not incur income for tax purposes with respect
to which they have received no corresponding cash distribution.
o If the merger is not consummated, the limited partners would
continue to own units. This likely would be true for the foreseeable
future because there is no assurance that in the absence of a
liquidation the limited partners would have a liquidity event with
respect to their units until the expiration of the term of Prometheus
Income Partners under its partnership agreement. The general partner
would be under no obligation to seek a sale of the properties prior to
the expiration of the partnership's term. Therefore, the limited
partners would continue to be exposed to the risks inherent in the
ownership of real property, such as fluctuations in occupancy rates,
operating expenses and rental rates, which in turn may be affected by
general and local economic conditions, the supply and demand for
properties of the type owned by Prometheus Income Partners and federal
and local laws and regulations affecting the ownership and operation of
real estate. Although the properties owned by the partnership have
experienced positive rental growth and high occupancy for the last few
years, there still exists a risk of a downturn in these trends in the
future. These factors could also adversely impact any future price at
which the units or the partnership's properties could be sold. If the
merger is consummated, the limited partners would no longer have their
units subject to the risk of the real property ownership and operation,
including the uncertainty of recovery in the construction defects
litigation; or the risks of substantial loss of use of the partnership's
properties as a result of existing defects or otherwise.
o The non-refundable advance on the merger consideration of $1,200
per unit, without giving effect to any deferred payment of merger
consideration, represents a multiple of 16x annual net income of the
partnership per limited partner unit for the most recently completed
fiscal year ended December 31, 1999.
o Although the partnership typically has experienced year-to-year
revenue and income growth, the potential for continued income growth
beyond the horizon of the current remaining terms on existing leases is
uncertain. The partnership's properties currently have occupancy rates
of approximately 99%. Continued growth in income
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will thus have to be derived from increases in rental rates or
reductions in costs. While the geographic areas in which the
partnership's properties are located have generally experienced
increases in rental rates over such period, such rates are subject to
change based on a variety of factors, including general economic
conditions in such areas.
Overall, the general partner and each of the acquiring parties believe
these factors combine to give limited partners the opportunity to realize their
investment at a fair price that would not be afforded through other alternatives
while eliminating the risks of loss that would be attendant to retaining limited
partnership interests in a real estate limited partnership fraught with
substantial uncertainties of litigation and structural defects.
Negative Factors Considered
Each of the general partner and the acquiring parties also considered the
following negative factors:
o PIP Partners, PIP Acquisition and Prometheus Development Co. are
all under the common control of Sanford Diller and, therefore,
Prometheus Development Co. has substantial conflicts of interest with
respect to the approval of the merger. The merger consideration was
determined without any arms-length negotiations between PIP Partners and
either Prometheus Development Co. or any other person acting
independently on behalf of the limited partners. In structuring the
transaction, only Prometheus Development Co. represented the interests
of the limited partners.
o PIP Partners is making this offer with a view to making a profit
and, therefore, there is a conflict between PIP Partners desire to
purchase your units at a low price and your desire to sell your units at
a high price. PIP Partners believes that it can profit from its
ownership of the partnership notwithstanding the prevailing risks and
uncertainties. Affiliates of Prometheus Development Co. will hold 100%
of the units if the transaction is completed. Consequently, affiliates
of Prometheus Development Co. will continue to have the opportunity to
benefit from any future earnings growth and increases in the value of
Prometheus Income Partners and its properties.
o There has been no independent evaluation of the terms of the
merger, no independent committee has reviewed the merger and no
independent opinion as to the fairness of the merger consideration has
been obtained.
o Prometheus Development Co. has not contacted any third-party
unaffiliated with the Prometheus Development Co. concerning a possible
sale of the partnership's underlying properties to that third-party, a
tender offer by that third-party for the units for cash, or any other
acquisition of units by that third-party.
o The limited partners will not have the benefit for tax purposes of
future losses (if any) of Prometheus Income Partners, including any
losses related to construction defects, to offset other sources of
income.
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o Following the transaction, the limited partners, other than PIP
Partners, will cease to participate in future earnings or growth, if
any, of Prometheus Income Partners or benefit from increases, if any, in
the value of Prometheus Income Partners or its properties.
o If limited partners owning more than 50% of the units vote for the
merger proposal, their approval will bind all limited partners.
Therefore, a limited partner may vote against the merger proposal and
nevertheless have its units converted into the right to receive cash in
the merger if the requisite vote of the limited partners is obtained.
o Limited partners do not have any dissenters' rights or other rights
of appraisal under the state law which governs Prometheus Income
Partners, the partnership agreement of Prometheus Income Partners or
otherwise in connection with the merger proposal. Therefore, dissenting
limited partners do not have the right to have their units independently
appraised if they disapprove of the merger or the merger consideration.
o The limited partners will not be able to benefit from potential
alternatives to the merger. These alternatives include a separate sale
of all of the assets of Prometheus Income Partners and subsequent
liquidation of Prometheus Income Partners, other possible acquisitions
of units or the continuation of Prometheus Income Partners under its
current ownership structure.
o If the merger occurs, you will not receive any future distributions
from operating cash flow of Prometheus Income Partners, if and when
reinstituted, or upon a sale or refinancing of the properties owned by
Prometheus Income Partners.
o Affiliates of Prometheus Development Co. have a separate economic
interest in structuring the transaction to achieve favorable tax
treatment. Limited partners will recognize gain or loss on the
conversion of their units into cash in the merger.
o The obligations of PIP Partners are subject to the condition that
the holder of indebtedness of Prometheus Income Partners consents to the
merger on terms acceptable to PIP Partners. There is no assurance that
this consent will be obtained on terms acceptable to PIP Partners.
o The merger may be approved even though a majority of the units held
by limited partners unaffiliated with Prometheus Development Co. do not
approve the merger. This is because PIP Partners will vote its units
according to the percentage of units voting in person or by proxy at the
meeting in favor of the merger. Thus, units not voted at the meeting
will not be taken into account by PIP Partners in determining the
percentage of its own units to be voted in favor of the merger.
In the view of the general partner and the acquiring parties, these
negative factors were not sufficient, either individually or in the aggregate,
to outweigh the benefits of the proposed transaction to the limited partners.
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In evaluating the fairness of the transaction, the general partner and the
acquiring parties also considered the information on weighted average private
sales prices for units of which it was aware. Over the past two years, other
than the recent block purchase by PIP Partners, units have been sold for between
$495 and $601 (this does not include the sale of units pursuant to a recent
tender offer at $650 per unit), far less than the minimum merger consideration
of $1,200 per unit. However, none of the acquiring parties placed significant
emphasis or weight on these prices and ranges and none considered these prices
and ranges to be material factors in making their determinations and
recommendations because, at present, there is no established public trading
market for the units, nor is one expected to develop. Moreover, liquidity is
limited to sporadic private sales which generally involve a relatively small
percentage of the units outstanding. Each of the general partner and the
acquiring parties believes that the fair value of the units (based on the
potential value of Prometheus Income Partners' real estate, and the anticipated
outcome of the litigation as discussed below) is substantially higher than
recent trading prices.
Regarding the price being paid, these persons believe the lack of a
significant change in the trading price of the units as the financial condition
of Prometheus Income Partners has improved reflects the weak market for the
units. In a more efficient market, they believe that recent trading prices would
be higher than it currently is. However, even then, the uncertain status of the
construction defect litigation in which Prometheus Income Partners is involved
reduces the possibility that Prometheus Income Partners will be able to dispose
of its properties at a fair price, thus reducing the possibility that the
limited partners will be able to liquidate their units other than through this
merger or a similar transaction in the foreseeable future. The general partner
and the acquiring parties have decided to go forward with the merger because the
merger would allow the limited partners to liquidate their units at a fair price
despite these concerns.
Alternatives to the Transaction Considered
The decision to pursue the merger, and, in part, the assessment by the
general partner and the acquiring parties of the fairness of the merger,
included a review of different alternatives identified as having the potential
to achieve the investment objectives of limited partners as expressed to the
general partner. They considered three alternatives to the merger:
o liquidation of Prometheus Income Partners through a sale of its
properties and distribution of the net cash proceeds of the liquidation;
o a negotiated tender offer by PIP Partners - General for a
percentage of the units; and
o continuation of the business of Prometheus Income Partners, with
Prometheus Income Partners continuing to be owned by the current limited
partners, including PIP Partners.
The general partner did not consider any other form of transaction in
which the limited partners would receive anything other than cash (including the
deferred cash right included in the merger consideration). Discussion of these
alternatives were limited to Mr. Diller, Mr. Murphy, Ms. Mullins and the
partnership's legal advisors.
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Liquidation
One alternative to the transaction considered was to liquidate Prometheus
Income Partners' assets, distribute the net cash proceeds of the liquidation to
the partners and then dissolve Prometheus Income Partners. The general partner
and the acquiring parties determined that Prometheus Income Partners should not
pursue this alternative for the reasons discussed below. Because of the negative
factors discussed below, they did not deem it warranted to solicit expressions
of interest regarding the purchase of the properties of Prometheus Income
Partners.
In a liquidation, Prometheus Development Co. would market the
partnership's properties and, if a potential purchaser were interested in
purchasing Alderwood or Timberleaf or both, Prometheus Development Co. would
negotiate and enter into an agreement for the sale of the property or
properties. Prometheus Development Co. would be required to obtain the approval
of limited partners holding at least 50% of the units before the sale could
close. If the limited partners approved the sale of both properties and these
sales were closed, Prometheus Development Co. would proceed to liquidate the
partnership in accordance with the provisions of the partnership agreement of
Prometheus Income Partners and applicable law, subject to final resolution of
the pending litigation or the making of other arrangements with respect thereto.
Pursuant to the partnership agreement of Prometheus Income Partners, net
proceeds from a sale and liquidation would be distributed in the following order
to the extent of the funds are available:
(1) To the payment of current partnership obligations,
liabilities and expenses.
(2) To the setting up of reserves that the general partner deems
necessary for the payment of partnership debts or liabilities, whether
then payable or not yet payable, including any contingent or unforeseen
liabilities or obligations.
(3) In proportion to, and to the extent of, the positive
capital account balances of the partners.
(4) 100% to the limited partners until each limited partner has
received an amount equal to a preferred percentage return on its invested
capital plus the limited partners' remaining invested capital.
(5) A disposition fee of up to 3% of the sales price to the
general partner.
(6) The balance:
(a) 85% to the limited partners; and
(b) 15% to the general partner.
Benefits of liquidation. Prometheus Development Co. considered the primary
benefits of a sale and liquidation to be the following:
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o Upon the completion of a liquidation, the limited partners would be
entitled to receive cash in exchange for their units and, accordingly,
limited partners would no longer bear the risks inherent in the
ownership of the properties through Prometheus Income Partners,
including the uncertainty of recovery in the construction defects
litigation resulting in uncertainty as to whether the partnership will
have adequate funds to make necessary repairs to its properties.
o A liquidation would not take place unless greater than 50% of the
units vote for the transaction. This procedure grants the limited
partners in the aggregate the opportunity to choose whether to liquidate
their interests or veto the transaction.
o In the absence of a sale of one or both properties, it is unclear
whether and when Prometheus Income Partners would be able to make
distributions of income to the limited partners, given the status of
construction defects in the properties and the uncertainties involved in
the construction defects litigation.
o Commencing with the tax year following the tax year in which the
closing of a liquidation occurs, the limited partners would no longer
need to include in their federal and state income tax returns the
various items of income, loss, deduction and credit as previously
reported on Schedule K-1s delivered by Prometheus Income Partners and
would not incur income for tax purposes with respect to which they have
received no cash distribution.
Disadvantages of Liquidation. The general partner and the acquiring
parties also considered the following disadvantages of liquidating Prometheus
Income Partners:
o Based on their experience as to the substantial discount real
estate professionals impose in instances where substantial structural
construction defects exist and the relatively little value these
professionals ascribe to the potential for litigation recoveries, the
general partner and the acquiring parties believe that the presence of
significant construction defects and the litigation in which Prometheus
Income Partners is involved would cause the partnership and/or its
properties to be sold at a price per unit substantially less than the
merger consideration. The general partner believes that because of its
experience in pursuing construction defect litigation and its
familiarity with the partnership's properties, it is in a better
position to achieve a better result in these matters than unaffiliated
third parties--and thus it discounts the value of the properties less
than would these other parties.
o There can be no assurance that Prometheus Development Co. would be
able to sell Prometheus Income Partners' properties for prices that
would result in a distribution to the limited partners that is equal or
greater than the consideration they would receive in the merger. Any
distribution of proceeds from the sale of the properties would be
subject to the prior satisfaction of the partnership's liabilities.
Given the outstanding defects in these properties, there is no assurance
that the price at which the properties could be sold would be sufficient
to satisfy the partnership's liabilities.
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o A potential purchaser could require the limited partners to place
all or a substantial portion of the purchase price in escrow pending the
outcome of the construction defect litigation, and, if an unfavorable
outcome of the litigation occurred, might require some of the funds in
escrow to be returned to the purchaser.
o So long as the existing construction defects remain, the existing
loans would not be assumable by a buyer of the properties.
o The limited partners would likely give up any rights to receive the
funds currently kept in reserve for the construction defects or any
potential payoff on the construction defect litigation.
o Until the properties of Prometheus Income Partners are sold and the
partnership is liquidated and terminated, limited partners would
continue to receive Schedule K-1s from Prometheus Income Partners, and
Prometheus Income Partners would continue to have SEC reporting
obligations.
o Limited partners do not have any dissenters' rights or other rights
of appraisal under the state law which governs Prometheus Income
Partners, the partnership agreement of Prometheus Income Partners or
otherwise in connection with a sale and liquidation. Therefore,
dissenting limited partners would not have the right to have their units
independently appraised if they disapprove of the liquidation.
o The limited partners would not be able to benefit from the
alternatives to a liquidation. These alternatives include the merger,
other possible acquisitions of units or the continuation of Prometheus
Income Partners under its current ownership structure.
o No assurance can be given that a liquidation would be consummated.
o If a liquidation occurred, the limited partners would not receive
any future distributions from operating cash flow of Prometheus Income
Partners if and when reinstituted, the liquidation of the security
accounts, upon a sale or refinancing of the properties owned by
Prometheus Income Partners, or upon the dissolution of Prometheus Income
Partners.
Tender Offer
Another alternative to the transaction considered by the general partner
and the acquiring parties was to make a cash tender offer for the units. In a
tender offer, those limited partners who tendered their units, and whose units
were accepted for purchase, would realize most of the benefits the limited
partners would receive in the merger.
The primary benefit the merger offers which is not offered by a tender
offer is that, due to the legal structure of Prometheus Income Partners, as a
practical matter PIP Partners would be restricted in the number of units it
could acquire by way of tender offer. Importantly, if more than 50% of the units
are transferred in any given year, Prometheus Income Partners would
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suffer adverse tax consequences as a result of a reassessment of its properties,
estimated by the general partner to result in the payment of additional property
taxes of approximately $160,000 annually and subject to further ordinary course
annual adjustments. In addition, if PIP Partners held more than 50% of the
units, it would essentially be unable under applicable law to purchase the
balance of the units at a later date, and thus unable to provide the other
limited partners with liquidity, unless it held more than 90% of the units.
Thus, PIP Partners might not be able to offer liquidity to all limited partners
who desired liquidity. In addition, a discount would be applied to the price
paid due to the costs inherent in continuing to have minority partners. Another
significant benefit to the merger versus a tender offer is that following a
tender offer Prometheus Income Partners might continue to be required to satisfy
its current reporting obligations pursuant to SEC rules. Also, in a tender
offer, it likely would be impracticable to provide the limited partners with a
continuing economic interest in the portential litigation recovery.
The primary advantage to pursuing a tender offer versus the merger is that
those limited partners who do not wish to tender their units are not required to
do so. In the merger, if a majority of the units are voted in favor of the
merger and the merger takes place, each limited partner other than PIP Partners
will be entitled to receive the merger consideration for each unit each limited
partner holds. In a tender offer, those limited partners not tendering their
units would retain those units.
The general partner also considered soliciting third party interest in
making a tender offer for the units. However, for the reasons set forth above as
to why the general partner and the acquiring parties believe the partnership's
properties would be undervalued in a sale, they believe the units would be
similarly undervalued in the price a third party would be willing to pay in a
tender offer. This is particularly true because there would be no mechanism
available in connection with a tender offer to escrow a part of the purchase
price to cover contingent liabilities of the partnership.
Continued Ownership of Prometheus Income Partners
Benefits of continued ownership. Another alternative to the transaction
considered by the general partner and the acquiring parties was to continue
Prometheus Income Partners in accordance with its existing business plan, with
Prometheus Income Partners continuing to be owned by the limited partners. This
will be the result if Prometheus Income Partners does not participate in the
merger. The general partner and the acquiring parties considered the primary
benefits of continuing the business of Prometheus Income Partners to be as
follows:
o Limited partners of Prometheus Income Partners would continue to
have the right to receive distributions of net cash flow arising from
operations and the sale or refinancing of Prometheus Income Partners'
properties if and when Prometheus Development Co. determines that there
were adequate reserves for contingent and other liabilities.
o Continued ownership of Prometheus Income Partners by the limited
partners affords the limited partners with the opportunity to
participate in any future appreciation in the partnership's properties.
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o As discussed above, the general partner believes that the presence
of significant construction defects and the litigation in which
Prometheus Income Partners is involved would cause the partnership
and/or its properties to be sold at a disproportionate discount from
their fair market value.
o The limited partners would be able to benefit from potential future
transactions involving the sale of the units. These alternatives include
a future merger or tender offer at a higher price, although there can be
no assurance that an opportunity with respect to future transactions
would materialize.
Disadvantages of Continued Ownership. The general partner and the
acquiring parties also considered the relative disadvantages to the limited
partners of continuing Prometheus Income Partners under its current business
plan, as follows:
o The availability of future commercially reasonable opportunities to
provide liquidity to the limited partners is highly speculative. While
the general partner may from time to time consider various alternatives
for limited partner liquidity, including a sale of the partnership's
properties if and when commercially reasonable to do so, the limited
partners will not have any assurance of when or if another liquidation
transaction will occur until the expiration of the term of Prometheus
Income Partners under its partnership agreement. The general partner
would be under no obligation to seek a sale of the properties prior to
the expiration of the partnership's term. While a sale of one or both
properties could be effected well in advance of such date, the general
partner is required to act in the best interests of the partnership in
evaluating whether or not to pursue and consummate such sale based on
circumstances that prevail from time to time.
o Continued ownership by the limited partners would fail to secure
the benefits to the limited partners that are expected to result from
the transaction, including providing immediate liquidity to the limited
partners of their investment. At present, there is no established public
trading market for the units and liquidity opportunities generally are
limited to sporadic private sales. To date, these sales are at a price
far less than the merger consideration and typically involve only a very
limited number of units.
o The limited partners would continue to own units and therefore
would continue to be exposed to the risks inherent in the ownership of
real property, such as fluctuations in occupancy rates, operating
expenses and rental rates, which in turn may be affected by general and
local economic conditions, the supply and demand for properties of the
type owned by Prometheus Income Partners and federal and local laws and
regulations affecting the ownership and operation of real estate. The
financial results of the partnership are materially dependent on
occupancy rates and rental rates. The partnership's properties currently
are operating at a 99% average occupancy rate. Growth in performance
will thus be dependent upon increases in rental rates. Although the
properties owned by the partnership and the rental market where the
properties are located have experienced positive rental growth and high
occupancy for the last few years, there still exists a risk of a
downturn in these trends in the future.
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o As discussed above, the known and unknown construction defects will
have to be repaired to maintain the continued viability of the
partnership's properties as income producing assets. There can be no
assurance that the partnership will be successful in litigation to
recover the costs of these repairs, or that it will be so in a timely
manner. As a result, established reserves, together with the amounts
recovered in this litigation, if any, may be insufficient to fund these
repairs in a timely manner. If the partnership does not have sufficient
cash to fund these repairs as required, the partnership would have to
obtain additional capital resources to fund these repairs. This could
result in substantial cost to the partnership or substantial dilution of
the limited partnership's interests in the partnership. There is no
assurance capital resources would be available to the partnership on
commercially reasonable terms. If not, then the partnership would have
to consider other alternatives, such as a sale of the properties at what
the general partner believes to be substantially depressed prices. If
the merger is consummated, the limited partners would no longer bear the
risks of these uncertainties.
o Until the properties of Prometheus Income Partners are sold and the
partnership is liquidated and terminated, limited partners would
continue to receive Schedule K-1s from the partnership, and the
partnership would continue to have SEC reporting obligations.
o The limited partners would be forced to continue to pay taxes on
partnership income which is not being distributed due to contractual and
anticipated cash reserve requirements.
THE MEETING
Time, Date and Place
This Proxy Statement is being furnished to limited partners of Prometheus
Income Partners in connection with the solicitation of proxies by and on behalf
of Prometheus Development Co., as general partner of Prometheus Income Partners,
for use at the meeting of limited partners to be held at 1:30 p.m., local time,
on March __, 2001, at [location], and at any adjournments or postponements of
the meeting.
Matters to be Considered
At the meeting, the limited partners will be asked to consider and vote on
the merger proposal and the adjournment proposal and to consider any other
matters as may properly come before the meeting. A vote for the merger proposal
is not also a vote for the adjournment proposal. You must vote separately on
each proposal.
Approval of the merger proposal by the limited partners is a condition to
Prometheus Income Partners' participation in the merger.
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Approval of the adjournment proposal will permit the adjournment of the
meeting to solicit additional proxies in the event that there are not sufficient
votes at the time of the meeting to approve the merger proposal. The merger
provides that Prometheus Development Co. will recommend the adjournment of the
meeting for ten days if on the date of the meeting Prometheus Income Partners
has not received duly executed proxies which, when added to the number of votes
represented in person at the meeting by persons who at that time intend to vote
for the merger proposal, will constitute a sufficient number of votes to approve
the merger proposal. However, if limited partners holding greater than a
majority of the outstanding units have indicated their intention to vote
against, and have submitted duly executed proxies voting against, the merger
proposal, the merger does not require Prometheus Development Co. to recommend
adjournment of the meeting. Approval of the adjournment proposal by the limited
partners is not a condition to Prometheus Income Partners' participation in the
transaction.
Other than the merger proposal and the adjournment proposal, Prometheus
Development Co. does not expect to ask the limited partners to vote on any other
matters at the meeting. However, if matters other than the merger proposal and
the adjournment proposal are properly brought before the meeting, or any
adjournments or postponements of the meeting, the persons appointed as proxies
will have discretion to vote or act on those matters according to their best
judgment.
Recommendations of the General Partner and the Acquiring Parties
Prometheus Development Co., Prometheus Income Partners, PIP Partners, PIP
Acquisition, PromHill, The DNS Trust, Helen Diller and Sanford Diller,
considering, among other factors, the opportunity for the limited partners to
achieve liquidity, have each determined that the transaction is fair to
Prometheus Income Partners and its limited partners. Accordingly, these parties
have approved the merger and the transactions contemplated by the merger.
Each of these parties recommends that limited partners of Prometheus
Income Partners vote for the merger proposal and for the adjournment proposal.
Record Date; Voting Power
Prometheus Development Co. has fixed the close of business on February __,
2001, as the record date for determination of the limited partners entitled to
notice of and to vote at the meeting and any adjournment or postponement of the
meeting. Only holders of record of units at the close of business on February
__, 2001 are entitled to notice of and to vote at the meeting. As of the record
date, there were 18,995 units in Prometheus Income Partners outstanding and held
of record by ____ holders of record. Holders of record of units are entitled to
one vote for each unit that they hold on the merger proposal, the adjournment
proposal and any other matter that may properly come before the meeting.
Quorum
The necessary quorum for the transaction of business at the meeting is the
presence in person or by proxy of limited partners holding a majority of the
units in Prometheus Income Partners outstanding on the record date. For purposes
of determining the presence of a quorum,
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proxies marked "ABSTAIN" will be counted by Prometheus Development Co. as
present at the meeting.
In the event that there are insufficient votes present at the meeting to
constitute a quorum, and proxies and votes for the merger proposal represent
fewer than 50% of the units, the units for which proxies have been received
marked in favor of the adjournment proposal may be voted to adjourn the meeting
to a later date. Notice of the adjourned meeting need not be given if the time
and place of the adjourned meeting is announced at the meeting, the adjournment
is for not more than forty-five days from the date of the original meeting and
no new record date is set.
Vote Required
A vote for the merger proposal is not also a vote for the adjournment
proposal. You must vote separately on each proposal. The affirmative vote of
limited partners holding greater than 50% of the units outstanding on the record
date is required to approve the merger proposal. The affirmative vote of limited
partners holding more than 50% of the units present in person or by proxy at the
meeting is required to approve the adjournment proposal.
Limited partners are urged to complete, date, sign and promptly return the
enclosed proxy. All properly executed proxies received by Prometheus Development
Co. prior to the meeting that are not revoked will be voted at the meeting in
accordance with the instructions indicated on the proxies.
If you mark "ABSTAIN" on your proxy and do not vote in person at the
meeting, the effect will be the same as a vote against the merger proposal. If
you fail to return your proxy and do not vote in person at the meeting, as a
result of the agreement of PIP Partners to vote as have the voting limited
partners, the effect on the merger proposal will depend on how other limited
partners vote. If you fail to return your proxy, your units will have no effect
on the outcome of the adjournment proposal. If you mark "ABSTAIN" on your proxy
and do not vote in person at the meeting, the effect will be the same as a vote
against the adjournment proposal. If you sign and return your proxy but do not
give instructions on your proxy, your units will be voted for the merger
proposal and for the adjournment proposal.
Approval of the merger proposal by the limited partners is a condition to
Prometheus Income Partners' participation in the merger. Therefore, if we do not
receive votes for the merger proposal from limited partners holding greater than
50% of the units, the merger proposal will not be approved and Prometheus Income
Partners will not participate in the merger.
Approval of the adjournment proposal by the limited partners is not a
condition to Prometheus Income Partners' participation in the transaction.
Approval of the adjournment proposal by the limited partners will permit the
adjournment of the meeting to solicit additional proxies in the event that there
are not sufficient votes at the time of the meeting to approve the merger
proposal.
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Changing Your Vote
You may revoke your proxy at any time before it is voted at the meeting
(1) by sending in a later dated, signed proxy, (2) by written notice of
revocation to Prometheus Development Co. or (3) by attending the meeting and
voting in person.
Solicitation of Proxies
Proxies are being solicited by and on behalf of Prometheus Development
Co., as general partner of Prometheus Income Partners. In addition to
solicitation by mail, Prometheus Development Co. and the officers and directors
of Prometheus Development Co., principally Mr. Murphy and Ms. Mullins, may
solicit proxies by telephone, telegram or facsimile transmission. No additional
compensation will be paid to these persons for these solicitation services.
Prometheus Income Partners will request that brokerage firms, fiduciaries and
other custodians forward copies of this Proxy Statement and the enclosed form of
proxy to the beneficial owners of units held of record by them, and Prometheus
Income Partners will reimburse those brokerage firms, fiduciaries and other
custodians for their reasonable expenses incurred in forwarding this material.
Prometheus Income Partners has retained persons to aid it in the solicitation.
Pursuant to a letter agreement dated February __, 2001 between MacKenzie
Partners, Inc. and Prometheus Development Co., MacKenzie Partners agreed to
distribute this Proxy Statement to limited partners, provide information with
respect to the merger to limited partners, and provide advisory services to
Prometheus Development Co. with respect to the merger. Prometheus Development
Co. agreed to pay MacKenzie Partners a set fee plus out-of-pocket expenses
incurred by MacKenzie in rendering these services.
The matters to be considered at the meeting are of great importance to
Prometheus Income Partners and to the limited partners. Please read and
carefully consider the information presented in this Proxy Statement and the
other documents to which we have referred you and complete, date, sign and
promptly return the enclosed proxy. Completed proxies should be returned as soon
as possible. You may return your proxy as follows:
by regular mail, in the enclosed postage-paid envelope, to:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, NY 10010
(800) 322-2885
proxy@mackenziepartners.com
or by fax to:
[Phone]
List of Limited Partners
Under the federal securities laws, a limited partner who is entitled to
vote at the meeting may request in writing a list of the other limited partners
entitled to vote at the meeting to enable the requesting limited partner to mail
soliciting materials to the other limited partners.
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Alternatively, a limited partner of Prometheus Income Partners who is entitled
to vote at the meeting may request that Prometheus Income Partners mail copies
of any proxy statement, form of proxy or other soliciting material furnished by
the requesting limited partner to the other limited partners. The requesting
limited partner must reimburse Prometheus Income Partners for Prometheus Income
Partners' reasonable expenses incurred in connection with performing these
services. Any requests referred to in this paragraph should be made in writing
to: Prometheus Development Co., Inc., 350 Bridge Parkway, Redwood City,
California 94065-1517.
At the time of making the request, the requesting limited partner must, if
its units are held through a nominee, provide Prometheus Income Partners with a
statement from the nominee or other independent third party confirming the
limited partner's beneficial ownership. In addition, the requesting limited
partner must provide Prometheus Income Partners with an affidavit or similar
document that:
o identifies the proposal that will be the subject of the limited
partner's solicitation;
o states that the limited partner will not use the list for any
purpose other than to solicit limited partners with respect to the same
action for which Prometheus Income Partners is soliciting votes; and
o states that the limited partner will not disclose the information
provided to it to any person other than a beneficial owner for whom the
request was made and an employee or agent to the extent necessary to
effectuate the communication or solicitation.
Upon termination of any solicitation by the requesting limited partner,
the requesting limited partner must return to Prometheus Income Partners,
without keeping any copies, the information provided by Prometheus Income
Partners and any information derived from that information. A limited partner is
only entitled to the foregoing information with respect to Prometheus Income
Partners.
The partnership agreement of Prometheus Income Partners provides that a
current list of limited partners is open to inspection, examination and copying
by a limited partner of Prometheus Income Partners or that limited partner's
duly authorized representative at all reasonable times.
THE PARTIES
Prometheus Income Partners
Background
Prometheus Income Partners, a California limited partnership, was formed
on April 15, 1985, under the California Revised Limited Partnership Act, for the
purpose of acquiring the Alderwood and Timberleaf properties. Prometheus
Development Co., Inc., a California corporation, is the general partner of
Prometheus Income Partners. The principal business of Prometheus Income Partners
is to invest in, construct, hold, operate, and ultimately sell its properties.
The principal investment objectives of the partnership are to preserve and
protect its
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capital, to obtain capital appreciation from the sale of its 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 it.
With the proceeds of two bank loans, an affiliate of Prometheus
Development Co. purchased the Timberleaf site from an unaffiliated third party
in January 1985. With the proceeds of another bank loan, Prometheus Development
Co. leased the Alderwood site from a local school district with a purchase
option in April 1985. Ownership of Timberleaf and the interest under the
Alderwood lease subsequently were transferred to the partnership.
Beginning in February 1987 through December 1987, Prometheus Income
Partners offered and sold 19,000 limited partnership units for $19,000,000. The
sale of these units was registered under the Securities Act of 1933, as amended,
pursuant to a Registration Statement that was declared effective on February 12,
1987; the offering and sale of the units was completed in December 1987. The net
proceeds of that offering, together with the proceeds of additional bank loans,
were used to satisfy the construction loans with respect to the Alderwood and
Timberleaf properties and to exercise the purchase option for the Alderwood land
site.
Prometheus Income Partners 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. Prometheus Income Partners has no employees, officers or
directors. Prometheus Real Estate Group, Inc., a California corporation,
previously known as Prom Management Group, Inc., a California corporation doing
business as Maxim Property Management, the majority of which is beneficially
owned by Mr. Diller, employs all of the personnel for the operation of
Prometheus Income Partners' properties pursuant to a Management and Operating
Agreement, dated as of October 1, 1992, by and between Prometheus Income
Partners and Prometheus Real Estate Group. The senior management personnel of
Prometheus Real Estate Group also act in these capacities for certain other real
estate partnerships in which Mr. Diller and other officers of Prometheus
Development Co. hold interests. Prometheus Real Estate Group receives various
fees and reimbursement of various expenses from Prometheus Income Partners under
the Management and Operating Agreement.
Prometheus Income Partner'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. Its properties are located in an
area that contains numerous other competitive residential rental properties. The
income of the properties may be affected by various 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 these
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. Prometheus Development Co. is unable to predict the
effect, if any, of these events on the future operations of Prometheus
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Income Partners. There is no assurance there will be a ready market for the sale
of the properties or, if sold, that a sale could be made on favorable terms.
Properties
Prometheus Income Partners owns the 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. Lease-up activities began in November
1986 and continued through the third quarter of 1987. 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. 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.
Alderwood and Timberleaf are encumbered by first mortgage liens, which
secure promissory notes payable as of June 30, 2000 in the amount of $16,805,000
and $9,231,000, respectively. 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, may be subject to a
prepayment penalty.
Construction Defects; Litigation -
Construction Defects
--------------------
In June 1996, Prometheus Development Co. learned that the hardboard siding
used at both Alderwood and Timberleaf was beginning to fail. That was the first
indication of potential product failure at these properties, and the general
partner commissioned a survey of the sites.
On June 26, 1996, experts conducted the first visual inspection of
Alderwood with respect to the defects on behalf of Prometheus Income Partners.
Throughout 1997 and 1998, the partnership inspected and investigated Alderwood
with respect to the construction defects, and in March and November 1998,
various defendants inspected and investigated Alderwood as well. Similarly, on
July 11, 1996 experts conducted the first visual inspection of Timberleaf.
Additional investigations took place in 1997, 1998 and 2000.
As of the dates of these inspections, moisture had accumulated in the
walls of these projects through a combination of construction defects and
endemic problems with the hardboard siding. Sufficient moisture over time causes
rot and decay in the wood, framing and siding which necessitates repairs which,
in some cases, are structural in nature. Rot and decay, which form inside the
wall, are not visible, and until rot and decay have caused changes in the
physical
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appearance of the exterior of the buildings, it is difficult to ascertain all
the locations where rot and decay exist. On September 23, 1996, Prometheus
Income Partners filed two lawsuits against the siding manufacturer, the general
contractor, the subcontractors and the architects, one for each of its
properties, regarding problems at the properties stemming from the hardboard
siding. Each of these persons has denied responsibility for the defects. In
October 1997, a cross-claim was filed by one of the defendants in each of these
lawsuits against the partnership seeking relief against other parties to the
litigation if either filing party is found liable in the litigation. This cross
claim was tendered to the partnership's insurance carrier, counsel for whom has
denied all allegations. The general partner does not believe there is a
substantial risk of recovery against the partnership on this claim, but there is
no assurance a judgment will not be rendered against the partnership based on
this claim.
As part of the inspections discussed above, certain structural issues
caused by the defects in the hardboard siding were uncovered at Alderwood and
Timberleaf and were rebuilt as part of an immediate repair process. Prometheus
Development Co. subsequently determined that additional immediate repairs were
necessary, which, with the exception of roof repairs noted below, have been
completed. Prometheus Development Co. continues to monitor the condition of the
property to look for any other signs of rot and decay that would necessitate
immediate attention and repair.
In addition to the hardboard siding problems, in September 1999 routine
roofing inspection uncovered failing roof substrate at dormer roof assemblies
for Alderwood and Timberleaf. Prometheus Development Co. traced the cause of
this roofing problem to inadequate venting of the roof space. Inadequate venting
leads to condensation in roof areas. This has been sufficient to cause
deflection and decay of the roof and its structural support, requiring
replacement. Prometheus Development Co. has received design specifications for
remedial roof repairs and has completed a prototype repair of four dormer roof
assemblies. A bid based on the approved scope for additional dormer roof repair
as recommended by our engineer is currently being reviewed and once fully
negotiated will be executed. These repairs will begin as soon as possible.
Based on information currently available to the general partner, damages
and economic loss appear to be in the range of $19-$20 million.
Since 1997, both cases have been under the supervision of a Special Master
who is appointed and empowered by the court to assist in resolving the cases.
Investigations and other subsequent discoveries have been 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 in March 1998 for Alderwood and May 1998 for Timberleaf, 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. Additional testing and
investigations have been conducted periodically on the properties and continue
to be performed from time to time.
The first settlement conference supervised by the Special Master was held
on March 11, 1997 among the various defendants and Prometheus Income Partners.
Since then, there have been conferences with respect to Timberleaf in May, June,
September and December 1997,
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April, June, August, October and December 1998, and February, June and October
1999. There have also been conferences with respect to Alderwood in January,
March, April, September, October and November of 1999. None of these conferences
produced a settlement, and so on May 5, 2000, the judge ordered another
mandatory settlement conference to be held on August 16, 2000. No settlement was
reached at this conference. It is possible that a settlement of pending
litigation can occur anytime, but based on the lack of any agreement on the
terms or parameters of a settlement arising out of prior settlement conferences
and discussions, and that the sides are far apart in terms of the framework for
any potential settlement, Prometheus Development Co. believes settlement in the
near term to be unlikely. A trial date is expected to be set by the superior
court for the second quarter of 2001.
Under applicable law and court rules, a trial date must be set prior to
September 9, 2001, five years after Prometheus Development Co. filed the initial
complaints. The discovery of additional construction defect problems, as
discussed above, may result in additional delays.
The terms of the mortgages on the properties require that a security
account be maintained for each property to cover contingent liabilities with
respect to defects in the properties' hardboard siding. These security accounts
are additional collateral for the lender, and total, as of September 30, 2000,
approximately $5,176,000. Because there is no current prospect for settling the
hardboard siding litigation or of refinancing the properties to remove these
covenants, there are no current prospects for the liquidation and distribution
of these accounts to limited partners.
In addition to the security accounts mandated under the partnerships'
financing arrangements, Prometheus Development Co. has determined that it is in
the best interest of the partnership to continue building reserves for the
potential cost of dealing with known and unknown construction defects.
Prometheus Development Co. currently maintains an additional account totaling as
of December 31, 2000 approximately $2,885,000, which is primarily intended to
cover additional contingent liabilities related to the construction defects and
other matters.
The extent and magnitude of the construction defects continues to worsen
with time. Prometheus Development Co. believes that Prometheus Income Partners
can no longer wait for the cases to be resolved and has authorized the start of
repairs using the cash reserve funds currently held. As of December 31, 2000,
Prometheus Income Partners has spent approximately $1,561,000 on emergency
repairs and litigation expenditures. Assuming that the litigation is not
successfully resolved, over the next twelve months the partnership anticipates
spending approximately $1,900,000 to $2,400,000 on additional urgent repairs. 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. The
cost of pursuing litigation also is significant. Prometheus Development Co.
cannot predict or estimate what amounts, if any, will be recovered through
litigation.
Recent Tender Offers
The following are the sole tender offers that have been made for units.
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Beginning in 1996, competing tender offers were made for units. One tender
offer from Prom Investment Partners commenced in December 1996. In response to
that offer, PIP Partners made a similar offer, which commenced in January 1997.
An aggregate 2,750.5 units were tendered to and purchased by these bidders per
unit - 1,430 to PIP Partners and 1,320.5 to Prom Investment Partners, 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 pursuant to these offers for $495 per unit.
During 1998, Bond Purchase, LLC, a third party not affiliated with PIP
Partners, Prometheus Development Co. or Mr. Diller, made an unsuccessful offer
to purchase units. The offer was for less than 5% of outstanding units and
nominal legal costs were incurred by Prometheus Income Partners. On October 16,
1998 Bond Purchase, LLC cancelled its transfer request and no units were
acquired by it.
On June 27, 2000, Everest Properties II, LLC, a third party not affiliated
with PIP Partners, Prometheus Development Co. or Mr. Diller, made a tender offer
for up to 2% of the units, or 379 units, for $650 per unit. This tender expired
by its terms on July 31, 2000. On October 1, 2000, Everest Properties was
admitted as a limited partner with respect to 289 units that were tendered
pursuant to this tender offer.
The Partnership Agreement of Prometheus Income Partners
Pursuant to the partnership agreement of Prometheus Income Partners,
Prometheus Development Co. is the sole general partner of the partnership. All
of the outstanding shares of the general partner are owned by The DNS Trust. Mr.
Sanford N. Diller and Mrs. Helen Diller are the sole trustees and beneficiaries
of The DNS Trust. Mr. Diller is also President, Secretary and a director of the
general partner. The DNS Trust is also the principal beneficial owner of PIP
Partners - General; thus, PIP Partners and the partnership are affiliates. The
general partner has responsibility for all aspects of the partnership's
operations. The partnership agreement of Prometheus Income Partners contains
provisions relating to the rights and obligations of the general partner, the
limited partners and the partnership, including without limitation, the
financial arrangement between the general partner and the partnership.
The partnership agreement provides, and, as parties thereto, the limited
partners agree, that the general partner and its affiliates have the right to
contract with or otherwise deal with the partnership subject in certain cases to
the approval of the limited partners.
Subject to certain limitations contained in the partnership agreement, the
partnership is to distribute quarterly all distributable cash from operations as
follows:
(1) initially 100% to the limited partners until the limited
partners have received a sum each year equal to a 10% simple annual rate
of return on their investment;
(2) after the receipt by the limited partners of this 10% return,
100% to the general partner until the general partner has received 5% of
the aggregate cash distributed to the limited partners in that year; and
(3) thereafter, 95% to the limited partners and 5% to the general
partner.
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The partnership agreement provides that cash received from the sale or
refinancing of the properties would be used or distributed to the extent funds
are available as follows:
(1) to the payment of current partnership obligations, liabilities
and expenses;
(2) to the setting up of reserves which the general partner may deem
necessary for partnership debts or liabilities, whether payable or not yet
payable, including any contingent or unforeseen liabilities or
obligations; and
(3) 100% to the limited partners until each limited partner has
received an amount equal to:
(a) the excess of a 10% annual simple rate of return on the
limited partners' investment (plus an amount necessary to provide
limited partners subscribing for units on or prior to June 1, 1987,
an 11% annual simple rate of return for calendar 1988 on invested
capital) less the sum of all previous cash distributions during the
term of the partnership other than distributions of invested
capital;
(b) the limited partners' remaining invested capital; and
(c) to the general partner a commission fee of up to 3% of the
proceeds of a sale of a property (see below for a more complete
explanation of this commission).
(4) The balance: 85% to the limited partners, 15% to the general
partner.
However, distributions of net proceeds from a sale or refinancing arising
from the termination of Prometheus Income Partners would be distributed first in
proportion to, and to the extent of, the positive capital account balances of
the limited partners and the general partner and then as set forth above.
The commission the general partner is entitled to receive as set forth
above is equal to the lesser of (a) 3% of gross sale price of the property and
(b) one-half of the competitive real estate brokerage commission which would be
charged by unaffiliated parties rendering similar services. However, all real
estate brokerage commissions or similar fees payable to all persons involved in
the sale of a property may not exceed 6% of the sales price.
The partnership agreement further provides for the allocation of the net
profits and net losses among the general partner and the limited partners.
If, immediately prior to the dissolution and termination of the
partnership, the general partner's capital account has a deficit balance and the
partnership's assets available for distribution upon dissolution and termination
are insufficient to provide distributions to limited partners equal to their
aggregate invested capital, the general partner shall be obligated to contribute
to the partnership that amount of capital if any equal to the lesser of:
o an amount sufficient to restore its capital account to zero and
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o 1.01% of the aggregate capital contributions of the limited
partners, less any capital previously contributed by the general partner.
If Prometheus Development Co. ceases to be the general partner of the
partnership upon the occurrence of certain terminating events, including
withdrawal, removal as a result of the majority vote of the limited partners,
bankruptcy, reorganization or dissolution and termination of Prometheus
Development Co., then the partnership will, at its election, either
o purchase Prometheus Development Co.'s interest; or
o convert to that of a special limited partnership interest.
Upon conversion of its interest to that of a special limited partner,
Prometheus Development Co. would retain the same rights to profits, losses, and
distributions as before the terminating event and would be entitled to the
voting rights accorded other limited partners. If Prometheus Development Co.'s
interest is repurchased, it would receive from the partnership the then present
value of its interest in the partnership, determined by agreement of Prometheus
Development Co. and the partnership. If the parties cannot agree, the purchase
price would be determined in accordance with the then current rules of the
American Arbitration Association, with the expense of arbitration borne equally
by the parties. If the termination of Prometheus Development Co. was voluntary,
the method of payment for its interest would be under a non-interest bearing
unsecured, promissory note with principal payable from distributions which
Prometheus Development Co. otherwise would have received under this Agreement if
it had remained as general partner. If the termination is involuntary, the
method of payment would be a promissory note bearing interest at the reference
rate of the bank specified by Prometheus Development Co., with equal payments of
principal and interest over a term of five years.
Prometheus Income Partners is permitted to engage in various transactions
involving Prometheus Development Co. and its affiliates, as more fully described
in the partnership agreement.
The partnership agreement provides that Prometheus Income Partners will
reimburse its general partner, or its affiliates for:
o the actual cost to the general partner or its affiliates of goods
and materials used for or by the partnership and obtained from entities
which are not affiliated with the general partner;
o expenses for specified administrative services;
o other administrative services, provided that these services are
necessary to the prudent operation of the partnership; and
o funds advanced to the partnership by the general partner or its
affiliates pursuant to the management agreement.
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However, no reimbursement for administrative services is permitted for
services for which the general partner or its affiliates receive a separate fee,
and the amount of these expenses may not exceed the lesser of:
o the actual cost of these services; and
o 90% of the amount which Prometheus Income Partners would be
required to pay to independent third parties for comparable services.
For 1999 and 2000 to date, Prometheus Development Co. or its affiliates,
other than the management company (which was entitled to additional
reimbursements under the partnership's management agreement), did not receive
any reimbursement for direct or other administrative and out-of-pocket expenses.
The partnership agreement exculpates the general partner, its officers,
directors and affiliates from liabilities to Prometheus Income Partners and
indemnifies the general partner, its officers, directors and affiliates against
liability to third parties resulting from its or their acts or omissions, so
long as the conduct was in the best interests of the partnership, except in the
event these liabilities or losses resulted from misconduct or negligence (gross
or ordinary). As a result of the exculpation and indemnification provisions, a
limited partner may be entitled to a more limited right of action than he or she
would otherwise have if these provisions were not included in the partnership
agreement.
For further information regarding the partnership agreement of Prometheus
Income Partners, review the partnership agreement of Prometheus Income Partners,
filed as Appendix B hereto.
Repurchase Rights
Pursuant to the partnership agreement the general partner may allocate up
to 10% of distributable cash from operations on an annual basis for the
repurchase of units from limited partners. During its existence, the partnership
may repurchase only up to 5% of the outstanding units, although the general
partner may increase the percentage of units eligible for repurchase. The
repurchase price is equal to 80% of the value of the units repurchased, as
determined by the general partner, utilizing a sales/liquidation analysis that
is based on independent appraisals. As noted elsewhere in this document, the
general partner believes the current repurchase price as so calculated would be
substantially below the merger consideration. Repurchases are required to be
made on a first come, first served basis. On January 1, 1994, the partnership
acquired five units from a limited partner pursuant to these repurchase rights
at a price of $309 per unit. The valuation method used for this repurchase did
not follow the provisions set forth in the partnership agreement. Instead, the
partnership and the limited partner agreed to a valuation method which is used
by real estate brokers in the area the properties were located, based upon an
estimated market value of the properties, less debt prepayment penalties and a
discount as provided in the partnership agreement
Prometheus Income Partners made no repurchases under this Limited
Liquidity Plan during the years ended December 31, 2000, 1999, 1998 and 1997 and
has made no repurchases
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thereunder to date in 2001. Prometheus Income Partners has not repurchased units
because of the lack of availability of cash for such purpose after the
establishment of the reserves described above.
Financing
Each of the properties is subject to a Loan Agreement and a Deed of Trust,
Security Agreement and Fixture Filing with Assignment of Rents in connection
with certain debt incurred by the partnership as part of the refinancing of the
properties in 1997. Under these documents, the partnership has issued a
non-recourse Note with respect to each property, secured by a first deed of
trust. These Notes bear fixed interest of 6.99% for Alderwood, and 7.09% for
Timberleaf. No immediate plans have been made to repay these Notes.
The terms of the Notes require, among other things, that the partnership
maintain a security account with respect to each property. These security
accounts are additional collateral for the lender. Cash held in these security
accounts was $2,993,000 and $2,183,000 for Alderwood and Timberleaf,
respectively, as of December 31, 2000. On an annual basis, for each property,
the partnership is obligated to contribute an amount 10% of the current value of
the security account to the security account . If the total cash flow for a
property is less than the required contribution, Prometheus Income Partners may
contribute an amount equal to the total cash flow, but will be obligated to
continue to deposit all cash flow into the security accounts until the total
deposits equals the required contribution.
If the construction defects repairs are not 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 Prometheus Income Partners 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 reasonable fees and expenses incurred by the
lender shall be paid by the partnership.
If the litigation is not settled by December 2002, and the partnership has
then met all its obligations under the Notes, then the date for completion of
required repairs 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 as of December 31, 1999,
1998 and 1997, respectively. As of December 31, 2000, the cash balance was
$2,823,000. The reinstatement and level of future distributions, if and when
reinstituted, 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 defect problems,
and continued stabilized operations at the properties.
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Restriction Under Loan Documents. Prometheus Income Partners agreed to
maintain insurance for the properties, maintain the properties in good order,
not to transfer the properties, not seek to change the zoning of the properties,
and not to operate the properties as condominiums or cooperatives.
With respect to transfers, the loan documents may limit mergers involving
the partnership, unless the consent of the lender is obtained. A violation of
these provisions may allow the lender thereunder to, among other things,
accelerate the payment of all principal and interest and charge Prometheus
Income Partners as a prepayment penalty. If the consummation of the merger
confers upon the lender the right to accelerate the loans, PIP Partners will
seek to obtain the consent of the lender. PIP Partners intends to enter into
discussions with the lender to determine if the lender will grant consent, if
required, and, if so, on what terms. If an acceptable agreement can be
concluded, any fee incurred with respect to obtaining this consent will be paid
by PIP Partners. However, Prometheus Income Partners has not entered into any
discussions to date and does not intend to do so until it distributes the proxy
materials to the limited partners.
Distributions
Distributions to limited partners began with the quarter ending September
29, 1987. The limited partners collectively received aggregate distributions of
distributable cash from Operations in 1995 of approximately $1,550,000 (or
$81.60 per unit) and approximately $375,000 in 1996 ($19.74 per unit). Cash
distributions were suspended in 1996. No distributions were made for 1996, 1997,
1998, 1999 or 2000.
Quarterly distributions have been suspended in order to continue building
reserves for the potential cost of dealing with the construction defect
problems. Had these reserves not been necessary, the general partner estimates
that the distributions from 1996 through September 30, 2000 would have
approximated an aggregate of $7,400,000, or $390 per limited partner unit. At
this time, the general partner cannot predict when distributions will resume;
however, it is Prometheus Development Co.'s current intention to resume
distributions as soon as reasonably possible and prudent. The reinstatement and
level of future distributions, if and when reinstituted, 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.
Executive Officers
Prometheus Income Partners 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. After the merger, all of the persons
who currently are officers and employees of Prometheus Development Co. will
continue to be officers and employees of Prometheus Development Co.
Sanford N. Diller. Age 72. President, Secretary and sole Director. Mr.
Diller supervises the acquisition, disposition and financial structuring of
properties. Mr. Diller founded Prometheus Development Co., and effectively
controls all of its outstanding stock. Mr. Diller received his undergraduate
education at the University of California at Berkeley and his Doctor
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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 41. Vice President. Ms. Mullins' responsibilities
include supervising all property operations, information systems and finance, as
well as managing the disposition and financial structuring of properties. Ms.
Mullins came to Prometheus Development Co. in March 1994 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 38. Vice President. Mr. Murphy's responsibilities
include managing all financial, accounting and reporting activities, and
insurance. Mr. Murphy came to Prometheus Development Co. in January 1995 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.
Helen Diller. Age 71. Trustee of The DNS Trust. Ms. Diller has not been
employed for the past five years. She is not involved in the management of The
DNS Trust or any of the other entities described in this document.
Prometheus Income Partners does not pay or employ directly any officers or
directors. Compensation to executives and employees of Prometheus Development
Co. is not based on the operations of Prometheus Income Partners. Prometheus
Real Estate Group, the property manager of the partnership's properties, and its
affiliates receive a management fee as compensation for services rendered and
reimbursement of certain partnership expenses.
During the last five years, none of the above has been convicted in a
criminal proceeding excluding traffic violations or similar misdemeanors, nor
have any of the above been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of this proceeding
was or is subject to a judgment, decree or final order enjoining future
violations of, or prohibiting or mandating activities subject to, federal or
state securities laws or finding any violation with respect to these laws. All
of the above are U.S. citizens.
Principal Unitholders
Other than PIP Partners, which as of January 31, 2001 owns 18.2% of the
outstanding units, no person of record owns or is known by the Registrant to
directly own beneficially more than 5% of the outstanding units. 99% of the
membership interests of PIP Partners are held by Sanford N. Diller and Helen P.
Diller as Trustees of The DNS Trust, and 1% of these interests are held by
Jaclyn B. Safier. Thus, through PIP Partners, Mr. Diller, Mrs. Diller and The
DNS Trust indirectly beneficially own these units.
Prometheus Development Co. owns no units. However, Prometheus Development
Co., pursuant to the partnership agreement of Prometheus Income Partners, has
discretionary control
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over most of the decisions made for Prometheus Income Partners. In addition, Mr.
Diller, the holder of 99% of the outstanding equity of Prometheus Development
Co., beneficially holds 18.2% of the units through PIP Partners, as described
above, and is the sole executive officer of Prometheus Development Co. who
beneficially owns units.
Following the merger, PIP Partners will own all of the units.
Recent Transactions
In 1994, a total of five units were repurchased by Prometheus Income
Partners from a limited partner unaffiliated with Prometheus Development Co.
pursuant to the repurchase program established under the partnership agreement
and described above under the caption "Repurchase Rights" beginning on page 54.
Since 1994, Prometheus Income Partners has made no repurchases under this
Limited Liquidity Plan, principally due to the lack of availability of cash for
such purpose after the establishment of the reserves described above.
The current market for units is thin and illiquid. Prometheus Development
Co. is aware of three companies who quote prices for units, and through which a
small number of units, usually less than 1% of issued and outstanding units, are
traded each year. When the partnership is contacted by a limited partner
regarding the possible sale of units, the partnership identifies these three
companies, whom the partnership believes are brokers, to the limited partner and
provides contact information. The partnership also indicates the interest of PIP
Partners in acquiring units.
PIP Partners acquired 7.5283% of the outstanding units in 1997. During
1998, 1999 and 2000, PIP Partners acquired 0.716%, 1.2371%, and 0.855% of
outstanding units, respectively at prices ranging from $495 to $550 per unit. In
June 2000, PIP Partners purchased 1,487.5 units from Prom Investment Partners
and two of its affiliates (Liquidity Fund Growth--Plus Partners, a California
limited partnership and Liquidity Fund Appreciation and Income Partners, a
California limited partnership), for $1,200 per unit. This purchase price was
arrived at pursuant to arm's-length negotiations between PIP Partners and Prom
Investment Partners. PIP Partners is controlled by The DNS Trust, and Sanford
and Helen Diller.
On February 17, 2000, a limited partner unaffiliated with Prometheus
Development Co. contacted Prometheus Income Partners requesting information on
how to dispose of its units. Prometheus Income Partners responded with an
information letter describing the secondary market for units. On April 11, 2000,
the limited partner initiated a transaction whereby it would sell 2.5 units to
PIP Partners. The transaction was confirmed and the funds were disbursed to the
limited partner on May 1, 2000, and these units were transferred on July 1,
2000.
Other than as described above and under the caption "Background - Reasons
for the Merger" beginning on page 27, neither PIP Partners, Prometheus
Development Co. nor any party affiliated with either of them has made any effort
to purchase or sell units or been willing to buy or sell units. However, PIP
Partners has contacted the three companies mentioned above and asked these
companies to contact it when units become available for purchase.
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PIP Partners - General, LLC
PIP Partners - General, LLC was formed in 1996 to make a tender offer for
units as described above under the caption "Recent Tender Offers" on page 50.
The DNS Trust is also the sole shareholder of Prometheus Development Co. Since
that time, PIP Partners has acquired additional units. PIP Partners conducts no
other business. It is controlled by The DNS Trust and Sanford Diller, who also
control Prometheus Development Co. The Manager of PIP Partners is PromHill,
Inc., a California corporation which is beneficially owned by The DNS Trust.
PromHill is solely in the business of acting as a manager of limited liability
companies and a general partner of partnerships affiliated with the general
partner. The DNS Trust beneficially owns 99% of the interests in PIP Partners.
The sole director of the Manager is Sanford N. Diller, who is also the
President, Secretary and the sole director of Prometheus Development Co. Vicki
R. Mullins and John J. Murphy are also executive officers of the Manager. The
principal executive offices of PIP Partners - General are located at 350 Bridge
Parkway, Redwood City, California 94065-1517, telephone number 650-596-5393.
PIP Acquisition
PIP Acquisition, LLC is a newly formed California limited liability
company which was organized by PIP Partners in connection with the transactions
contemplated by the merger. PIP Acquisition is a nonsubstantive transitory
merger vehicle that will be merged out of existence at the effective time of the
merger. Accordingly, it is not expected to have significant assets or
liabilities other than those arising under the merger or to engage in any
activities other than those incident to its formation and the merger. PIP
Acquisition is a wholly owned subsidiary of PIP Partners. It is controlled by
The DNS Trust and Sanford Diller, the same entities who control Prometheus
Development Co. The principal executive offices of the PIP Acquisition are
located at 350 Bridge Parkway, Redwood City, California 94065-1517, telephone
number 650-596-5393.
THE MERGER
Effects of the Merger on Prometheus Income Partners
If the merger proposal is approved by the limited partners and Prometheus
Income Partners participates in the transaction, then the effects of the
transaction with respect to Prometheus Income Partners will be as follows:
o Limited partners other than PIP Partners - General will receive the
Liquidation Value in cash for each unit, $1,200 of which will be paid
promptly following the consummation of the merger and the balance of
which (if any) will be paid following repair of existing construction
defects and final resolution of the associated litigation. The current
limited partners of Prometheus Income Partners other than PIP Partners
will no longer have any interest in and will not be limited partners
and, therefore, will not participate in Prometheus Income Partners'
future earnings and potential growth.
o Prometheus Development Co. will own the general partner interest in
Prometheus Income Partners and PIP Partners will own all of the
outstanding units. Sanford
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Diller, Helen Diller and Jaclyn Safier will thus hold all of the equity
of Prometheus Income Partners.
o Prometheus Development Co. intends to seek deregistration of the
units under the Exchange Act, and, if deregistration is obtained, all
SEC reporting obligations of Prometheus Income Partners will cease
pursuant to Section 12(g)(4) and 15(d) of the Exchange Act, because the
units will be held by fewer than 300 persons. No future transaction
would be subject to Rule 13e-3 of the Exchange Act.
o Limited partners will receive final Schedule K-1s from Prometheus
Income Partners after the closing of the transaction and thereafter will
no longer receive Schedule K-1s from Prometheus Income Partners.
o PIP Partners intends to continue to retain all senior management of
Prometheus Development Co. to continue to manage Prometheus Income
Partners.
No Dissenters' Rights
If limited partners owning more than 50% of the units vote for the merger
proposal, this approval will bind all limited partners. Limited partners do not
have any dissenters' rights or other rights of appraisal, under the Act which
governs Prometheus Income Partners, the partnership agreement of Prometheus
Income Partners or otherwise, in connection with the merger. Therefore,
dissenting limited partners do not have the right to have an appraisal of
Prometheus Income Partners to confirm the fair market value of their units if
they disapprove of the action of the limited partners that voted for the merger
proposal.
Federal Income Tax Consequences
The following summary is a general discussion of some of the federal
income tax consequences that are relevant to limited partners. This summary is
based on the Internal Revenue Code of 1986, as amended, applicable Treasury
regulations under the Internal Revenue Code, administrative rulings, practice
and procedures and judicial authority, all as effective as of the date of the
transaction. All of the foregoing are subject to change or alternative
construction with possible retroactive effect, and any change or alternative
construction could affect the continuing accuracy of this summary. This summary
does not discuss all aspects of federal income taxation that may be relevant to
a particular limited partner in light of that limited partner's specific
circumstances or to limited partners subject to special treatment under federal
income tax laws, including except where otherwise noted, foreign persons,
dealers in securities, banks, insurance companies and tax-exempt organizations.
In addition, except as otherwise expressly indicated, this summary does not
describe any aspect of state, local, foreign or other tax laws.
Each limited partner should consult its tax advisor as to the particular
tax consequences to that limited partner of the transaction.
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Taxable Gain or Loss
In general, a limited partner will recognize gain or loss on the
conversion of units into cash as a result of the merger. This gain or loss will
be equal to the difference between the limited partner's "amount realized" from
the merger and the limited partner's adjusted tax basis in the units converted.
The "amount realized" will be a sum equal to the amount of the initial advance
payment ($1,200 per unit) on the merger consideration, the amount of the
deferred payment of the merger consideration (if any) ultimately paid with
respect to the litigation and construction defect repairs ultimately received by
the limited partner for the units in the merger, plus the amount of Prometheus
Income Partners' liabilities allocable to the units as determined under Section
752 of the Internal Revenue Code. In general, a limited partner's initial tax
basis in its units equals its cash investment in Prometheus Income Partners,
increased by that limited partner's share of Prometheus Income Partner's
non-recourse liabilities at the time the units were acquired. Prometheus
Development Co. is not in a position to determine the tax basis for each of the
limited partners.
A limited partner's initial basis is generally increased by:
o that limited partner's share of Partnership taxable income
including its allocable share of taxable income for the year in which
the merger occurs, and
o any increases in that limited partner's share of non-recourse
liabilities of Prometheus Income Partners.
A limited partner's initial basis is generally decreased (but not below
zero) by:
o that limited partner's share of Partnership cash distributions,
o any decreases in that limited partner's share of non-recourse
liabilities of Prometheus Income Partners,
o that limited partner's share of losses of Prometheus Income
Partners including an allocable share of tax loss for the year in which
the merger occurs, and
o that limited partner's share of nondeductible expenditures of
Prometheus Income Partners that are not chargeable to capital.
If a limited partner's adjusted tax basis is less than its share of
Prometheus Income Partners' non-recourse liabilities, including the effect of
net loss allocations and/or distributions exceeding the cost of its units, that
limited partner's gain will exceed the cash proceeds it receives pursuant to the
merger.
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Timing of Gain or Loss
Because the merger consideration includes a deferred payment, which is
uncertain as to amount, the tax treatment of the advance payment and the
deferred payment is uncertain.
Under the so-called "open transaction" doctrine, no current tax
consequence attaches to the receipt of an item of property whose fair market
value cannot be reasonably determined. Limited partners may wish to consult
their tax advisors concerning the possible applicability of the open transaction
doctrine to the receipt of the deferred payment. If the open transaction
doctrine were applicable to the deferred payment, (i) the payment would not be
taken into account in determining a limited partner's gain upon receipt of the
merger consideration and any gain would be limited to the extent the amount
realized with respect to the Advance Payment exceeds the limited partner's tax
basis; (ii) the limited partner would take no tax basis in the deferred payment;
and (iii) amounts thereafter received by virtue of the deferred payment will be
treated partially as interest and the balance as capital gain or loss to the
extent it differs from any remaining basis in the limited partner's units.
It is the position of the Internal Revenue Service, reflected by Treasury
Regulations, that only in "rare and extraordinary cases" is the value of the
property so uncertain that open transaction treatment is available. Accordingly,
the Internal Revenue Service may require a limited partner to allocate his tax
basis in the Partnership units, in general, over a 15 year period (or a shorter
period if it is certain that no further payments will be received). Under this
scenario, it would be possible for a limited partner to recognize significant
capital gain upon the receipt of the advance payment and potentially recognize a
significant capital loss (subject to significant limitations as to usage) in the
year the deferred payment is actually received.
Due to the lack of available precedent and the inherently factual nature
of the question, tax counsel are not able to express any view as to the
availability of open transaction reporting in respect of the deferred payment.
Accordingly, holders are urged to consult their tax advisors regarding the
issue.
Character of Gain or Loss
Except as described below, the gain or loss recognized by a limited
partner upon receipt of cash in the merger will generally be treated as a
capital gain or loss if the units were held by the limited partner as a capital
asset. This capital gain or loss will be treated as long-term capital gain or
loss if the limited partner's holding period for the units exceeds one year.
If any portion of the amount realized by a limited partner is attributable
to "unrealized receivables," which includes recapture of certain depreciation
deductions previously taken, or "inventory items," as defined in Section 751 of
the Internal Revenue Code, then a portion of the limited partner's gain or loss
may be ordinary rather than capital. In addition, a limited partner will be
allocated its pro rata share of Prometheus Income Partners' taxable income or
loss for the year in which the merger occurs, and therefore, will recognize
ordinary income or loss in an amount equal to its allocable share of Prometheus
Income Partners' ordinary income or loss. As described above, this allocation by
Prometheus Income Partners to the limited partner for the
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year in which the merger occurs will affect the limited partner's tax basis in
its units and, therefore, the taxation of the amount of that limited partner's
taxable gain or loss upon the conversion of its units into cash in the merger.
Passive Activity Losses
Under Section 469 of the Internal Revenue Code, a non-corporate taxpayer
or personal service corporation generally can deduct "passive activity losses"
in any year only to the extent of the person's passive activity income for that
year. Closely-held corporations may not offset these losses against so-called
"portfolio" income. Substantially all post-1986 losses of limited partners from
Prometheus Income Partners should be considered passive activity losses. limited
partners may have "suspended" passive losses from Prometheus Income Partners
(i.e., post-1986 net taxable losses in excess of statutorily permitted
"phase-in" amounts which have not been used to offset income from other passive
activities) which may be available to shelter gain from the receipt of cash in
the merger in the manner described below.
Limited partners that recognize a gain on the conversion of their units
into cash in the merger will be entitled to use their current and "suspended"
passive activity losses (if any) from Prometheus Income Partners and other
passive sources to offset that gain. limited partners that recognize a loss on
the conversion of their units into cash in the merger will be entitled to deduct
that loss currently (subject to other applicable limitations) against the sum of
their passive activity income from Prometheus Income Partners for that year (if
any) plus any passive activity income from other sources for that year. The
balance of any "suspended" losses from Prometheus Income Partners that were not
otherwise utilized against passive activity income as described in the two
preceding sentences will no longer be suspended and will therefore be deductible
(subject to any other applicable limitations) by that limited partner against
any other income of that limited partner for that year, regardless of the
character of that income. Accordingly, limited partners should consult their tax
advisors concerning whether, and the extent to which, they have available
suspended passive activity losses from Prometheus Income Partners or other
investments that may be used to offset gain from the conversion of their units
into cash in the merger.
Information Reporting, Backup Withholding and FIRPTA
A limited partner whose units are converted into cash in the merger must
file an information statement with its federal income tax return for the year in
which the merger occurs which provides the information specified in Treasury
Regulation Section 1.751-1(a)(3).
Limited partners (other than tax-exempt persons, corporations and some
foreign persons) may be subject to 31% backup withholding unless they provide a
taxpayer identification number and certify that the taxpayer identification
number is correct or properly certify that they are awaiting a taxpayer
identification number. See the instructions to the letter of transmittal which
will be sent to you after the merger is completed.
Gain realized by a foreign limited partner on the conversion of units into
cash in the merger will be subject to federal income tax under the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under the FIRPTA
provisions of the Internal Revenue Code, the
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transferee of an interest held by a foreign person in a partnership which owns
United States real property generally is required to deduct and withhold 10% of
the amount realized on the disposition. Amounts withheld would be creditable
against a foreign limited partner's federal income tax liability and, if in
excess thereof, a refund could be obtained from the Internal Revenue Service by
filing a United States income tax return. See the instructions to the letter of
transmittal which will be sent to you after the merger is completed.
Consequences to a Tax-Exempt Limited Partner
Although certain entities are generally exempt from federal income
taxation, these tax-exempt entities (including individual retirement accounts
(an "IRA")) are subject to federal income tax on any "unrelated business taxable
income" ("UBTI"). UBTI generally includes, among other things, income (other
than, in the case of property which is not "debt-financed property," interest,
dividends, real property rents not dependent upon income or profits, and gain
from disposition of non-inventory property) derived by certain trusts (including
IRAs) from a trade or business or by certain other tax-exempt organizations from
a trade or business, the conduct of which is not substantially related to the
exercise of the organization's charitable, educational or other exempt purpose
and income to the extent derived from debt-financed property. Subject to certain
exceptions, "debt-financed property" is generally any property which is held to
produce income and with respect to which there is an "acquisition indebtedness"
at any time during the taxable year. Acquisition indebtedness is generally
indebtedness incurred by a tax-exempt entity directly or through a partnership:
(a) on acquiring or improving a property;
(b) before acquiring or improving a property if the indebtedness
would not have been incurred but for this acquisition or
improvement; or
(c) after acquiring or improving a property if the indebtedness
would not have been incurred but for this PIP Partners -
General or improvement and the incurrence of this indebtedness
was reasonably foreseeable at the time of the PIP Partners -
General or improvement.
To the extent Prometheus Income Partners holds debt-financed property or
inventory or other assets as a dealer, a tax-exempt limited partner (including
an IRA) could realize UBTI on the conversion of a unit to cash. In addition, a
tax-exempt limited partner will realize UBTI upon the conversion of a unit to
cash, if the limited partner held its units as inventory or otherwise as dealer
property, or acquired its units with acquisition indebtedness. However, any UBTI
recognized by a tax-exempt limited partner as a result of a conversion of a unit
to cash, in general, may be offset by the limited partner's net operating loss
carryover (determined without taking into account any amount of income or
deduction which is excluded in computing UBTI), subject to applicable
limitations.
Anticipated Accounting Treatment
Prometheus Income Partners will account for the transaction under the
"purchase" method of accounting in accordance with generally accepted accounting
principles.
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Regulatory Requirements
Except for the filing of the certificate of merger with the Secretary of
State of the State of California pursuant to the Act, after the approval of the
merger proposal and compliance with federal and state securities laws, neither
PIP Partners nor Prometheus Development Co. is aware of any material United
States federal or state or foreign governmental regulatory requirement necessary
to be complied with or approval that must be obtained in connection with the
transaction.
THE MERGER AGREEMENT
This section of the Proxy Statement describes various aspects of the
proposed transaction, including material provisions of the merger agreement. The
merger agreement was amended and restated as of September 29, 2000 and again as
of January 31, 2001 to restructure the transaction and to extend the deadline
for consummating the merger to April 30, 2001. A copy of the Amended and
Restated Merger Agreement is attached to this Proxy Statement as Appendix A, and
is incorporated in this Proxy Statement by reference. Limited partners are urged
to read carefully the merger agreement in its entirety.
Parties to the Merger
For a description of the parties to the transaction, the disclosure under
the caption "Summary - Parties to the Transaction" beginning on page 12 hereto.
Structure; Consideration
The transaction is a statutory merger whereby PIP Acquisition, an
affiliate of Prometheus Development Co. and wholly owned subsidiary of PIP
Partners, will merge into Prometheus Income Partners.
If the partnership participates in the transaction, you will become
entitled to receive the Liquidation Value for each of your units, and you will
no longer be a limited partner of Prometheus Income Partners. The current holder
of the equity of PIP Acquisition, PIP Partners, who is an affiliate of
Prometheus Development Co., will hold all of the units. Member interests in PIP
Acquisition will be converted on a one-for-one basis into units.
Calculation of Liquidation Value
The Liquidation Value with respect to each unit will be equal to the cash
sum that would be distributed to the holder of such unit in accordance with the
partnership agreement had the partnership been liquidated on the effective date
of the merger, after giving effect to (1) the purchase of the Alderwood
Apartments and the Timberleaf Apartments for $68,900,000 less 2% representing
estimated costs of sale, minus (2) the principal balance due (including the
prepayment penalty that would be due on sale) and any accrued but unpaid
interest on the mortgages secured by deeds of trust on the partnership's
properties on the effective date of the merger, plus (3) the net recovery in the
construction defect litigation (as described below), less (4) the payment by the
partnership of the actual cost of repairs to the properties for the construction
defects (as described below).
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The net litigation recovery will be equal to the proceeds of the
partnership's litigation of the construction defect matters actually received by
the partnership or its successors in interest, after (a) deducting (1) all costs
and expenses of attorneys and other experts, other than such costs or expenses,
if any, paid before the effective date of the merger, (2) all other
out-of-pocket costs and expenses of this litigation paid by the partnership
after the effective date of the merger, (3) a litigation management fee payable
to Prometheus Development Co. (the general partner) or an affiliate thereof (in
lieu of any other revenue-based fee on the gross proceeds of the Litigation)
equal to 3% of such gross proceeds, (4) any obligations paid or incurred as a
result of any cross complaint, counter suit or other lawsuit relating to or
arising out of this litigation and (5) federal, state or local tax liabilities,
if any, due and payable by the partnership and/or its then existing partners
with respect to such proceeds and (b) adding interest actually earned, if any,
on such proceeds following receipt by the partnership.
The relevant construction defects are those construction defects relating
to hardboard siding, roofing systems or otherwise existing on the effective date
of the merger, or caused by or arising out of such defects, including, but not
limited to, lost rents caused by or arising out of the repair of any such
defects and are further described by way of illustration, but not by way of
limitation, to include removal and replacement of hardboard siding, removal and
replacement of building paper, removal and replacement of sheer ply, removal and
replacement of damaged structural framing, removal and replacement of deck
flashing and waterproof membranes, removal and replacement of damaged roofing
and underlayment substrate and framing members, removal and replacement of
flashing and sealants related to waterproofing, removal and replacement of
decorative trim, removal and replacement of window flashing, removal and
re-setting or replacement of windows, sliding glass doors, construction design
and engineering as required for the above-referenced items, construction
management, paint and paint preparation.
By way of example, if the net recovery in the litigation were to equal the
cost of repair of the existing construction defects, the total deferred cash
consideration to be paid would be equal to the liquidating share of the limited
partners in restricted cash reserved for the making of repairs as of the closing
date. Based on restricted cash of $5,256,000 as of the December 31, 2000, an
additional $245 would be paid with respect to each limited partnership unit in
such circumstances if the actual cost of repairs equalled the current estimate
and the net litigation recovery equalled those costs of repair. The actual net
litigation recovery may be equal to, greater than or less than the cost to
repair the existing construction defects. The deferred cash component of the
merger consideration, if any, will depend on the relative amounts of such
recovery and such costs. Even if the net litigation recovery plus the amount of
restricted cash held by the partnership at the effective date of the merger are
insufficient to cover the costs of repair of the existing defects, which would
have the effect of reducing the Liquidation Value below the amount of the
advance to be paid on the merger consideration ($1,200 per unit), the limited
partners will not be required to return any part of such advance.
Closing of the Transaction
The closing of the transaction will take place at a time and on a date
which will be no later than twenty business days after the later of satisfaction
or waiver of all conditions precedent to the closing of the transaction set
forth in the merger, including the approval of the merger
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proposal. PIP Acquisition shall be merged with and into Prometheus Income
Partners. Prometheus Income Partners shall succeed to all of the assets and
liabilities of PIP Acquisition.
Consent of Lender
PIP Partners - General will pay any and all fees with respect to obtaining
consent to the transaction by Prometheus Income Partners' lender, if necessary,
but does not anticipate any fees will be required.
Payment of Merger Consideration
Following the effective time of the merger, upon receipt by Prometheus
Development Co. of a letter of transmittal from a limited partner, the limited
partner will be entitled to receive a check in an amount equal to the product
obtained by multiplying the number of units held by that limited partner by
Liquidatiuon Value. Each holder of a unit shall cease to have any rights with
respect thereto, except the right to receive the merger consideration.
Expenses
PIP Partners - General will pay all charges and expenses relating to the
merger. These include an estimated $4,000 in SEC filing fees, $250,000 in legal
fees, $15,000 in accounting fees, $20,000 in solicitation costs and fees, and
$15,000 of printing costs. None of the payment agent, Prometheus Development
Co., nor any of their respective affiliates will be liable to any limited
partner for any merger consideration delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law.
Representations and Warranties
Prometheus Income Partners represented and warranted that:
o Prometheus Income Partners is duly organized and existing as a
limited partnership in good standing with full power and authority to
conduct its business, and has the power and authority to execute and
deliver this merger and consummate the transactions contemplated by that
document, subject to the approval of the limited partners.
o Other than potentially with respect to the partnership's financing
arrangements, the execution, delivery and performance of the merger does
not conflict with any mortgage, result in the creation of any lien, or
otherwise adversely affect the rights or privileges of Prometheus Income
Partners.
o Other than certain mortgages, taxes and liens not yet due and
payable, covenants, conditions and restrictions of record, Prometheus
Income Partners has good and marketable title to all of Prometheus
Income Partners' assets free and clear of all liens.
o Other than the construction defects litigation discussed in this
document, Prometheus Income Partners is involved in no material
litigation.
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PIP Acquisition and PIP Partners - General represented and warranted that:
o Each of them is duly organized and existing as a limited liability
company in good standing with full power and authority to conduct its
business, and has the power and authority to execute and deliver the
merger and consummate the transactions contemplated by that document.
o PIP Partners has adequate funds available out of current resources
to pay the $1,200 in cash for each unit to all holders of units (other
than PIP Partners - General). While as of the date of the merger
agreement PIP Partners had such funds, at the time the merger is
consummated, PIP Partners may need to have acquired additional financing
to complete the merger. Please see the disclosure under the caption
"Consideration and Financing" beginning on page 21.
Certain Covenants
Prometheus Income Partners agreed to hold a meeting of the limited
partners at which the limited partners will have the opportunity to vote their
units for or against the transactions contemplated by this Agreement. PIP
Partners agreed to vote its units for or against the transactions contemplated
by this Agreement in the same proportion as the total number of units voted by
limited partners unaffiliated with PIP Partners.
Conditions
The obligations of PIP Acquisition, PIP Partners and Prometheus Income
Partners to effect the merger are subject to the fulfillment or waiver of the
following conditions:
o No court or other governmental entity shall have issued an order
that prohibits consummation of the merger, restricts the operations of
Prometheus Income Partners or PIP Partners which would result in a
material adverse effect, or instituted any proceeding seeking any
similar order.
o All material approvals (if any) from governmental entities
necessary for the consummation of the merger shall have been obtained.
o PIP Partners having obtained the financing necessary to pay the
merger consideration.
The obligations of Prometheus Income Partners are further subject to the
condition (or waiver by Prometheus Income Partners) at or prior to the effective
date of the merger that the representations and warranties of PIP Acquisition
and PIP Partners shall be true and correct, and the merger shall have been
approved by the limited partners. If a material condition to the merger is
waived by the partnership, the general partner and the acquiring parties intend
to resolicit the approval of the transaction by the limited partners. If a
material condition to the merger is waived by the acquiring parties, the general
partner and the acquiring parties do not intend to resolicit the approval of the
transaction by the limited partners.
The obligations of PIP Acquisition and PIP Partners are further subject to
the conditions (or waiver by PIP Acquisition) at or prior to the effective date
of the merger that the
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representations and warranties of Prometheus Income Partners set forth in this
document shall be true and correct at and as of the closing date, and the
holders of the deeds of trust referred to in the merger consent to the merger on
terms acceptable to PIP Partners, and there is no material adverse change in the
assets, business, financial condition or prospects of Prometheus Income
Partners.
Termination
The Merger Agreement may be terminated at any time prior to the effective
date of the merger by the mutual written consent of Prometheus Income Partners
and PIP Partners - General upon written notice given to the other party of a
material breach of the Agreement if not cured within thirty (30) days, or by PIP
Partners or Prometheus Income Partners if the merger has not yet been
consummated on or before April 30, 2001.
APPRAISAL
The general partner engaged CB Richard Ellis, an independent
appraiser ("Appraiser"), to appraise the real properties owned by the
Partnership as of December 5, 2000.
Experience of Appraiser. Since its founding, Appraiser has provided
information, research, appraisal, and consulting services to clients throughout
the United States, including major New York Stock Exchange firms and insurance
companies and over seventy companies engaged in the management and operation of
partnerships and real estate investment trusts. The activities of Appraiser
include financial advisory services, asset and securities valuations, industry
and company research and analysis, litigation support and expert witness
services, and due diligence investigations in connection with both publicly
registered and privately placed securities transactions.
2000 Portfolio Appraisal
Summary of Methodology. At the request of the general partner, Appraiser
evaluated the real estate on a summary basis utilizing the sales comparison and
income approach to valuation. Appraisers typically use up to three approaches in
valuing real property:
o the cost approach;
o the income approach; and
o the sales comparison approach.
The type and age of a property, lease terms, market conditions and the quantity
and quality of data affect the applicability of each approach in a specific
appraisal situation.
The value estimated by the cost approach incorporates separate estimates
of the value of the unimproved site and the value of improvements, less observed
physical wear and tear and functional or economic obsolescence. The income
approach estimates a property's capacity to produce income through an analysis
of the rental stream, operating expenses, net income and estimated residual
value. Net income may then be processed into a value through either direct
capitalization or discounted cash flow analysis, or a combination of these two
methods. The
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sales comparison approach involves a comparative analysis of the subject
property with other similar properties that have sold recently or that are
currently offered for sale in the market.
The cost approach was considered to be less reliable than the income
approach given the primary criteria used by buyers of the type of property
appraised in the Appraisal.
In conducting the Appraisal, representatives of Appraiser reviewed and
relied upon, without independent verification, certain information supplied by
the property managers, general partner and the partnership, including, but not
limited to: lease abstracts and information relating to the creditworthiness of
tenants; financial schedules of current lease rates, income, expenses, capital
expenditures, reserve requirements, cash flow and related financial information;
property descriptive information and rentable square footage, information
relating to the condition of each property, including any deferred maintenance,
capital budgets, status of ongoing or newly planned property additions,
reconfigurations, improvements and other factors affecting the physical
condition of the property improvements; and information relating to renewal and
purchase options.
Representatives of Appraiser also performed site inspections of all of the
properties. In the course of these site visits, the physical facilities of the
properties were inspected and information on the local market, the subject
property and the tenant was gathered. Where necessary, information gathered
during the site visits was supplemented by information provided by management,
telephonic surveys and reviews of published information.
In addition, Appraiser discussed with management of the properties, the
condition of each property (including any deferred maintenance, renovations,
reconfigurations and other factors affecting the physical condition of the
improvements), competitive conditions in net lease property markets, tenant
credit trends affecting the properties, certain lease and financing terms, and
historical and anticipated lease revenues and expenses. Appraiser also reviewed
historical operating statements, and 2001 operating budgets for the Partnership
and/or the properties.
Appraiser also reviewed the acquisition criteria and parameters used by
real estate investors utilizing published information and information derived
from interviews with buyers, owners and managers of similar leased properties.
Income Approach. Appraiser then estimated the value based on the income
approach to valuation. Specifically, the direct capitalization method was used
to determine the value of the simple interest in each property based upon the
lease that encumbers the property. The value indicated by the income approach
represents the amount an investor would probably pay for the expectation of
receiving the net cash flow from the property during the subject lease term and
the proceeds from the ultimate sale of the property.
Summary Of Appraisal Valuation Parameters
Alderwood Timberleaf
Going-In Net Operating Income $4,055,350 $2,095,868
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Going-In Capitalization Rate 8.5% 8.5%
Estimated Value less Deferred Maintenance $45,500,000 $23,400,000
Conclusion as to Value. Based on the valuation methodology described
above, Appraiser estimated the value of each of the properties as follows:
Property Value Conclusion
- ------- ----------------
Alderwood ................... $45,500,000
Timberleaf .................. $23,400,000
o Assumptions, Limitations and Qualifications of the 2000 Portfolio
Appraisal.
Appraiser utilized certain assumptions to determine the appraised
value of the properties. See the appraisal for a complete description of the
assumptions, limiting conditions and qualifications applicable to the Appraisal.
The Appraisal represents Appraiser's opinion of the value of the
portfolios of properties as of December 5, 2000 in the context of the
information available on such date. Events occurring after the valuation date
could affect the properties or the assumptions used in preparing the Appraisal.
Appraiser has no obligation to update the Appraisal on the basis of subsequent
events. In connection with the preparation of the Appraisal, Appraiser was not
engaged to, and consequently did not, prepare a written report or compendium of
its analysis for internal or external use by the Partnerships beyond the
analysis set forth in Appendix C.
Compensation and Material Relationships. The Partnership paid
Appraiser an aggregate fee of $6,000 for preparing the Appraisal. In addition,
Appraiser is entitled to reimbursement for reasonable legal, travel and
out-of-pocket expenses incurred in preparing the Appraisal, and is entitled to
indemnification against certain liabilities, including certain liabilities under
federal securities laws. The fee was negotiated between the general partner and
Appraiser and payment thereof is not dependent upon completion of any
transaction.
PIP Partners selected CB Richard Ellis, Inc. to appraise the partnership's
properties because it is a nationally recognized real estate firm engaged in the
appraisal of residential income properties and has substantial experience in
transactions similar to the merger.
CB Richard Ellis has, in the past, provided appraisal services to PIP
Partners - General, the partnership, the general partner and certain of their
affiliates and may continue to do so, and has received, and may receive,
customary fees for the rendering of these services.
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ADDITIONAL INFORMATION CONCERNING UNITS
Asof February __, 2001, there were 18,995 units outstanding and _____
holders of record of those units.
Except as described below, privately negotiated sales and sales through
intermediaries currently are the only means available to a limited partner to
liquidate an investment in units because the units are not listed or traded on
any exchange or quoted on any NASDAQ list or system. High and low sales prices
of units may be obtained through certain entities such as Partnership Profiles,
Inc., an independent, third-party source which reports this type of information;
however, the gross sales prices reported by Partnership Profiles, Inc. do not
necessarily reflect the net sales proceeds received by sellers of units, which
typically are reduced by commissions and other secondary market transaction
costs to amounts less than the reported prices. The most recent data reported by
Partnership Profiles, Inc. (an independent third party source which reports sale
information) indicates that 80 units traded in the period from October 1999
through March 2000 at per unit prices between $532 and $558 with a weighted
average price of $538.50 per unit.
The table below sets forth the high and low sales prices from April 1998
through December 2000 for all sales of units as reported to Prometheus
Development Co. on a quarterly basis (other than pursuant to the tender offers
described above under the caption "Recent Tender Offers):
Trading Prices
Period Amount High Low
------ ------ ---- ---
1998 2nd Quarter 50 units $495 $495
3rd Quarter 116 units $505 $450
4th Quarter No Trades
1999 1st Quarter 85 units $601 $500
2nd Quarter 79 units $503 $500
3rd Quarter 20 units $530 $503
4th Quarter 131 units $530 $530
2000 1st Quarter 100 units $550 $550
2nd Quarter 60 units $525 $525
3rd Quarter No Trades
4th Quarter No Trades
The table below sets forth the number of units purchased and the prices
paid by PIP Partners - General from April 1998 through December 2000 (other than
pursuant to the tender offers described above under the caption "Recent Tender
Offers):
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Period Amount Trading Price
------ ------ -------------
1998 2nd Quarter 50 units $495
3rd Quarter 96 units $495
4th Quarter No Trades
1999 1st Quarter 55 units $503
2nd Quarter 29 units $503
3rd Quarter 10 units $503
4th Quarter 131 units $530
2000 1st Quarter 100 units $550
2nd Quarter 60 units $525
3rd Quarter No Trades
4th Quarter No Trades
The units currently are registered under Section 12(g) of the
Exchange Act, which means, among other things, that Prometheus Income Partners
is required to file periodic reports with the Securities and Exchange Commission
and to comply with the Commission's proxy rules. The parties expect that the
consummation of the merger will cause the units to cease to be registered under
Section 12(g)(4) of the Exchange Act because the units will be held by fewer
than 300 persons.
Principal Holders of Units
As of January 31, 2001, PIP Partners - General held 18.2% of the
outstanding units, or 3,451 units. 99% of the member interests of PIP Partners
are held by Sanford N. Diller and Helen P. Diller as Trustees of The DNS Trust,
and 1% of these interests are held by Jaclyn P. Safier, the Diller's daughter.
No other units were beneficially held by Prometheus Development Co., Prometheus
Income Partners, PIP Partners, PIP Acquisition, or any officers, directors,
employees and affiliates of Prometheus Development Co., Prometheus Income
Partners, PIP Partners or PIP Acquisition. No other person was known to
Prometheus Development Co. to own beneficially 5% or more of the outstanding
units.
Other than the past contacts, transactions and negotiations described in
this Proxy Statement, no contacts, transactions or negotiations concerning a
merger, consolidation, acquisition, tender offer or other acquisition of units,
election of directors or sale or other transfer of a material amount of assets
of Prometheus Income Partners which are known by Prometheus Income Partners to
have been entered into or to have occurred in the past two years between any
affiliates of Prometheus Income Partners or between Prometheus Income Partners
or any of its affiliates and any person who is not affiliated with Prometheus
Income Partners and who would have a direct interest in those matters.
Contracts, Arrangements and Understandings
Except for the merger agreement and the partnership agreement, none of
Prometheus Income Partners, Prometheus Development Co., PIP Acquisition or PIP
Partners - General or any of the named persons, has any arrangement, contract,
relationship or understanding with any person with respect to any units,
including any arrangement, contract, relationship or understanding concerning
the transfer or the voting of any units, any joint venture, any loan or
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option arrangement, any put or call, any guarantee of a loan, any guarantee
against loss, or any giving or withholding of any authorization, consent or
proxy.
Plans or Proposals
Except as generally described in this Proxy Statement, none of Prometheus
Income Partners, Prometheus Development Co., PIP Partners - General, PIP
Acquisition, or any of the natural persons named in this document, has any plan
or proposal regarding any action or transaction which is to occur after the
transaction to which this Proxy Statement relates and which relates to or would
result in any extraordinary corporate transaction involving Prometheus Income
Partners, any sale or transfer of a material amount of Prometheus Income
Partners' assets, any change in Prometheus Income Partners' management, any
material change in Prometheus Income Partners' present distribution rate or
policy or indebtedness or capitalization, or any other material change in
Prometheus Income Partners' structure or business.
CERTAIN FINANCIAL PROJECTIONS AND VALUATIONS OF THE PARTNERSHIP
Prometheus Income Partners does not as a matter of course publicly
disclose internal budgets, valuations, plans, estimates, forecasts or
projections as to future revenues, earnings or other financial information. The
projected financial data set forth below reflect information which was contained
in projections prepared by Prometheus Development Co. These projections were
based upon a variety of estimates and assumptions; the material ones are set
forth below. The estimates and assumptions underlying the projections involved
judgments with respect to, among other things, future economic, competitive, and
financial market conditions and future business decisions which may not be
realized and are inherently subject to significant business, economic and
competitive uncertainties, all of which are difficult to predict and many of
which are beyond the control of Prometheus Income Partners. While Prometheus
Development Co. believes these estimates and assumptions are reasonable, there
can be no assurance that the projections will be accurate, and actual results
may vary materially from those shown. In light of the uncertainties inherent in
forward-looking information of any kind, the inclusion of these projections in
this document should not be regarded as a representation by Prometheus Income
Partners, Prometheus Development Co. or any other person that the anticipated
results will be achieved and limited partners are cautioned not to place undue
reliance on this information.
Historical and projected financial performance of the partnership are
substantially dependent on occupancy rates and rental rates. While the
partnership has experienced growth in each of these rates in recent years,
current occupancy rates are approximately 99% and thus occupancy rates have no
real growth potential. There can be no assurance that current occupancy rates
will be maintained or that growth rates will not decrease or increase in the
future.
Except as required by law, Prometheus Income Partners does not intend to
update or otherwise revise any of the projections set forth below. The
information set forth below should be read together with the information
contained in Prometheus Income Partners' Annual Report on Form 10-K for the year
ended December 31, 1999 and Prometheus Income Partners' Quarterly Report on Form
10-Q for the quarter ended September 30, 2000, which are being
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mailed with this Proxy Statement to all limited partners, and the other
information included or incorporated by reference in this Proxy Statement.
The financial information for 2000 and 1999 is provided for comparison
purposes only. All numbers are in thousands of dollars, and are unaudited.
2001 Estimate 2000 Estimate 1999
------------- ------------- ----
Total Revenues $ 7,891 $ 7,142 $ 6,106
Total Operating Expenses 6,958 5,094 4,675
----- ----- -----
Net Income $ 933 $ 2,048 $ 1,431
=== ===== =====
Net Cash Flow $ 2,751 $ 2,204 $ 1,327
Beginning Cash (Including 10,290 6,500 5,173
Restricted Cash) ------ ----- -----
Ending Cash (Including $ 13,041 $ 8,704 $ 6,500
Restricted Cash) ====== ======= =====
While the partnership is seeking full recovery for known defects, the
value of pending litigation is speculative. With respect to any litigation,
there ultimately are questions as to probability of success, issues regarding
proof of damages, and, ultimately, the cost of litigation, including attorneys'
fees (including in this case contingent attorneys' fees to be paid out of any
recovery). In addition, due to the time necessary for the process to run its
course (including the possibility of appeal), any potential recovery must be
discounted to present value. While the general partner and each of the acquiring
parties believe the litigation to be valuable, they believe it is impossible to
reasonably quantify a value for the litigation.
RELATED SECURITY HOLDER MATTERS
Because the merger may be considered a "going private" transaction,
Prometheus Income Partners, PIP Partners - General, PromHill, Inc., Prometheus
Development Co., Sanford N. Diller And Helen P. Diller as Trustees of The DNS
Trust, Helen P. Diller and Sanford N. Diller have filed a Schedule 13E-3 with
the SEC with respect to the transaction. Therefore, each of them has been
included as a filing person on this Schedule 13E-3. The Schedule 13E-3 requires
the persons filing the Schedule 13E-3 to furnish certain additional information
with respect to transactions of the filing persons involving Prometheus Income
Partners or the units.
FORWARD-LOOKING STATEMENTS
This Proxy Statement and the documents incorporated by reference contain
certain forward-looking statements regarding the operations and business of
Prometheus Income
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Partners. Statements in this document that are not historical facts are
"forward-looking statements." These forward-looking statements include those
relating to:
o Prometheus Income Partners' future business prospects;
o the outcome of current litigation;
o possible acquisitions; and
o projected revenues, working capital, liquidity, capital needs,
interest costs and income.
The words "estimate," "project," "intend," "expect" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are found at various places throughout this Proxy
Statement. Wherever they occur in this Proxy Statement or in other statements
attributable to Prometheus Income Partners, Prometheus Development Co.,
forward-looking statements are necessarily estimates reflecting best judgments.
However, these statements still involve a number of risks and uncertainties that
could cause actual results to differ materially from those suggested by the
forward-looking statements. This forward-looking statements should, therefore,
be considered in light of various important factors, including those set forth
in this Proxy Statement and other factors set forth from time to time in
Prometheus Income Partners' reports and other information filed with the SEC.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. Prometheus Income Partners
disclaims any intent or obligation to update forward-looking statements, except
as required by law. Moreover, Prometheus Income Partners, through senior
management of Prometheus Development Co. may from time to time make
forward-looking statements about the matters described in this document or other
matters concerning Prometheus Income Partners.
Prometheus Income Partners does not as a matter of course make available
any projections, forecasts, internal budgets, plans or estimates as to future
performance, revenues, earnings or other financial information, and the
forecasts set forth above are included in this proxy statement only because the
forecasts contained in projections prepared by Prometheus Development Co. prior
to or in the course of the inception of or in the course of this transaction.
These forecasts were not prepared with a view to disclosure to any person or in
compliance with Generally Accepted Accounting Principles or standards regarding
projections and forecasts. These forecasts were prepared solely for internal use
and are subjective in many respects and thus susceptible to various
interpretations and periodic revision based on actual experience and business
developments. The estimates and assumptions underlying the projections involved
judgments with respect to, among other things, future economic, competitive, and
financial market conditions, contingencies and future business decisions which
may not be realized and are inherently subject to significant financial, market,
business, economic and competitive uncertainties, all of which are difficult to
predict and many of which are beyond the control of Prometheus Income Partners.
While Prometheus Development Co. believes these estimates and assumptions
are reasonable, there can be no assurance that the projections will be accurate,
and actual results may
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vary materially from those shown. These projections were based upon a variety of
estimates and assumptions, the material ones of which are set forth above. The
forecast of 2001 performance was completed in November 2000 and the forecast of
2000 performance was completed in October 2000. Due to the passage of time and
changes in circumstances, many of the assumptions on which they were based may
no longer be valid. It is expected that there will be differences between the
actual and forecast results and that the actual results may be materially higher
or lower than those projected. None of Prometheus Income Partners, PIP
Acquisition, Prometheus Development Co. or PIP Partners - General assumes any
responsibility for the accuracy or validity of any of these forecasts, and
inclusion of the foregoing forecasts should not be regarded as an indication
that Prometheus Income Partners, PIP Acquisition, Prometheus Development Co. or
PIP Partners - General considers it an accurate prediction of future events. In
light of the uncertainties inherent in forward-looking information of any kind,
the inclusion of these projections in this document should not be regarded as a
representation by Prometheus Income Partners, Prometheus Development Co., PIP
Acquisition or PIP Partners - General or any other person that the anticipated
results will be achieved and limited partners are cautioned not to place undue
reliance on this information.
LIMITED PARTNER PROPOSALS
If the merger of Prometheus Income Partners is consummated, there will be
no limited partners of Prometheus Income Partners other than PIP Partners -
General. If the transaction is not consummated with respect to Prometheus Income
Partners, limited partners would continue to be entitled to participate in
future meetings in accordance with the terms of the partnership agreement of
Prometheus Income Partners. Other than the meeting scheduled to consider and
vote on the merger proposal, there are no meetings scheduled, and Prometheus
Development Co. cannot predict when, if ever, future meetings may be called.
Meetings may be called upon notice by Prometheus Development Co. to the limited
partners or by notice to Prometheus Development Co. by limited partners holding
at least 10% of the outstanding units. Any proposals by limited partners
intended to be presented at a meeting must be received by Prometheus Income
Partners not less than 60 nor more than 90 days prior to this meeting, provided
that, in the event that Prometheus Income Partners gives less than 10 days'
notice or prior public disclosure of the date of the meeting, notice must be
received by Prometheus Income Partners no later than the close of business on
the tenth day following this notice or prior public disclosure. For a limited
partner to bring other business before a meeting, timely notice must be received
by Prometheus Income Partners within the time limits described above. This
notice must include a description of the proposed business, the reasons
therefore, and other specific matters. In each case, the notice must be given to
Prometheus Income Partners at Prometheus Income Partners' principal address. Any
limited partner desiring a copy of the partnership agreement of Prometheus
Income Partners will be furnished a copy without charge upon written request to
Prometheus Income Partners.
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WHERE YOU CAN FIND MORE INFORMATION
As required by law, Prometheus Income Partners files reports, proxy
statements and other information with the Commission. You can read and copy
these materials at the public reference facilities maintained by the Commission
at:
Room 1024
450 Fifth Street, N.W.
Washington, D.C. 20549
and at the following regional offices of the Commission:
7 World Trade Center
13th Floor
New York, New York 10048
and
Suite 1400
500 West Madison Street
Chicago, Illinois 60661.
For further information concerning the Commission's public reference
rooms, you may call the Commission at 1-800-SEC-0330. Some of this information
may also be accessed on the World Wide Web through the SEC's Internet address at
"http://www.sec.gov."
Copies of the Schedule 13E-3 may be read and copied at the public
reference facilities maintained by the Commission, which facilities are listed
above, or may be accessed on the World Wide Web through the Commission's
Internet address at "http://www.sec.gov." Copies of the Schedule 13E-3 and
copies of the documents listed in above are also available for inspection and
copying at the principal executive offices of Prometheus Income Partners during
its regular business hours by any interested limited partner of Prometheus
Income Partners or a representative of that limited partner who has been so
designated in writing.
You should rely only on the information contained in (or incorporated by
reference into) this Proxy Statement in connection with your consideration of
the merger proposal. Neither Prometheus Development Co. nor Prometheus Income
Partners has authorized anyone to give any information different from the
information contained in (or incorporated by reference into) this Proxy
Statement. This Proxy Statement is dated February __, 2001. You should not
assume that the information contained in this Proxy Statement is accurate as of
any later date, and the mailing of this Proxy Statement to limited partners
shall not create any implication to the contrary.
ANNUAL REPORT AND QUARTERLY REPORT
Prometheus Income Partner's Annual Report on Form 10-K for the year ended
December 31, 1999, and Prometheus Income Partners' Quarterly Report on Form 10-Q
for the
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quarter ended September 30, 2000 (in each case, not including exhibits to those
reports), are being mailed with this Proxy Statement to all limited partners.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this Proxy Statement. We incorporate by reference the
documents listed below:
o Annual Report on Form 10-K for the year ended December 31, 1999,
including the financial statements set forth in that document;
o Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2000,
including the financial statements set forth in that document;
o Quarterly Report on Form 10-Q for the quarter ended June 30, 2000,
including the financial statements set forth in that document; and
o Quarterly Report on Form 10-Q for the quarter ended September 30,
2000, including the financial statements set forth in that document.
We will mail these filings within one business day to any person,
including any beneficial owner, to whom this Proxy Statement is delivered, at no
cost, upon written or oral request to 350 Bridge Parkway, Redwood City,
California 94065-1517.
OTHER MATTERS
Prometheus Income Partners does not know of any matter other than those
described in this Proxy Statement that will be presented for action at the
meeting. If other matters properly come before the meeting, the persons named as
proxies intend to vote the units represented by those proxies in accordance with
the judgment of Prometheus Development Co.
Any copies of any written instructions, forms or other materials related
to oral solicitations of proxies will be filed as exhibits to this document.
Prometheus Development Co. has made no provision to grant limited partners
unaffiliated with Prometheus Development Co. access to the corporate files of
Prometheus Development Co., nor to provide counsel to any unaffiliated limited
partners at Prometheus Development Co.'s expense.
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APPENDIX A
Second Amended and Restated Agreement and Plan of Merger
SECOND AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
This Second Amended and Restated Agreement and Plan of Merger (this
"Agreement") is entered into as of January 31, 2001, by and among Prometheus
Income Partners, a California limited partnership (the "Partnership"), PIP
Partners - General, LLC, a California limited liability company ("PIP General"),
and PIP Acquisition, LLC, a California limited liability company and a
wholly-owned subsidiary of PIP General ("Acquisition").
WHEREAS, the parties desire to merge Acquisition with and into the
Partnership (the "Merger") on the terms and conditions hereinafter set forth and
in accordance with the provisions of Sections 15678.1-.9 of the California
Revised Uniform Limited Partnership Act, as amended (the "Act") and Sections
17550-17556 of the Beverly-Killea Limited Liability Company Act (the "LLC Act");
WHEREAS, Acquisition has been formed for such purpose and the parties
entered into that certain Agreement and Plan of Merger dated June 22, 2000
providing for the Merger (the "Original Agreement") and the Amended and Restated
Agreement and Plan of Merger, dated as of September 29, 2000 (the "First Amended
Agreement");
WHEREAS, the parties wish to amend and restate the Original Agreement and
the First Amended Agreement as hereinafter provided; and
NOW, THEREFORE, BE IT RESOLVED, that in consideration of the mutual
covenants and agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
ARTICLE I
TERMS OF MERGER
Acquisition shall be merged with and into the Partnership in a statutory
merger in accordance with the Act and the LLC Act on the terms and subject to
the conditions set forth in this Agreement.
ARTICLE II
EFFECT OF MERGER
On the "Effective Date" (as defined below):
(1) Acquisition shall be merged with and into the Partnership;
(2) the Partnership shall possess all the rights, privileges, immunities
and franchises of Acquisition, and all property, real, personal and mixed, and
debts due on whatever account, and every other interest belonging to or due to
Acquisition (including, but not limited to, liability for any fees or franchise
taxes due and owing to the Secretary of State of California as of the Effective
Date) shall be deemed to be transferred to and vested in the Partnership,
without further act, deed or transfer;
(3) the Partnership shall thenceforth be responsible for and subject to
all of the debts, liabilities and obligations of Acquisition in the same manner
as if the Partnership had itself incurred them;
(4) any claim, existing action, or proceeding pending by or against
Acquisition may be prosecuted to judgment by the Partnership; and
(5) neither the rights of creditors nor any liens upon the property of
Acquisition shall be impaired by the Merger;
The "Effective Date" shall be the date following the satisfaction of the
conditions set forth in Article VIII hereof on which a Certificate of Merger is
filed with the Secretary of State of the State of California in accordance with
the Act and the LLC Act, which date shall be not greater than twenty days
following the approval of the Merger by the limited partners of the Partnership
(the "Limited Partners").
ARTICLE III
MANNER AND BASIS OF CONVERTING INTERESTS
As of the Effective Date, by virtue of the Merger and without any action
on the part of any party hereto:
(1) Each limited partner interest in the Partnership (each, a "Unit")
outstanding immediately prior to the Effective Date (other than any such Unit
held by PIP General) shall be converted into and shall become (a) the right to
receive cash in an amount equal to $1,200 (the "Initial Merger Consideration")
upon surrender of a duly executed letter of transmittal by the holder of such
Unit in form and substance reasonably satisfactory to PIP General and (b) the
right to receive on the Distribution Date (the "Deferred Consideration Right")
additional consideration, if any, calculated pursuant to the formula set forth
in Exhibit 2-1, less the $1,200 payable upon the Effective Date (such amounts,
together, the "Merger Consideration"). Regardless of the amount of the Merger
Consideration, in no event shall any limited partner be required to return to
the Partnership or the General Partner any portion of the Initial Merger
Consideration. The "Distribution Date" shall be the later of (i) the completion,
as determined in good faith by the General Partner, of repairs of the
Construction Defects (as defined in Exhibit 2-1) or (ii) the receipt of the
proceeds from or other termination of the lawsuits filed by the
2
Partnership on September 23, 1996, as amended, revised or consolidated,
including related actions, against the hardboard siding manufacturer and others,
each being entitled Prometheus Income Partners v. Weyerhauser Co., et al., in
the Santa Clara County, California, Superior Court, as Cases No. CV 760935
(Timberleaf) and CV 760934 (Alderwood) (the "Litigation").
The Deferred Consideration Right shall be non-voting and shall not
bear interest. It shall be non-transferable except by will, intestate succession
or operation of law and shall not be represented by any certificate or
instrument. Any purported transfer of the Deferred Consideration Right in
violation hereof shall be null and void, ab initio. As of the Effective Date,
each Unit (other than Units held by PIP General) shall no longer be outstanding
and shall automatically be cancelled and retired and shall cease to exist, and
the holder of such Unit shall cease to have any rights with respect thereto
(including but not limited to any ownership interest in the Partnership or any
right to participate in the income of the Partnership) except the right to
receive the Merger Consideration.
(2) As of the Effective Date, each member interest in Acquisition
issued and outstanding as of the Effective Date shall be converted into one
newly-issued Unit.
ARTICLE IV
CHARTER DOCUMENTS; GENERAL PARTNER
(1) The Certificate of Limited Partnership and Second Amended and
Restated Limited Partnership Agreement of the Partnership dated October 1, 1992
(the "Partnership Agreement"), each as in effect on the Effective Date, shall be
the charter documents of the Partnership until duly amended or changed in
accordance with the Partnership Agreement and the Act.
(2) Subject to and in accordance with the Partnership Agreement,
Prometheus Development Co., Inc. will continue as the general partner of the
Partnership.
(3) From and after the Effective Date, the Partnership shall bear all
risk of loss of the Properties (as defined in Exhibit 2-1).
ARTICLE V
PARTNERSHIP REPRESENTATIONS AND WARRANTIES
The Partnership hereby represents and warrants that:
(1) The Partnership has been duly organized and is existing as a
limited partnership in good standing under the laws of the State of California
with full power and authority to own and lease its properties and to conduct its
business as currently conducted.
3
(2) The Partnership has the power and authority to execute and deliver
this Agreement, to consummate the transactions contemplated hereby and to
perform its obligations under this Agreement. The execution and delivery by it
of this Agreement, and the consummation of the transactions contemplated hereby,
have been duly authorized by all necessary action by the Partnership other than
the approval of Limited Partners holding at least 50% of the issued and
outstanding Units. This Agreement (assuming the due authorization, execution and
delivery hereof by the other parties hereto) constitutes the legal, valid and
binding obligation of the Partnership, enforceable against it in accordance with
the terms hereof.
(3) Other than as follows, the execution, delivery and performance of this
Agreement and the consummation of the transactions will not (i) conflict with or
result in a breach or violation of any terms or provision of, or constitute a
default under (with or without notice or passage of time, or both), or otherwise
give any person a basis for accelerated or increased rights or termination or
nonperformance under, any indenture, mortgage, deed of trust, loan or credit
agreement, lease, license or other agreement or instrument to which the
Partnership is a party or by which the Partnership or its assets is bound or
affected, (ii) result in the violation of the provisions of the formation
documents of the Partnership or any legal requirement applicable to or binding
upon the Partnership, (iii) result in the creation or imposition of any lien
upon any property or asset of the Partnership, (iv) require the consent of any
person to the transactions contemplated hereby that has not heretofore been
obtained other than the consent of the Limited Partners and of The Prudential
Insurance Company of America or (v) otherwise adversely affect the contractual
or other legal rights or privileges of the Partnership:
(a) Deed of Trust, Security Agreement and Fixture Filing with
Assignment of Rents and Proceeds dated as of December 23, 1997, with
respect to Alderwood; and
(b) Deed of Trust, Security Agreement and Fixture Filing with
Assignment of Rents and Proceeds dated as of December 23, 1997, with
respect to Timberleaf.
(4) Other than as follows, or as otherwise disclosed in this Agreement as
of the date of this Agreement, the Partnership has good and marketable title to
all of the Partnership's assets free and clear of all liens:
Mortgages and liens not yet due and payable, convenants,
conditions and restrictions of record
(5) Other than the Litigation, as of the date of this Agreement, neither
the Partnership nor its assets is involved in material litigation.
ARTICLE VI
VOTING OF UNITS
4
(1) The Partnership hereby covenants and represents that as promptly as
practicable following the date hereof it shall hold a meeting (the "Meeting") of
the Limited Partners at which the Limited Partners will have the opportunity to
vote their Units for or against the transactions contemplated by this Agreement.
(2) At the Meeting, PIP General hereby covenants and represents that it
shall vote its Units for or against the transactions contemplated by this
Agreement in the same proportion as the total number of Units voted by Limited
Partners unaffiliated with PIP General or the General Partner.
(3) The Partnership shall use reasonable commercial efforts to obtain
the approval of the Merger by the Limited Partners at the Meeting.
ARTICLE VII
PIP GENERAL AND ACQUISITION REPRESENTATIONS AND WARRANTIES
Each of PIP General and Acquisition hereby represents and warrants that:
(1) Such party has been duly organized and is existing as a limited
liability company in good standing under the State of California with full power
and authority to own and lease its properties and to conduct its business as
currently conducted.
(2) Such party has the power and authority to execute and deliver this
Agreement, to consummate the transactions contemplated hereby and to perform its
obligations under this Agreement. The execution and delivery by such party of
this Agreement, and the consummation by it of the transactions contemplated
hereby, have been duly authorized by all necessary limited liability company
action. This Agreement (assuming the due authorization, execution and delivery
hereof by the other parties hereto) constitutes the legal, valid and binding
obligation of such party, enforceable against it in accordance with the terms
hereof.
(3) Such party's execution, delivery and performance of this Agreement
and the consummation by it of the transactions contemplated hereby will not (i)
conflict with or result in a breach or violation of any terms or provision of,
or constitute a default under (with or without notice or passage of time, or
both), or otherwise give any person a basis for accelerated or increased rights
or termination or nonperformance under, any indenture, mortgage, deed of trust,
loan or credit agreement, lease, license or other agreement or instrument to
which such party is a party or by which it or its assets is bound or affected,
(ii) result in the violation of the provisions of the formation documents of
such party or any legal requirement applicable to or binding upon such party,
(iii) result in the creation or imposition of any lien upon any property or
asset of such party, (iv) require the consent of any person to the transactions
contemplated hereby that has not heretofore been obtained or (v) otherwise
adversely affect the contractual or other legal rights or privileges of such
party.
5
ARTICLE VIII
COVENANTS OF PIP GENERAL
(1) The Partnership shall, within 45 days after the end of each
calendar quarter, commencing with the calendar quarter next following the
Effective Date, mail to each former Unit holder a written description, as would
be required if the Partnership were a reporting entity under Section 12(g) of
the Securities Exchange Act of 1934, of material developments in the Litigation,
the amount of the Net Litigation Recovery (as defined in Exhibit 2-1), if any,
and the restricted cash reserves of the Partnership existing on the Effective
Date, the actual costs and expenses incurred for litigation and/or repairs, the
estimated cost, determined from time to time in good faith by PIP General, to
complete the repair of the Construction Defects and the estimated time to
complete such repairs, and such other information required by law.
(2) The Partnership shall deposit the Net Litigation Recovery, if any,
in a separate bank account and shall reasonably account to the former Unit
holders on a quarterly basis, as set forth above, on the use of such proceeds.
(3) PIP General and Acquisition shall use their reasonable best efforts
to promptly seek and consummate the financing necessary to pay the Initial
Merger Consideration.
ARTICLE IX
CONDITIONS
(1) The obligations of each party hereto to effect the Merger shall be
subject to the fulfillment (or waiver by each party hereto) at or prior to the
Effective Date of the following conditions:
(a) No court or other governmental entity of competent
jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, judgment, decree, injunction
or other order (whether temporary, preliminary or permanent) (i)
that is in effect and prohibits consummation of the Merger or any
other transactions with respect to any party hereto expressly
contemplated by this Agreement, or (ii) that is enacted, issued,
promulgated, enforced or entered after the date of this Agreement
and, in any such case, is in effect and imposes restrictions on any
party hereto with respect to the business operations thereof that
would result in a material adverse effect on the assets, business,
financial condition or prospects thereof (clauses (i) and (ii),
collectively, and "Order"), and no governmental entity shall have
instituted any proceeding or threatened to institute any proceeding
seeking any such Order, and no other person shall have instituted
any proceeding seeking any such Order which is reasonably likely to
succeed.
6
(b) All material actions by, and all consents, approvals,
orders or authorizations from, or filings with, governmental
entities of competent authority necessary for the consummation of
the Merger or any other transactions expressly contemplated by this
Agreement shall have been obtained or made, as the case may be.
(2) The obligations of the Partnership to effect the Merger and the
other transactions relating to the Partnership which are contemplated by this
Agreement to be performed by it are further subject to the condition (or waiver
by the Partnership) that:
(a) the representations and warranties of PIP General and
Acquisition set forth herein shall be true and correct at and as of
the closing date; and
(b) this agreement and the transactions contemplated hereby
shall have been approved and adopted by the requisite approval of
the Limited Partners.
(3) The obligations of PIP General and Acquisition to effect the
Merger and the other transactions contemplated by this Agreement which are to be
performed by it are further subject to the conditions (or waiver by PIP General
and Acquisition) that:
(a) the representations and warranties of the Partnership set
forth herein shall be true and correct at and as of the closing
date;
(b) the holders of the deeds of trust referred to in Article
V, Section 3 above, consent (if necessary) to the Merger on terms
acceptable to PIP General and Acquisition;
(c) there has been no material adverse change, from and after
the date hereof, in the assets, business, financial condition or
prospects of the Partnership; and
(d) the financing necessary to pay the Initial Merger
Consideration has been obtained and has been consummated or is
simultaneously consummated herewith upon terms acceptable to PIP
General and Acquisition.
ARTICLE X
TERMINATION
This Agreement may be terminated at any time prior to the Effective Date
(regardless of whether or not the requisite approvals of the Limited Partners
have been obtained) as follows:
7
(1) by the mutual written consent of the Partnership, PIP General and
Acquisition;
(2) by the Partnership, on the one hand, or PIP General and
Acquisition, on the other hand, upon written notice given to the other if any
judgment, injunction, order, decree or action by any governmental entity of
competent authority preventing the consummation of the transactions contemplated
by this Agreement shall have become final and nonappealable;
(3) by PIP General or Acquisition upon written notice given to the
Partnership, upon a material breach on the part of the Partnership of any
representation, warranty, covenant, obligation or agreement of the Partnership
set forth herein that is not curable or, if curable, is not cured within thirty
(30) days after written notice of such breach is given by PIP General or
Acquisition to the Partnership;
(4) by the Partnership upon written notice given to PIP General or
Acquisition, upon a material breach on the part of PIP General or Acquisition of
any representation, warranty, covenant, obligation or agreement of PIP General
or Acquisition set forth herein that is not curable or, if curable, is not cured
within thirty (30) days after written notice of such breach is given by the
Partnership to PIP General or Acquisition; or
(5) by PIP General, Acquisition or the Partnership if the Merger has
not yet been consummated on or before April 30, 2001.
ARTICLE XI
MISCELLANEOUS
(1) The parties hereto each agree to do, execute, acknowledge and
deliver all such further acts, instruments and assurances, and to take all such
further action, including, without limitation, the execution and filing of such
instruments in the State of California and any other State as should be
necessary or desirable to carry out this Agreement and to consummate and effect
the Merger.
(2) This Agreement shall be governed by and construed in accordance
with the laws of California.
(3) All of the representations, warranties, covenants, agreements and
undertakings set forth in this Agreement or in any instrument delivered pursuant
to this Agreement confirming the representations, warranties, covenants,
agreements and undertakings set forth in this Agreement shall terminate as of
the Effective Date, and shall have no further force or effect.
(4) Whether or not the transactions contemplated by this Agreement are
consummated, all costs and expenses incurred in connection with this Agreement,
8
including, without limitations, the fees, expenses and disbursements of counsel,
financial advisors and accountants, shall be paid by PIP General and/or
Acquisition.
(5) None of the General Partner, PIP General, Acquisition or any
payment agent retained in connection herewith, nor any of their respective
affiliates, will be liable to any Limited Partner for any Merger Consideration
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
9
IN WITNESS WHEREOF, the Partnership, PIP General and Acquisition have each
caused this Agreement to be effective as of the date and the year first written
above.
PROMETHEUS INCOME PARTNERS,
a California Limited Partnership
By: PROMETHEUS DEVELOPMENT CO.,
INC., a California Corporation, its General
Partner
By: ------------------------------------
Name: -----------------------------
Title: -----------------------------
PIP ACQUISITION, LLC, a California Limited
Liability Company
By: PROMHILL, INC., a California Corporation,
its Manager
By: ------------------------------------
Name: -----------------------------
Title: -----------------------------
PIP PARTNERS - GENERAL, LLC, a California Limited
Liability Company
By: PROMHILL, INC., a California Corporation,
its Manager
By: ------------------------------------
Name: -----------------------------
Title: -----------------------------
10
EXHIBIT 2-1
-----------
The "Merger Consideration" with respect to each Unit is equal to the cash
sum that would be distributed to the holder of such Unit in accordance with the
Partnership Agreement had the Partnership been liquidated on the Effective Date,
after giving effect to (1) the purchase of the Alderwood Apartments and the
Timberleaf Apartments, two residential rental properties in Santa Clara,
California, owned by the Partnership (the "Properties") for $68,900,000 less 2%
representing estimated costs of sale, minus (2) the principal balance due
(including the prepayment penalty that would be due on sale) and any accrued but
unpaid interest on the mortgages secured by deeds of trust on the Properties on
the Effective Date, plus (3) the "Net Litigation Recovery," as defined below,
less (4) the payment by the Partnership of the actual cost of repairs to the
Properties for "Construction Defects," as defined below.
The "Net Litigation Recovery" is equal to the proceeds of the Litigation
actually received by the Partnership or its successors in interest, after (a)
deducting (1) all costs and expenses of attorneys and other experts, other than
such costs or expenses, if any, paid before the Effective Date, (2) all other
out-of-pocket costs and expenses of the Litigation paid by the Partnership after
the Effective Date, (3) a litigation management fee payable to the General
Partner or an affiliate thereof (in lieu of any other revenue-based fee on the
gross proceeds of the Litigation) equal to 3% of such gross proceeds, (4) any
obligations paid or incurred as a result of any cross complaint, counter suit or
other lawsuit relating to or arising out of the Litigation, (5) federal, state
or local tax liabilities, if any, due and payable by the Partnership and/or its
then existing partners with respect to such proceeds and (b) adding interest
actually earned, if any, on such proceeds following receipt by the Partnership.
"Construction Defects" are those construction defects relating to
hardboard siding, roofing systems or otherwise existing on the Effective Date,
or caused by or arising out of such defects, including, but not limited to, lost
rents caused by or arising out of the repair of any such defects and are further
described by way of illustration, but not by way of limitation, to include
removal and replacement of hardboard siding, removal and replacement of building
paper, removal and replacement of sheer ply, removal and replacement of damaged
structural framing, removal and replacement of deck flashing and waterproof
membranes, removal and replacement of damaged roofing and underlayment substrate
and framing members, removal and replacement of flashing and sealants related to
waterproofing, removal and replacement of decorative trim, removal and
replacement of window flashing, removal and re-setting or replacement of
windows, sliding glass doors, construction design and engineering as required
for the above-referenced items, construction management, paint and paint
preparation.
APPENDIX B
Second Amended and Restated Limited Partnership Agreement of Prometheus Income
Partners
John Ghio
Page 2
APPENDIX C
Appraisal of CB Richard Ellis, Inc.
December 14, 2000
John Ghio
PROMETHEUS INCOME PARTNERS, A CALIFORNIA LIMITED PARTNERSHIP
350 Bridge Parkway
Redwood City, California 94065
RE: Appraisal of ALDERWOOD AND TIMBERLEAF APARTMENTS
900 Pepper Tree & 2147 Newhall Street
Santa Clara, Santa Clara County, California
CBREI File No. 00-931
Dear Mr. Ghio:
At your request and authorization, CB Richard Ellis, Inc. has prepared a
Complete Appraisal presented in a summary appraisal report of the market value
in the referenced real property.
The subject is comprised of two garden apartment buildings. Alderwood Apartment
is a 234 unit apartment complex built in 1986 situated on a 9.42 acre site in
Santa Clara, Santa Clara County, California. Currently the property is 99%
occupied. Timberleaf Apartments is a 124 units apartment complex built in 1986
situated on a 4.94 acre site in Santa Clara, Santa Clara County, California.
Currently it is 99% occupied. The subject is more fully described, legally and
physically within the enclosed report.
Data, information, and calculations leading to the value conclusion are
incorporated in the report following this letter. The report, in its entirety,
including all assumptions and limiting conditions, is an integral part of and
inseparable from this letter.
Based on the analysis contained in the following report, the market value of the
subject is concluded as follows:
- --------------------------------------------------------------------------------
MARKET VALUE CONCLUSION
- --------------------------------------------------------------------------------
Location Appraisal Premise Interest Appraised Date of Value Value Conclusion
- --------------------------------------------------------------------------------
Alderwood As Is Fee Simple December 5, 2000 $45,500,000
Timberleaf As Is Fee Simple December 5, 2000 $23,400,000
- --------------------------------------------------------------------------------
Source: CB Richard Ellis, Inc.
- --------------------------------------------------------------------------------
John Ghio
Page 3
The following appraisal sets forth the most pertinent data gathered, the
techniques employed, and the reasoning leading to the opinion of value. The
analyses, opinions and conclusions were developed based on, and this report has
been prepared in conformance with, our interpretation of the guidelines and
recommendations set forth in the Uniform Standards of Professional Appraisal
Practice (USPAP), the requirements of the Code of Professional Ethics and
Standards of Professional Appraisal Practice of the Appraisal Institute, The
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA),
Title XI Regulations.
The report is for the sole use of the client; however, client may provide only
complete, final copies of the appraisal report in its entirety (but not
component parts) to third parties who shall review such reports in connection
with loan underwriting or securitization efforts. Appraiser is not required to
explain or testify as to appraisal results other than to respond to the client
for routine and customary questions. Please note that our consent to allow an
appraisal report prepared by CB Richard Ellis, Inc. or portions of such report,
to become part of or be referenced in any public offering, the granting of such
consent will be at our sole discretion and, if given, will be on condition that
we will be provided with an Indemnification Agreement and/or Non-Reliance
letter, in a form and content satisfactory to us, by a party satisfactory to us.
We do consent to your submission of the reports to rating agencies, loan
participants or your auditors in its entirety (but not component parts) without
the need to provide us with an Indemnification Agreement and/or Non-Reliance
letter.
It has been a pleasure to assist you in this assignment. If you have any
questions concerning the analysis, or if CB Richard Ellis, Inc. can be of
further service, please contact us.
Respectfully submitted,
CB RICHARD ELLIS, INC.
VALUATION & ADVISORY SERVICES
/s/ Susan R. Mullahey /s/ Elizabeth Champagne
- --------------------------------------- --------------------------------------
Susan R. Mullahey Elizabeth Champagne, MAI
Senior Real Estate Analyst Senior Managing Director
California Cert. AG010520 California Cert. AG025144
Phone: 415-986-7259 Phone: 415-986-7395
Fax: 415-986-6862 Fax: 415-986-6862
Email: smullahey@cbrichardellis.com Email: echampagne@cbrichardellis.com
John Ghio
Page 4
Certification of the Appraisal
We certify to the best of our knowledge and belief:
1. The statements of fact contained in this report are true and correct.
2. The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions and are our personal, impartial
and unbiased professional analyses, opinions, and conclusions.
3. We have no present or prospective interest in or bias with respect to the
property that is the subject of this report and have no personal interest in
or bias with respect to the parties involved with this assignment.
4. Our engagement in this assignment was not contingent upon developing or
reporting predetermined results.
5. Our compensation for completing this assignment is not contingent upon the
development or reporting of a predetermined value or direction in value that
favors the cause of the client, the amount of the value opinion, the
attainment of a stipulated result, or the occurrence of a subsequent event
directly related to the intended use of this appraisal, such as the approval
of a loan.
6. This appraisal assignment was not based upon a requested minimum valuation, a
specific valuation, or the approval of a loan.
7. Our analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the Uniform Standards of Professional
Appraisal Practice of The Appraisal Foundation and the requirements of the
Code of Professional Ethics and the Standards of Professional Appraisal
Practice of the Appraisal Institute. In addition, this report conforms to the
requirements of the Financial Institutions Reform, Recovery, and Enforcement
Act (FIRREA).
8. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
9. Elizabeth Champagne, MAI has completed the requirements of the continuing
education program of the Appraisal Institute.
10.Susan R. Mullahey has and Elizabeth Champagne, MAI has not made a personal
inspection of the property that is the subject of this report.
11.No one provided professional assistance to the persons signing this report.
12.Susan R. Mullahey and Elizabeth Champagne, MAI have extensive experience in
the appraisal/review of similar property types.
13.Susan R. Mullahey and Elizabeth Champagne, MAI are currently certified in the
state where the subject is located.
14.Valuation and Advisory Services operates as an independent economic entity
within CB Richard Ellis, Inc. Although other employees of CB Richard Ellis,
Inc. divisions may be contacted as a part of our routine market research
investigations, absolute client confidentiality and privacy are maintained at
all times with regard to this assignment without conflict of interest.
John Ghio
Page 2
/s/ Susan R. Mullahey /s/ Elizabeth Champagne
- --------------------------------------- --------------------------------------
Susan R. Mullahey Elizabeth Champagne, MAI
Senior Real Estate Analyst Senior Managing Director
California Cert. AG010520 California Cert. AG025144
John Ghio
Page 3
APPENDIX D
CONSENT OF CB RICHARD ELLIS, INC.
We hereby consent to the use of our name and to the description of our
Appraisal, dated December 14, 2000, under the caption "Appraisal" in, and to the
inclusion of such Appraisal as Appendix C to, the Proxy Statement of Prometheus
Income Partners.
Dated: February 27, 2001 CB RICHARD ELLIS, INC.
By: /s/
------------------------------
REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE GENERAL PARTNER
The undersigned hereby appoints ________________, or any of them, with
full power of substitution, as attorneys, agents and proxies (the "Proxies") to
vote on behalf of the undersigned at the meeting of limited partners of
Prometheus Income Partners to be held at 1:30 p.m., local time, on _______ March
_, 2001, at [location], or any adjournment or postponement of the meeting:
(1) Proposal to approve the Second Amended and Restated Agreement and Plan
of Merger dated as of January 31, 2001 by and among Prometheus Income Partners,
a California limited partnership, PIP Partners - General, LLC, a California
limited liability company, and PIP Acquisition, LLC, a California limited
liability company. This proposal, together with the merger and all of the
transactions contemplated by the merger agreement, is referred to in the
accompanying Proxy Statement as the "merger proposal." Approval of the merger
proposal will also constitute approval of all of the transactions contemplated
by the merger agreement.
/ /FOR / /AGAINST / /ABSTAIN
(2) Proposal to permit Prometheus Development Co. to adjourn the meeting
to permit further solicitation of proxies in the event that there are not
sufficient votes at the time of the meeting to approve the merger proposal. This
proposal is referred to in the accompanying Proxy Statement as the "adjournment
proposal."
/ /FOR / /AGAINST / /ABSTAIN
(3) In their discretion, the Proxies are authorized to vote on such other
business as may properly come before the meeting, or any adjournment or
postponement of the meeting.
/ /FOR / /AGAINST / /ABSTAIN
THE GENERAL PARTNER AND THE ACQUIRING PARTIES RECOMMEND A VOTE FOR THE
MERGER PROPOSAL AND FOR THE ADJOURNMENT PROPOSAL
This proxy when properly executed will be voted in the manner directed in
this document by the undersigned limited partner. If no direction is made on
this card, this proxy will be voted FOR the merger proposal and FOR the
adjournment proposal.
Instructions For Returning Proxy. Please mark, sign, date and return this
proxy promptly using the enclosed postage paid envelope or via facsimile, to:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, NY 10010
[Fax]
By: ------------------------------------
Name: ------------------------------
By: ------------------------------------
Name: ------------------------------
Please sign exactly as name appears hereon. When units are held by joint
tenants, both should sign. When signing as an attorney, executor, administrator,
trustee or guardian, please give full title of the signer. If a corporation,
please sign name by President or other authorized officer. If a partnership,
please sign partnership name by authorized person.
Questions and Information. If you have questions regarding the merger
proposal or need assistance in completing your proxy, you may call:
MacKenzie Partners, Inc.
(800) 322-2885
Please mark address changes or corrections above. For all other
corrections or changes, please contact MacKenzie Partners, Inc. at the number
listed above.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY AS INSTRUCTED
ABOVE.
TABLE OF CONTENTS
-----------------
Page
----
QUESTIONS AND ANSWERS ABOUT THE TRANSACTION..................................1
WHO CAN HELP ANSWER YOUR QUESTIONS?..........................................8
SUMMARY......................................................................9
PARTIES TO THE TRANSACTION...................................................9
PROMETHEUS INCOME PARTNERS...................................................9
PIP PARTNERS - GENERAL, LLC.................................................10
PIP ACQUISITION.............................................................11
EFFECTS OF THE TRANSACTION..................................................11
FAIRNESS OF THE MERGER......................................................11
THE MEETING.................................................................11
RECORD DATE; VOTING POWER...................................................13
QUORUM; VOTE REQUIRED.......................................................13
CHANGING YOUR VOTE..........................................................14
STRUCTURE OF THE TRANSACTION................................................15
CONFLICTS OF INTEREST.......................................................17
CONDITIONS TO THE TRANSACTION...............................................17
CONSIDERATION AND FINANCING.................................................18
PROXY SOLICITATION..........................................................19
ACCOUNTING TREATMENT........................................................19
FEDERAL INCOME TAX CONSEQUENCES.............................................19
SUMMARY SELECTED FINANCIAL DATA OF THE PARTNERSHIP..........................20
BACKGROUND..................................................................22
REASONS FOR THE MERGER......................................................22
FAIRNESS OF THE TRANSACTION.................................................24
POSITIVE FACTORS CONSIDERED.................................................26
NEGATIVE FACTORS CONSIDERED.................................................29
ALTERNATIVES TO THE TRANSACTION CONSIDERED..................................31
LIQUIDATION.................................................................32
TENDER OFFER................................................................34
CONTINUED OWNERSHIP OF PROMETHEUS INCOME PARTNERS...........................35
THE MEETING.................................................................37
TIME, DATE AND PLACE........................................................37
MATTERS TO BE CONSIDERED....................................................37
RECOMMENDATIONS OF THE GENERAL PARTNER AND THE ACQUIRING PARTIES............38
RECORD DATE; VOTING POWER...................................................38
-i-
Page
----
QUORUM......................................................................38
VOTE REQUIRED...............................................................39
CHANGING YOUR VOTE..........................................................40
SOLICITATION OF PROXIES.....................................................40
LIST OF LIMITED PARTNERS....................................................40
THE PARTIES.................................................................41
PROMETHEUS INCOME PARTNERS..................................................41
BACKGROUND..................................................................41
PROPERTIES..................................................................43
CONSTRUCTION DEFECTS........................................................43
RECENT TENDER OFFERS........................................................45
THE PARTNERSHIP AGREEMENT OF PROMETHEUS INCOME PARTNERS.....................46
REPURCHASE RIGHTS...........................................................49
FINANCING ..................................................................50
DISTRIBUTIONS...............................................................51
EXECUTIVE OFFICERS..........................................................51
PRINCIPAL UNITHOLDERS.......................................................52
RECENT TRANSACTIONS.........................................................53
PIP PARTNERS - GENERAL, LLC.................................................54
PIP ACQUISITION.............................................................54
THE MERGER..................................................................54
EFFECTS OF THE MERGER ON PROMETHEUS INCOME PARTNERS.........................54
NO DISSENTERS' RIGHTS.......................................................55
FEDERAL INCOME TAX CONSEQUENCES.............................................55
TAXABLE GAIN OR LOSS........................................................55
CHARACTER OF GAIN OR LOSS...................................................56
PASSIVE ACTIVITY LOSSES.....................................................57
INFORMATION REPORTING, BACKUP WITHHOLDING AND FIRPTA........................57
CONSEQUENCES TO A TAX-EXEMPT LIMITED PARTNET................................58
ANTICIPATED ACCOUNTING TREATMENT............................................58
REGULATORY REQUIREMENTS.....................................................59
THE MERGER AGREEMENT........................................................59
PARTIES TO THE MERGER.......................................................59
STRUCTURE; CONSIDERATI0N....................................................59
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CLOSING OF THE TRANSACTION..................................................59
CONSENT OF LENDER...........................................................59
PAYMENT OF MERGER CONSIDERATION.............................................60
EXPENSES....................................................................60
REPRESENTATIONS AND WARRANTIES..............................................60
CERTAIN COVENANTS...........................................................61
CONDITIONS..................................................................61
TERMINATION.................................................................62
ADDITIONAL INFORMATION CONCERNING UNITS.....................................62
PRINCIPAL HOLDERS OF UNITS..................................................63
CONTRACTS, ARRANGEMENTS AND UNDERSTANDINGS..................................63
PLANS OR PROPOSALS..........................................................64
CERTAIN FINANCIAL PROJECTIONS AND VALUATIONS OF THE PARTNERSHIP.............64
RELATED SECURITY HOLDER MATTERS.............................................66
FORWARD-LOOKING STATEMENTS..................................................66
LIMITED PARTNER PROPOSALS...................................................68
WHERE YOU CAN FIND MORE INFORMATION.........................................69
ANNUAL REPORT AND QUARTERLY REPORT..........................................69
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.............................70
OTHER MATTERS...............................................................70
APPENDIX A AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER................1
APPENDIX B SECOND AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF
PROMETHEUS INCOME PARTNERS.............................................1
REVOCABLE PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE GENERAL PARTNER.....1
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