SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the Year Ended December 31, 2001 Commission File
No. 0-16950
Prometheus Income Partners, a California limited partnership
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(Exact Name of Registrant as Specified in its Charter)
California 77-0082138
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
350 Bridge Parkway
Redwood City, CA 94065-1517
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(650) 596-5300
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
No market for the Units of Limited Partnership Interest exists and therefore a market value
for such Units cannot be determined.
DOCUMENTS INCORPORATED BY REFERENCE
Prospectus, dated February 12, 1987, and Supplement No. 1, dated September 18, 1987,
incorporated into Registration Statement Form S-11 (Registration #33-9164), thereto filed
pursuant to Section 424(b) under the Securities Act of 1933, and Solicitation/Recommendation
Statement pursuant to Section 14(d)(4) of the Securities Exchange Act of 1934, Schedule 14D-9,
dated November 4, 1996 and Schedules 14D-91A, Amendments 1, 2 and 3, dated November 15, 1996,
December 12, 1996 and December 20, 1996, respectively are incorporated into Parts I, II, III
and IV.
Exhibit index located on page 19
Table of Contents
Form 10-K
Part I Page
Item 1 Business....................................................................... 3
Item 2 Properties......................................................................4
Item 3 Legal Proceedings...............................................................5
Item 4 Submission of Matters to Vote of Security Holders...............................5
Part II
Item 5 Market for Registrant's Units and Related Security Holder Matters...............6
Item 6 Selected Financial Data.........................................................8
Item 7 Management's Discussion and Analysis of Financial Conditions and
Results of Operations........................................................10
Item 8 Financial Statements and Supplementary Data....................................16
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................................16
Part III
Item 10 Directors and Executive Officers of the Registrant.............................17
Item 11 Executive Compensation.........................................................17
Item 12 Security Ownership of Certain Beneficial Owners and Management.................18
Item 13 Certain Relationships and Related Transactions.................................18
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................................................19-35
PART I
ITEM 1. BUSINESS
Prometheus Income Partners, a California limited partnership,
(hereinafter referred to as "Partnership" or "Registrant") was formed on April
15, 1985, under the California Revised Limited Partnership Act. Prometheus
Development Co., Inc., a California corporation, is the General Partner of the
Partnership.
The principal business of the Partnership is to invest in, construct,
hold, operate, and ultimately sell two residential rental properties in Santa
Clara, California, Alderwood Apartments ("Alderwood") and Timberleaf Apartments
("Timberleaf"), (collectively, the "Properties"). The principal investment
objectives of the Partnership are to preserve and protect the Partnership's
capital, to obtain capital appreciation from the sale of the Properties, and,
beginning in 1987, to provide "tax sheltered" distributions of cash from
operations due to the cost recovery and other non-cash tax deductions available
to the Partnership. See Item 7, Liquidity and Capital Resources and Construction
Defects discussions concerning deferment and resumption of distributions. For a
further description of the Properties and the business of the Partnership; see
Item 2 below, and the section entitled "Business of the Partnership" (pages
24-26) and "Properties" (pages 27-35) in the Prospectus. For financial
information, see Item 8, below.
Beginning in February 1987 through December 1987, the Partnership
offered and sold 19,000 Units of Limited Partnership Interests ("Units") for
$19,000,000. The net proceeds of this offering, together with the proceeds of
the permanent financing, were used to satisfy construction loans with respect to
Alderwood and Timberleaf and to exercise the purchase option for the Alderwood
land site.
The Partnership's investments in real property are affected by, and
subject to, the general competitive conditions of the residential real estate
rental market in the Santa Clara area. The Partnership's Properties are located
in an area which contains numerous other competitive residential rental
properties.
The Partnership is engaged solely in the business of real estate
investment. The business of the Partnership is not seasonal. The Partnership
does not engage in foreign operations or derive revenues from foreign sources.
The Partnership has no employees, officers or directors. The officers and
employees of the General Partner and its Affiliates perform services for the
Partnership.
The income of the Properties may be affected by factors outside the
Partnership's control. For example, changes in the supply of rental properties,
population shifts, the availability of mortgage funds or changes in zoning laws
could affect apartment rental rates. It is also possible that some form of rent
control may be legislated at the state or local level. Expenses of operating the
Properties, such as administrative and maintenance costs and real estate taxes,
are subject to change due to inflation, supply factors or legislation. These
increases in expenses may be offset by increases in rental rates, although such
increases may be limited due to market conditions or other factors as discussed
above. Certain expenses, such as debt service, are at fixed rates and are not
affected by inflation. The General Partner is unable to predict the effect, if
any, of such events on the future operations of the Partnership. There is no
assurance there will be a ready market for the sale of the Properties or, if
sold, such a sale would be made on favorable terms.
3
ITEM 2. PROPERTIES
The Partnership has constructed two residential income-producing
properties, Alderwood and Timberleaf, both in Santa Clara, California. The City
of Santa Clara, with a population of approximately 104,000, is the third largest
city in Santa Clara County, commonly referred to as Silicon Valley, is
approximately 47 miles south of San Francisco, encompasses 1,300 square miles
and has a population of approximately 1.7 million people, making it the most
populous of the nine counties in the greater San Francisco Bay Area.
The Alderwood luxury garden apartment complex is located at 900 Pepper
Tree Lane in Santa Clara, California. Construction began in November 1985 and
was completed by December 31, 1986. The complex contains 234 apartment units
housed in 19 two-story buildings on a 9.4 acre site. Covered and uncovered
parking for 468 cars is provided. See Item 7, Management's Discussion and
Analysis of Financial Conditions and Results of Operations, for a discussion of
current operations.
The Timberleaf luxury garden apartment complex is located at 2147
Newhall Street in Santa Clara, California. Construction began in November 1985
and was completed by December 31, 1986. The complex contains 124 apartment units
housed in nine buildings of two or three stories on a five acre site. Covered
and uncovered parking for 248 cars is provided. See Item 7, Management's
Discussion and Analysis of Financial Conditions and Results of Operations, for a
discussion of current operations.
Alderwood and Timberleaf are encumbered by first mortgage liens, which
secure promissory notes payable in the amount of $16,488,000 and $9,060,000,
respectively. The notes payable (collectively, the "Notes") bear interest at the
rate of 6.99% per annum for Alderwood, and 7.09% per annum for Timberleaf, and
mature in 2007. The Notes, if prepaid more than thirty (30) days from maturity,
are subject to a prepayment penalty.
4
ITEM 3. LEGAL PROCEEDINGS
See Item 7 for a discussion of construction defects.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
period covered by this report.
5
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED SECURITY HOLDER MATTERS
A) No public trading market exists or is expected to be established
for the Registrant's Units. The Units were issued by the
Partnership for $1,000 per Unit. The General Partner established
a Limited Liquidity Plan which commenced in 1989 and provides
Limited Partners with the option, subject to certain conditions,
to have their Units repurchased by the Partnership (or a person
designated by the Partnership). A further description of the
repurchase terms can be found in the section entitled "Business
of the Partnership-Limited Liquidity Plan" (pages 24-25) in the
Prospectus.
B) At December 31, 2001, the 18,995 outstanding Units were held by
979 investors.
C) Tender Offers To Purchase Units
During 1996, competing tender offers were made for limited
partner interests ("Units") in the Partnership. One tender offer
from Prom Investment Partners, LLC ("Prom"), an unrelated third
party, commenced in December 1996. The second tender offer from
PIP Partners - General, LLC ("PIP Partners"), an affiliate of the
General Partner, commenced in January 1997. An aggregate 2,750.5
Units were tendered and purchased by these bidders -- 1,430 to
PIP Partners and 1,320.5 to Prom, or 7.5283% and 6.9518% of the
total outstanding Units, respectively. Under the terms of the
Partnership Agreement, the transfers were effective as of April
1, 1997. All Units were purchased for $495 per unit.
During 1998, Bond Purchase, LLC, an unrelated third party, made
an unsuccessful offer to purchase Units. The offer was for less
than 5% of outstanding Units and nominal legal costs were
incurred by the Partnership. On October 16, 1998, Bond Purchase,
LLC cancelled its transfer request and no Units were acquired by
it.
On June 27, 2000, Everest Properties II, LLC ("Everest II"), an
unrelated third party, 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. Under the terms of the Partnership
Agreement, Everest II was admitted as a limited partner on
October 1, 2000 and January 1, 2001 with respect to 289 and 15
Units, respectively, that were tendered pursuant to this tender
offer, for a total 1.600% of the outstanding Units.
On March 5, 2001, Everest Management, LLC ("Everest"), an
unrelated third party to the Partnership, but an affiliate of
Everest II, made another tender offer for up to 1.6% of the
units, or 300 units, for $800 per unit. This tender originally
was set to expire by its terms on March 30, 2001 but subsequently
was extended by Everest to April 20, 2001. Under the terms of the
Partnership Agreement, Everest was admitted as a limited partner
on July 1, 2001 as to an additional 639.5 Units tendered pursuant
to this tender offer, for a total 3.367% of the outstanding
Units.
Everest and its affiliates own a combined total of 943.5 Units or
4.9671% of the outstanding Units.
On September 4, 2001, Equity Resource Lexington Fund, L.P.,
("Equity Resource"), an unrelated third party, by letter to the
limited partners, made a tender
6
offer to purchase up to 200 units at a price of $700 per unit. By
its terms, this offer was set to expire on October 4, 2001. By
letter to the limited partners dated October 29, 2001 from Equity
Resource, the expiration of this tender offer was purportedly
extended to November 29, 2001 for an unspecified number of units
at a price of $700 per unit. Under the terms of the Partnership
Agreement, Equity Resource was admitted as a limited partner with
an effective date of January 1, 2002 with respect to 492 Units
that were tendered pursuant to this tender offer, for a total of
2.5902% of the outstanding Units.
D) Distributions to Limited Partners began with the quarter ending
September 30, 1987. Cash distributions were suspended in 1996.
See Item 7, Liquidity and Capital Resources and Construction
Defects for discussions concerning the deferment and resumption
of distributions.
No distributions were made for 1997, 1998, 1999, 2000, and 2001.
7
ITEM 6. SELECTED FINANCIAL DATA
The following represent selected financial data for the Partnership
for the years ended December 31, 2001, 2000, 1999, 1998, and 1997. The data
should be read in conjunction with the financial statements and related notes
included elsewhere in this Form 10-K. The selected financial data presented
below are unaudited. Refer also to Item 7, Management's Discussion and Analysis
of Financial Conditions and Results of Operations.
For the Years Ended December 31,
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2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In Thousands, Except for Unit Data)
Rental revenues $7,387 $6,695 $5,674 $5,578 $5,256
Net income $922 $2,409 $1,431 $896 $477
Net income
per $1,000 limited
partnership unit $49 $126 $75 $47 $25
Cash and cash equivalents
per $1,000 limited
partnership unit $210 $186 $101 $62 $34
Number of units used in
computation 18,995 18,995 18,995 18,995 18,995
Total assets $44,127 $31,088 $28,873 $27,830 $27,016
Notes payable $25,548 $25,879 $26,188 $26,476 $26,723
8
ITEM 6a. SELECTED FINANCIAL DATA
The following represent selected financial data for the Partnership
for the quarters ended March 31, June 30, September 30, and December 31, 2001
and 2000. The data should be read in conjunction with the financial statements
and related notes included elsewhere in this Form 10-K. The selected financial
data presented below are unaudited. Refer also to Item 7, Management's
Discussion and Analysis of Financial Conditions and Results of Operations.
For The Three Months Ended
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Dec 31, Sept. 30, June 30, Mar 31, Dec 31, Sept.30, June 30, Mar 31,
2001 2001 2001 2001 2000 2000 2000 2000
---- ---- ---- ---- ---- ---- ---- ----
(In Thousands, Except For Unit Data)
Rental revenues $1,747 $1,776 $1,935 $1,929 $1,856 $1,724 $1,595 $1,520
Net income (loss) $(975) $599 $512 $786 $921 $602 $427 $459
Net income (loss)
per $1,000 limited
partnership unit $(50) $31 $27 $41 $49 $31 $22 $24
Cash and cash equivalents
per $1,000 limited
partnership unit $210 $205 $208 $205 $186 $147 $115 $105
Number of units used in
computation 18,995 18,995 18,995 18,995 18,995 18,995 18,995 18,995
Total assets $44,127 $32,845 $32,128 $31,769 $31,088 $30,176 $29,554 $29,296
Notes payable $25,548 $25,633 $25,716 $25,799 $25,879 $25,958 $26,036 $26,113
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
Introduction
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The Partnership was organized in April 1985. Construction of
Alderwood and Timberleaf commenced in November 1985 and was completed by
December 1986. Lease-up activities began in November 1986 and continued through
the third quarter of 1987. The Partnership Registration Statement was declared
effective on February 12, 1987 and completed in December 1987. This Item should
be read in conjunction with the financial statements, footnotes and other items
contained elsewhere in this report.
Liquidity and Capital Resources
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The primary sources of funding for the Partnership's activities
through 1987 were capital contributions of its Limited Partners, construction
financing and permanent financing. The Partnership obtained $15,800,000 in
permanent financing in November 1987. These proceeds, together with the Limited
Partners' capital contributions, were applied towards the various construction
costs and offering expenses as outlined in the Prospectus. In addition, proceeds
from the loan were used to purchase the previously leased Alderwood land site.
Once lease-up began in 1986, operating expenses, debt service and Limited
Partner distributions were funded from apartment rental receipts and cash
reserves.
Quarterly distributions have been suspended in order to continue
building reserves for the potential cost of dealing with the construction defect
problems. See Construction Defects below for a more comprehensive discussion of
this matter.
Each property has a non-recourse note payable (collectively the
"Notes"), secured by a first deed of trust. These Notes bear fixed interest of
6.99% for Alderwood, and 7.09% for Timberleaf.
The terms of the Notes and the Security Agreement, Disbursement
Agreement and Assignment of Agreements (collectively the "Agreements") require
that each property maintain a hardboard siding security account. These security
accounts are additional collateral for the lender. Cash held in these security
accounts was $3,384,000 and $2,486,000 for Alderwood and Timberleaf,
respectively, as of December 31, 2001. Until the Completion Date, as defined in
the Agreements, annually the Partnership is obligated to contribute, an
additional 10%, as defined in the Agreements, or monthly cash flow, whichever is
less, and shall be deposited into each security account. Should the hardboard
siding repairs not be completed by December 2002, or every two years thereafter,
and insufficient cash has been accumulated to cure the defects based upon the
lender's determination of the cost, then all cash flow shall be deposited into
each applicable security account, as necessary, to fully fund the cost of
construction. If the projected cash flow is insufficient to satisfy this
deficiency contribution, then the Partnership has 60 days to fund the shortage
over the projected cash flow. No withdrawals are permitted from the security
accounts except to cure the siding defects. The lender shall have the right to
hire its own consultants to review, approve and inspect the construction. All
such reasonable fees and expenses incurred by the lender shall be paid by the
Partnership. Should construction not be completed by the Completion Date due to
an act of force majeure, the Completion Date can be further extended to complete
the construction work.
The Partnership was involved in litigation involving construction
defects at its Properties (see "Construction Defects" for a more comprehensive
discussion of the matter). The Defendants have settled both the Alderwood and
Timberleaf litigations. The $4,534,000 of Timberleaf net settlement proceeds
were received by the Partnership in 2001, and are segregated in a reserve bank
account and are designated as restricted cash in the balance sheet. Timberleaf's
settlement proceeds, including
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
accumulated interest income, total approximately $4,585,000 as of December 31,
2001. The Alderwood net settlement proceeds of $6,299,000 were received on March
5, 2002. A receivable for those net settlement proceeds was recorded in the
balance sheet as of December 31, 2001. All the settlement proceeds, including
accumulated interest income, is restricted for use to pay all siding related
design and construction repair expenditures.
Cash and cash equivalents not being held by the lender or from settlement
proceeds are comprised of cash invested in market rate, checking and investment
accounts. Cash balances were approximately $4,036,000, $3,568,000, and
$1,942,000, at December 31, 2001, 2000 and 1999, respectively.
Cash distributions will only resume when a determination has been made
that the Partnership has adequate cash reserves (including restricted cash) to
complete repairs of the construction defects in the Partnership's Properties.
This determination can only be made when the costs to repair construction
defects to the Partnership's Properties have been definitely determined.
Therefore, it is uncertain when cash distributions will resume. In addition, the
security accounts must be maintained until such time as the Partnership's lender
has determined that these accounts contain sufficient cash to complete the
repairs of the Partnership's Properties. The reinstatement and level of future
distributions, if and when reinstated, will be dependent on several factors,
including the degree of damage caused by the construction defects, and continued
stabilized operations at the Properties. The exact total repair costs cannot be
definitely determined until the repair work has begun and has substantially
progressed. In addition, if repairs of the Properties are not completed by
December 2002, the Partnership's lender has the right to require the Partnership
to retain additional cash collateral reserves, which could require further
suspension of distributions to Limited Partners.
Construction Defects
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In June 1996, the General Partner learned that the hardboard siding used
at both Alderwood and Timberleaf was beginning to fail. On September 23, 1996,
Prometheus Income Partners filed two lawsuits (since settled) 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.
The extent and magnitude of the construction defects continued to worsen
with time. The General Partner began making repairs using the cash reserve funds
held. As of December 31, 2001, the Partnership had spent approximately
$3,457,000 on emergency and permanent (principally dormer roof assemblies)
repairs, together with out of pocket expenditures incurred prior to receipt of
settlement proceeds. This amount is not included in the Partnership's current
estimates of costs to repair construction defects. As of December 31, 2001,
approximately 50% of the dormer roof assemblies at Timberleaf were re-built. At
Alderwood, approximately 50% of the dormer roof assemblies were started in 2001
and were completed during the first quarter of 2002. The remaining dormer roof
assemblies at both Properties will be completed concurrently with the permanent
repairs to the construction defects.
During 2001, all litigation regarding these construction defects was
settled. In total, from all Alderwood and Timberleaf settlements, defendants
have agreed to pay the Partnership an aggregate of $14,600,000. Of this amount,
the Partnership will receive net proceeds of approximately $10,832,000.
Timberleaf's net proceeds of $4,533,000 were received by the Partnership in
2001. The
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
Construction Defects (Continued)
- ---------------------
Alderwood litigation was settled on October 3, 2001 and net settlement proceeds
of $6,299,000 were received on March 5, 2002. As such, a receivable for the
Alderwood net settlement proceeds was recorded as of December 31, 2001, with an
offsetting credit recorded to the Construction Defects Reserve account.
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 December 31, 2001,
approximately $5,852,000. These security accounts must be maintained until such
time as the Partnership's lender has determined that these accounts contain
sufficient cash to complete the repairs of the Partnership's Properties.
The $4,533,000 of Timberleaf settlement proceeds were received by the
Partnership in 2001, and are segregated in a reserve bank account and are
designated as restricted cash, which totals approximately $4,585,000 as of
December 31, 2001. The settlement proceeds, including accumulated interest
income, is used to pay all siding related design and construction expenditures.
In addition to the security accounts mandated under the Partnerships'
financing arrangements and from settlement proceeds, the Partnership currently
maintains additional accounts exclusive of the Timberleaf settlement proceeds,
totaling as of December 31, 2001 approximately $4,036,000, which is primarily
intended to cover additional contingent liabilities related to the construction
defects and other matters.
The General Partner is now engaged in the process of developing an
updated repair plan in light of the settlement recovery and will move forward
with repairs estimated to occur during 2002 and 2003. The General Partner is
hopeful, that under prevailing circumstances and market conditions, it can
develop a plan to repair the construction defects, including rent concessions
and lost rents for approximately $12,500,000 to $14,000,000. This preliminary
projection of the cost to repair the construction defects is an estimate, and as
such it is at least reasonably possible that the estimate could change in the
near term due to certain factors that could be encountered in either the design
engineering phase and / or actual construction phase due to hidden defects that
are not evident until the current siding is removed and the underlying wall and
flooring structures are exposed and examined. As such, the cost to repair could
change, and the change could be material to this preliminary projection. Any
changes to this estimate will be adjusted in the subsequent year in which the
change is calculated and will be recorded in the manner described in the
following paragraphs.
The preceding paragraphs contain certain forward-looking disclosures
relating to working capital, liquidity and the cost to repair construction
defects, which are based upon the General Partner's current expectations. The
words "estimated," "projected," "intended," "expected" and similar expressions
are intended to identify forward-looking disclosures. These forward-looking
disclosures are found at various places throughout this document. Wherever they
occur in this document, forward-looking disclosures are necessarily estimates
reflecting best judgments. However, these disclosures still involve a number of
risks and uncertainties that could cause actual results to differ materially
from those suggested by the forward-looking disclosures. These forward-looking
disclosures should, therefore, be considered in light of various important
factors, including those set forth in the preceding paragraphs. The limited
partners are cautioned not to place undue
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
reliance on these forward-looking disclosures, which speak only as of the date
hereof. The Partnership disclaims any intent or obligation to update
forward-looking disclosures, except as required by law. Moreover, the
Partnership, through its General Partner , may from time to time make
forward-looking disclosures about the matters described in this document or
other matters concerning the Partnership.
While the General Partner believes the estimated cost to repair the
construction defects and all costs associated with the repairs and assumptions
are reasonable, there can be no assurance that the projection will be accurate,
and actual results may vary materially from those shown. This projection was
based upon a variety of estimates and assumptions. It is expected that there
will be differences between the actual and projected cost to repair the
construction defects and all costs associated with the repairs may be materially
higher or lower than those projected. Inclusion of the foregoing projection
should not be regarded as an indication that the General Partner considers it an
accurate prediction of future events. In light of the uncertainties inherent in
forward-looking information of any kind, the inclusion of this projection in
this document should not be regarded as a representation by the Partnership or
its General Partner that the anticipated cost to repair the construction defects
and all costs associated with the repairs will be achieved and limited partners
are cautioned not to place undue reliance on this information.
Although a definitive estimate of the cost of the repair plan for the
hardboard siding is not yet finalized, based upon the General Partner estimated
cost to repair these construction defects, there is a short fall of
approximately $1,667,000 between the net settlement proceeds of $10,832,000 and
the General Partner's low end estimate of the cost of engineering and
construction repairs of $12,500,000. The minimum loss contingency of $1,667,000
is recognized as a one-time charge in the accompanying Statement of Income for
the year ended December 31, 2001.
All siding related design and construction expenditures up to $12,500,000
will be offset against this liability. All expenditures, if any, above
$12,500,000, will be expensed as incurred in the year the actual expenditures
exceed this amount. In the event that this liability exceeds the costs to
repair the construction defects, the remaining liability would be recognized as
a gain upon the completion of the repairs.
None of the expenditures to repair the hardboard siding construction
defects will be capitalized inasmuch as the repairs are not considered a
betterment that will extend the life of the Partnership's assets, but are
considered a correction of a past deficiency in the assets. The construction
defects repairs will restore the assets to their original condition by
maintaining the existing condition of the Properties.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
Operations
- ----------
For the years ended December 31, 2001, 2000, and 1999, the average
occupied rent obtained from leased units, and the average occupancy
percentages were as follows:
Average Occupied Rental Rates
-----------------------------
2001 2000 1999
---- ---- ----
One Bedroom Units $1,575 $1,641 $1,285
Two Bedroom Units $1,931 $2,115 $1,567
Average Occupancy
-----------------
2001 2000 1999
---- ---- ----
Alderwood 96% 98% 97%
Timberleaf 95% 99% 97%
Both Properties are located in Santa Clara County, in an area commonly
referred to as Silicon Valley. With the economic decline in the economy, and
specifically in the high tech industry, the primary employer in the Silicon
Valley, job growth no longer continued to climb as in prior years, and actually
decreased by 45,000 jobs between December 31, 2000 and 2001. The fourth quarter
ending December 31, 2001 saw unemployment rise to 6.1% from 1.5% at December
31, 2000. This decline in jobs, coupled with new housing units (both single
family and multi-family) coming on line has resulted in a softening of the
rental market. The ability to affect increases in rental rates may be impacted
by market conditions such as supply of rental housing or local economic
conditions. These factors have impacted the average occupied rent and average
occupied percentages in all three of the years presented. For the period from
1999 to 2000, the Silicon Valley continued to see lowering unemployment and
increasing new job growth. Many housing developers were breaking ground for new
housing units. Commencing in the later half of 2000 and continuing into 2001,
unemployment rose, new job growth was non-existent with jobs decreasing and new
housing units were coming on line. As a result, average rental rates decreased
4% from 2000 to 2001. Concessions were utilized to increase occupancy, and to
remain competitive in the Santa Clara market.
Operating expenses include on-site management, maintenance, utilities, marketing
and other expenses related to earning rental revenues. Some of the operating
expenses vary as occupancy changes throughout the year. Others, such as property
taxes, do not fluctuate in response to changing occupancy levels. Operating
expenses have fluctuated between years due principally to the destructive
testing, emergency repairs and litigation fees associated with hardboard siding
defects. These three expenditure components of hardboard siding defects have
fluctuated based upon where in the litigation and repair cycles the Properties
happened to be. After initial owner investigations, came the quantification
phase wherein preliminary investigation subsequently led to extensive
destructive testing and emergency repairs were undertaken to preserve the
assets. Legal and expert consultant fees increased as the cases were prepared
for the ensuing litigation. In accordance with SFAS 5, the operating expenses
for 2001 include a one time current period charge of $1,667,000 for the
provision for construction defect repair costs (exclusive of rent concessions
and lost rents) exceeding the net settlement proceeds received. In as much as
the provision is a non-cash charge, there is no affect on cash flow the for year
2001.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
Overall, other than the fluctuation in operating expenses between years
caused by the expenditures associated with the hardboard siding defects and
related litigation, the Properties' income streams have not been materially
impacted due to the immediate attention given the defects and the emergency
repairs undertaken.
Interest expense on Notes is at a fixed rate of 6.99% per annum for
Alderwood, and 7.09% per annum for Timberleaf commencing December 26, 1997.
Monthly principal and interest payments under these Notes are $114,659 and
$63,587, respectively.
Depreciation and amortization remained consistent between 2001 and 2000.
Depreciation expense was $682,000 and $618,000 in 2001 and 2000, respectively.
Amortization expense was $30,000 each year.
Although inflation impacts the Partnership's expenses, increases in
expenses can sometimes be offset by increases in rental rates. However, the
ability to affect increases in rental rates may be impacted by market
conditions such as the supply of rental housing or local economic conditions.
Certain expenses, such as property taxes and debt service, may not be impacted
by inflation. Property taxes are affected primarily by limits placed by
legislation. Debt financing is at a fixed rate.
Critical Accounting Polices
---------------------------
The Partnership's most significant accounting policies are described in
the notes to the Financial Statements. The most critical policies relate to the
categories of Related Party Transactions (Note 3), Debt and Debt Covenants
(Notes 2 and 6), and Real Estate (Notes 1 and 5). All of these policies are
mandatory under accounting principles generally accepted in the United States
and the regulations of the Securities and Exchange Commission. Each of these
policies has a material effect on the timing of revenue and expense recognition
for significant Partnership operations.
Recent Accounting Pronouncement
- -------------------------------
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations for a disposal of a segment of a business. SFAS 144 is effective for
fiscal years beginning after December 15, 2001, with earlier application
encouraged. The Partnership expects to adopt SFAS 144 as of January 1, 2002 and
has not yet determined the impact, if any, that the adoption of the SFAS 144
will have on the Partnership's financial position and results of operations.
15
ITEM 7a. QUALITATIVE AND QUANTITATIVE INFORMATION ABOUT MARKET RISK
The Company has no debt subject to variable rates of interest and
does not invest in derivatives or similar types of instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Form
10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or executive officers. For
informational purposes only, the following are the names and additional
information relating to controlling persons, directors, executives and senior
management of Prometheus Development Co., Inc., a California corporation, the
General Partner of the Registrant.
Sanford N. Diller. Age 73. President, Secretary and sole Director. Mr. Diller
supervises the acquisition, disposition and financial structuring of
properties. Mr. Diller founded the General Partner, and effectively controls
all of its outstanding stock. Mr. Diller received his undergraduate education
at the University of California at Berkeley and his Doctor of Jurisprudence
from the University of San Francisco. He has been an attorney since 1953.
Since the mid 1960's, he has been involved in the development and/or
acquisition of more than 70 properties, totaling more than 13,000 residential
units and over 2,000,000 square feet of office space.
Vicki R. Mullins. Age 42. Vice President. Ms. Mullins' responsibilities include
supervising all property operations, information systems and finance, as well
as manages the disposition and financial structuring of properties. Ms.
Mullins came to Prometheus Development Co., Inc. 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 39. Vice President. Mr. Murphy's responsibilities include
managing all financial, accounting and reporting activities, and insurance.
Mr. Murphy came to Prometheus Development Co., Inc. from KPMG Peat Marwick
where he spent seven years and was a Senior Manager. He is a Certified Public
Accountant and holds a B.S. degree in Accounting with honors from the
University of San Francisco.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not pay or employ directly any officers or
directors. Compensation to executives and employees of the General Partner is
not based on the operations of the Partnership. The General Partner and its
affiliates receive a management fee as compensation for services rendered and
reimbursement of certain Partnership expenses. See Item 7, Management's
Discussion and Analysis of Financial Conditions and Results of Operations
(Critical Accounting Policies), and Item 13, Certain Relationships and Related
Transactions.
17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) Other than PIP Partners - General, LLC ("PIP Partners"), an
affiliate of the General Partner, which owns 18.1679%, of the
outstanding limited partner Units, no person of record owns or is
known by the Registrant to own beneficially more than 5% of the
outstanding Units.
(b) The General Partner owns no Units. However, the General Partner,
pursuant to the Partnership Agreement, has discretionary control
over most of the decisions made for the Partnership. The
executive officers of the General Partner, as a group, own no
Units.
PIP Partners, acquired 7.5283% of outstanding Limited Partner
Units in the Partnership during 1997. (See Item 5 for further
discussion.) During 1998, 1999, and 2000, PIP Partners acquired
.716%, 1.2371% and 8.6865% of outstanding Limited Partner Units,
respectively. No Units were acquired in 2001. As of December 31,
2001 PIP Partners owns 18.1679% of the outstanding Units.
(c) Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership pays or has paid fees to the General Partner and its
Affiliates. See Footnote 4 - Related Party Transactions of the financial
statements found in Item 14 and the Prospectus (pages 14-16 and 46-48) filed
pursuant to Rule 424(b) under the Securities Act of 1934, which is incorporated
by reference herein.
18s
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) 1. FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Page
----
Report of Ernst & Young LLP, Independent Auditors...................21
Report of Arthur Andersen LLP, Independent Auditors.................22
Financial Statements:
Balance Sheets as of December 31, 2001 and 2000.....................23
Statements of Income for the years ended
December 31, 2001, 2000 and 1999..................................24
Statements of Partners' Capital (Deficit) for the
years ended December 31, 2001, 2000 and 1999......................25
Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999..................................26
Notes to Financial Statements.......................................27
2. FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts.....................33
Schedule III - Real Estate and Accumulated Depreciation .........34-35
All other schedules are omitted because they are not required or
the required information is shown in the financial statements or
notes thereto.
(b) The following reports on Form 8-K's were filed during the period
covered by this report.
The company filed Form 8-K on November 27, 2000, regarding a letter
mailed to the limited partners.
The company filed Form 8-K on March 5, 2001, with respect to the
notification of the change in accounting firms for the fiscal year
ended December 31, 2001.
The company filed Form 8-K on March 12, 2001, regarding a letter
mailed to the limited partners.
The company filed Form 8-K on April 2, 2001, with respect to the
notification of the settlement reached with selected defendants in
the Timberleaf litigation.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K. (CONTINUED)
(b) The following reports on Form 8-K's were filed during the period
covered by this report, (Continued).
The company filed Form 8-K on May 22, 2001, with respect to the
notification of the settlement reached with the remaining
defendants in the Timberleaf litigation.
The company filed Form 8-K on October 11, 2001, with respect to the
notification of the settlement reached with the defendants in the
Alderwood litigation.
The company filed Form 8-K on March 4, 2002, regarding a letter
mailed to the limited partners.
(c) No additional exhibits are required pursuant to Item 601(b) of
Regulation S-K.
20
Report of Ernst & Young LLP, Independent Auditors
To the Partners
Prometheus Income Partners,
a California limited partnership:
We have audited the accompanying balance sheets of Prometheus Income Partners, a
California limited partnership, as of December 31, 2001 and 2000, and the
related statements of income, partners' capital (deficit), and cash flows for
the years then ended. Our audits also included the financial statement schedules
listed in the Index at Item 14(a). These financial statements and schedules are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Prometheus Income Partners, a
California limited partnership, at December 31, 2001 and 2000, and the results
of its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules when considered in relation
to the basic financial statements as a whole, present fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
San Francisco, California
March 1, 2002, except for Note 7 and paragraph two of Note 5,
as to which the date is March 5, 2002.
21
REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT AUDITORS
To the Partners of
Prometheus Income Partners,
a California limited partnership:
We have audited the accompanying statements of income, partners' capital
(deficit) and cash flows for the year ended December 31, 1999 of Prometheus
Income Partners, a California limited partnership. These financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Prometheus
Income Partners, a California limited partnership, for the year ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States.
/s/ Arthur Andersen LLP
San Francisco, California
March 28, 2000
22
PROMETHEUS INCOME PARTNERS
a California limited partnership
BALANCE SHEETS
As of December 31, 2001 and 2000
(In Thousands, Except for Unit Data)
2001 2000
---------- ---------
ASSETS
Real Estate
Land, buildings and improvements $31,881 $30,778
Construction in progress 776 44
Accumulated depreciation (9,483) (8,801)
-------- -------
23,174 22,021
Cash and cash equivalents 4,036 3,568
Restricted cash 10,437 5,256
Deferred financing costs, net of
accumulated amortization of $120 and $90 179 209
Accounts receivable and other assets 2 34
Receivable from settlement of construction defects litigation 6,299 --
-------- -------
Total assets $44,127 $31,088
======== =======
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Notes payable $25,548 $25,879
Accounts payable and accrued liabilities 387 439
Construction defects reserve 12,500 --
-------- -------
Total liabilities 38,435 26,318
-------- -------
Commitments (see Note 4)
Partners' Capital (Deficit)
General partner deficit (345) (354)
Limited partners' capital,
18,995 limited partnership
units issued and outstanding 6,037 5,124
-------- -------
Total partners' capital (deficit) 5,692 4,770
Total liabilities and partners' capital (deficit) $44,127 $31,088
======== =======
See accompanying notes.
23
PROMETHEUS INCOME PARTNERS
a California limited partnership
STATEMENTS OF INCOME
For the years ended December 31, 2001, 2000 and 1999
(In Thousands, Except for Unit Data)
2001 2000 1999
---------- ---------- ----------
REVENUES
Rental $7,387 $6,695 $5,674
Interest 415 464 250
Other 69 88 182
-------- -------- --------
Total revenues 7,871 7,247 6,106
-------- -------- --------
EXPENSES
Interest and amortization 1,837 1,860 1,881
Operating 1,731 1,421 1,400
Depreciation 682 618 573
Administrative 44 40 40
Payments to general partner and
affiliates:
Management fees 431 372 300
Operating and administrative 557 527 481
Provision for estimated construction
defects repair costs in excess of net
settlement proceeds 1,667 -- --
-------- ---------- ---------
Total expenses 6,949 4,838 4,675
-------- ---------- ---------
NET INCOME $922 $2,409 $1,431
======== ========== =========
Net income per $1,000
limited partnership
unit $49 $126 $75
======== ========== =========
Number of limited partnership
units used in computation 18,995 18,995 18,995
======== ========== =========
See accompanying notes.
24
PROMETHEUS INCOME PARTNERS
a California limited partnership
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 2001, 2000 and 1999
(In Thousands)
General Limited
Partner Partners Total
------- -------- -------
Balance as of December 31, 1998 $(392) $1,322 $930
Net Income 14 1,417 1,431
------ ------ ------
Balance as of December 31, 1999 (378) 2,739 2,361
Net Income 24 2,385 2,409
------ ------ ------
Balance as of December 31, 2000 (354) 5,124 4,770
Net Income 9 913 922
------ ------ ------
Balance as of December 31, 2001 $(345) $6,037 $5,692
====== ====== ======
See accompanying notes.
25
PROMETHEUS INCOME PARTNERS
a California limited partnership
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2000 and 1999
(In Thousands)
2001 2000 1999
------- ------- ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $922 $2,409 $1,431
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 682 618 573
Amortization 30 30 30
Provision for estimated construction defects
in excess of net settlement proceeds 1,667 -- --
Decrease (increase) in accounts
receivable and other assets 32 (5) 32
(Decrease) increase in payables
and accrued liabilities (52) 115 (101)
------- ------- -------
Net cash provided by operating activities 3,281 3,167 1,965
------- ------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES
Additions to buildings and improvements (1,103) (490) (350)
Construction in progress (732) (44) --
------- ------- -------
Cash used in investing activities (1,835) (534) (350)
------- ------- -------
CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES
Principal reductions on notes payable (331) (309) (288)
Proceeds from settlement of construction defects
litigation, net of direct costs incurred 4,534 -- --
Deposits to restricted cash (5,181) (698) (568)
------- ------- -------
Net cash provided by (used in) financing activities (978) (1007) (856)
------- ------- -------
Net increase in cash and cash equivalents 468 1,626 759
Cash and cash equivalents at beginning of year 3,568 1, 942 1,183
------- ------- -------
Cash and cash equivalents at end of year $4,036 $3,568 $1,942
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH
OPERATING ACTIVITY
Receivable from settlement of construction defects
litigation $6,299 $ -- $ --
======= ======= =======
See accompanying notes.
26
PROMETHEUS INCOME PARTNERS
a California limited partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Prometheus Income Partners, a California limited partnership (the
"Partnership"), was formed to invest in, construct, hold, operate and ultimately
sell two multi-family apartment projects, Alderwood Apartments ("Alderwood") and
Timberleaf Apartments ("Timberleaf"), located in Santa Clara, California
(collectively, the "Properties"). The General Partner is Prometheus Development
Co., Inc., a California corporation ("Prometheus"). The Partnership operates in
one segment, residential real estate.
In accordance with the terms of the Partnership Agreement, income or
loss is allocated 1% to the General Partner and 99% to the Limited Partners. Net
income or loss per limited partner unit is computed by dividing the net income
or loss allocable to the Limited Partners by the number of units outstanding
during the period in which the income or losses are allocated.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Real estate, which includes development costs, construction costs,
property taxes and interest incurred during the construction period, is valued
at cost unless circumstances indicate that cost cannot be recovered, in which
case the carrying value is reduced to estimated fair value. At December 31,
2001, the Partnership's management believes that the carrying value of the
Partnership's real estate does not exceed its estimated fair value.
None of the expenditures to repair the hardboard siding construction
defects will be capitalized inasmuch as the repairs are not considered a
betterment that will extend the life of the Partnership's assets, but are
considered a correction of a past deficiency in the assets. The construction
defects repairs will restore the assets to their original condition by
maintaining the existing condition of the Properties.
Maintenance and repair expenses are charged to operations as incurred.
Buildings, asset replacements and improvements are capitalized and are
depreciated using the straight-line method over their estimated useful lives,
which range from 5 to 40 years, as follows.
Buildings 40 years
Land Improvements 30 years
Structural Improvements 30 years
Personal property 5 years
Loan fees, incurred in conjunction with the notes payable have been
deferred and are amortized, using the straight-line method which approximates
the effective interest method, over the terms of the related notes payable.
27
NOTES TO FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
All leases are classified as operating leases. Rental revenues are
recognized when contractually due based on the terms of signed lease agreements,
which range in duration from month-to-month to one year.
No income taxes are levied on the Partnership; rather, such taxes are
levied on the individual partners. Consequently, no provision or liability for
federal or California income taxes has been reflected in the accompanying
financial statements. The net income or loss for financial reporting purposes
differs from the net income or loss for income tax reporting purposes
principally due to differences in useful lives and depreciation methods for
buildings and improvements, amortization of construction period interest and
taxes and the provision for estimated construction defects repair cost in excess
of net settlement proceeds. Reconciliations of net income per the federal tax
return to net income as reported in the accompanying financial statements for
the years ended December 31, 2001, 2000, and 1999 follows:
2001 2000 1999
----------- ------------ -----------
(In Thousands)
Net income per federal tax return $ 2,557 $ 2,348 $ 1,318
Provision for estimated construction defects
repair costs in excess of net settlement
proceeds (1,667) -- --
Prepaid rental receipts
3 (7) 24
Depreciation
29 68 89
----------- ------------ -----------
Net income per accompanying Statement
of Income $ 922 $ 2,409 $ 1,431
=========== ============ ===========
Syndication costs incurred in raising Limited Partners' capital are not charged
to Limited Partners' capital for tax reporting purposes.
The carrying amount of certain of the Partnership's financial
instruments, including accounts receivable, accounts payable, and accrued
liabilities, approximates fair value due to the relatively short maturity of
such instruments. The fair value of the notes payable approximates the carrying
value as of December 31, 2001 based on current rates available to the
Partnership for debt with similar terms.
Cash and cash equivalents consist of amounts held in market rate,
checking and investment accounts with maturities of three months or less. The
Partnership maintains its cash and cash equivalents in high credit-quality
depository institutions.
28
NOTES TO FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Restricted cash, designated as lender's cash collateral, is invested in
a government fund with original maturities of three months or less. (See Note 6
for further discussion.) The Timberleaf settlement proceeds are maintained in an
investment account with a maturity of three months or less, and are also
designated as restricted cash.
Recent Accounting Pronouncement
- -------------------------------
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and the accounting and
reporting provisions of Accounting Principal Board Opinion No. 30, Reporting the
Results of Operations for a disposal of a segment of a business. SFAS 144 is
effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. The Partnership expects to adopt SFAS 144 as of January
1, 2002 and has not yet determined the impact, if any, that the adoption of the
SFAS 144 will have on the Partnership's financial position and results of
operations.
2. NOTES PAYABLE
The Partnership had the following notes payable (the "Notes") at
December 31, 2001 and 2000:
2001 2000
---- ----
(In Thousands)
Non recourse note payable, secured by a first deed
of trust on Alderwood; interest is payable monthly
at a rate of 6.99% per annum; the balance is
payable at maturity, December 2007. $ 16,488 $ 16,703
Non recourse note payable, secured by a first deed
of trust on Timberleaf; interest is payable
monthly at a rate of 7.09% per annum; the balance
is payable at maturity, December 2007. 9,060 9,176
-------- --------
$ 25,548 $ 25,879
======== ========
One of the terms of the Notes requires that cash be set aside in a
hardboard siding security account, as additional collateral. See Note 6 for
further discussion.
Cash paid for interest in each of the years ended 2001, 2000 and 1999
was approximately $1,808,000, $1,830,000, and $1,851,000, respectively.
29
NOTES TO FINANCIAL STATEMENTS (Continued)
2. NOTES PAYABLE (Continued)
As of December 31, 2001, maturities on the Notes (In Thousands) are as
follows:
2002 $ 355
2003 381
2004 409
2005 439
2006 470
Thereafter 23,494
--------
$ 25,548
========
The Notes, if prepaid more than thirty (30) days from maturity, are subject to a
prepayment penalty.
3. RELATED PARTY TRANSACTIONS
Prometheus Real Estate Group, Inc., a California corporation
("Prometheus"), an affiliate of the General Partner, manages the Properties.
Management fees and payments to the General Partner and affiliates represent
compensation for services provided and certain expense reimbursements in
accordance with the Partnership Agreement, which specifically provides 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.
However no reimbursement for the 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 the Partnership would be required to pay to
independent third parties for comparable services.
For 2001, 2000 and 1999 neither the General Partner nor its affiliates,
other than Prometheus (which was entitled to additional reimbursements under the
Partnership's management agreement), received any reimbursement for direct or
other administrative and out-of-pocket expenses.
30
NOTES TO FINANCIAL STATEMENTS (Continued)
4. COMMITMENTS
Commencing on January 1, 1989, under the terms of the Limited Liquidity
Plan ("Plan"), the Partnership may repurchase up to 5% in aggregate of the
outstanding units from the Limited Partners, at the Limited Partners' option, in
accordance with the Partnership Agreement. The General Partner may allocate up
to 10% of the distributable cash from operations in the current year for the
purpose of making such repurchases. The price of any units repurchased by the
Partnership will be determined in accordance with the Partnership Agreement. The
Partnership made no repurchases under the Plan during the years ended December
31, 2001, 2000 and 1999.
5. LITIGATION SETTLEMENT - CONSTRUCTION DEFECTS
-
In June 1996, the General Partner learned that the hardboard siding used
at both Alderwood and Timberleaf was beginning to fail. On September 23, 1996,
Prometheus Income Partners filed two lawsuits (since settled) 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.
During 2001, all litigation regarding construction defects was settled.
In total, from all Alderwood and Timberleaf settlements, defendants have agreed
to pay the Partnership an aggregate of $14,600,000. Of this amount, the
Partnership will receive net proceeds of approximately $10,832,000. Timberleaf's
net proceeds of $4,533,000 have been received by the Partnership. The Alderwood
litigation was settled on October 3, 2001, and settlement proceeds of $6,299,000
were received on March 5, 2002. As such, a receivable for the Alderwood net
settlement proceeds was recorded as of December 31, 2001, with an offsetting
credit recorded to the Construction Defects Reserve account. The Partnership
recognized a charge against income in connection with the litigation settlements
as further discussed below.
Although a definitive estimate of the cost of the repair plan for the
hardboard siding is not yet finalized, based upon the General Partner's
preliminary estimate, the cost to repair the construction defects including rent
concessions and lost rents is anticipated to be between $12,500,000 and
$14,000,000. Accordingly, a construction defects reserve liability of
$12,500,000, equal to the low end of the range of estimated repair costs, has
been recorded in the accompanying Balance Sheet at December 31, 2001. In
conjunction with recording the reserve liability, the Partnership recognized a
charge to income of $1,667,000 in the accompanying Statement of Income for the
year ended December 31, 2001 for the estimated repair costs in excess of the net
settlement proceeds. All construction repair expenditures up to $12,500,000 will
be offset against the reserve liability.
It is reasonably possible that the future estimated repair costs could
change in the near term due to certain factors that could be encountered in
either the design engineering phase and / or actual construction phase due to
hidden defects that are not evident until the current siding is removed and the
underlying wall and flooring structures are exposed and examined. As such the
cost to repair could change, and the change could be material to the General
Partner's preliminary estimate. Any changes to the estimate will be reflected as
adjustments to the reserve liability in the periods in which the changes are
calculated with a corresponding charge reflected in the Statement of Income.
31
NOTES TO FINANCIAL STATEMENTS (Continued)
6. RESTRICTED CASH - CASH COLLATERAL
The terms of the Notes and the Security Agreement, Disbursements Agreement
and Assignment of Agreements (collectively the "Agreements") (See Note 2 for
further discussion) require that each Property maintain a hardboard siding
security account. These security accounts are additional collateral for the
lender. Cash held in these security accounts was $3,384,000 and $2,468,000 for
Alderwood and Timberleaf, respectively, at December 31, 2001. Until the
Completion Date, as defined in the Agreements, the Partnership is obligated to
contribute annually, an additional 10%, as defined in the Agreements, or monthly
cash flow, whichever is less and, shall be deposited into each security account.
Should the hardboard siding repairs not be completed by December 2002, or every
two years thereafter, and insufficient cash has been accumulated to cure the
defects based upon the lender's determination of the cost, then all cash flow
shall be deposited into each applicable security account, as necessary, to fully
fund the cost of construction. If the projected cash flow is insufficient to
satisfy this deficiency contribution, then the Partnership has 60 days to fund
the shortage over the projected cash flow. No withdrawals are permitted from the
security accounts except to cure the siding defects. The lender shall have the
right to hire its own consultants to review, approve and inspect the
construction. All such reasonable fees and expenses incurred by the lender shall
be paid by the Partnership.
Should construction not be completed by the Completion Date due to an act
of force majeure, the Completion Date can be further extended to complete the
construction work.
The security accounts are to be invested in either a treasury or
government fund.
7. SUBSEQUENT EVENT
The defendants in the Alderwood construction defect litigation settled the
litigation on October 3, 2001. The defendants agreed to pay the Partnership
$8,500,000. Of this amount, the Partnership received on March 5, 2002, after
payment of litigation expenses including legal fees, $6,299,000.
32
SCHEDULE II
PROMETHEUS INCOME PARTNERS
a California limited partnership
VALUATION AND QUALIFYING ACCOUNTS
As of December 31, 2001
(In Thousands)
Balance Additions Additions
at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
----------- --------- -------- -------- ---------- ---------
Year ended December 31, 2001:
Construction defects reserve $ - $ 1,667 $ 10,843 $ - $12,500
Year ended December 31, 2000:
None
Year ended December 31, 1999:
None
33
SCHEDULE III
PROMETHEUS INCOME PARTNERS
a California limited partnership
REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 2001
(In Thousands)
Cost Capitalized Gross Amount at Which
Subsequent Carried
To Acquisition at Close of Period (1)
---------------------------- -------------------------
Cost
to
the Build- Build- Accumu-
Partn- ings and Carry- ings and lated De- Date of Date
Encum- ership Improve- Improve- ing Improve- Total preciation Constru- Acquired
Description brances Land ments ments Costs Land ments (3) (4) ction (2)
- ----------- ----------------- ---------------------------- ------------------------- -------------------- --------
Alderwood Apts.
Santa Clara,
California $16,488 $5,931 $ -- $12,950 $441 $5,931 $14,472 $20,403 $6,066 11/86 12/87 (5)
Timberleaf Apts.
Santa Clara,
California 9,060 3,145 -- 6,961 510 3,145 8,333 11,478 3,417 11/86 11/86
------- ------ ------ ------- ----- ------ ------- ------- ------
Total $25,548 $9,076 $ -- $19,911 $ 951 $9,076 $22,805 $31,881 $9,483
======= ====== ====== ======= ===== ====== ======= ======= ======
34
SCHEDULE III
PROMETHEUS INCOME PARTNERS
a California limited partnership
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
As of December 31, 2001
(In Thousands)
NOTES:
(1) The aggregate cost for federal income tax purposes is $29,849.
(2) Depreciation is computed on lives ranging from 5 to 40 years.
(3) Balance, December 31, 1998 $ 29,938
Additions 350
-------
Balance, December 31, 1999 30,288
Additions 490
-------
Balance, December 31, 2000 30,778
Additions 1,103
-------
Balance December 31, 2001 $ 31,881
========
(4) Balance, December 31, 1998 $ 7,610
Provision charged to expense 573
-------
Balance, December 31, 1999 8,183
Provision charged to expense 618
-------
Balance, December 31, 2000 8,801
Provision charged to expense 682
-------
Balance, December 31, 2001 $ 9,483
=======
(5) The Land site was leased through November 1987 and acquired in December
1987.
35
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date indicated.
PROMETHEUS INCOME PARTNERS,
a California limited partnership
By PROMETHEUS DEVELOPMENT CO., INC.,
a California corporation,
Its General Partner
Date: March 28, 2002 By /s/ Vicki R. Mullins
-------------- ----------------------------------
Vicki R. Mullins,
Vice President
Date: March 28, 2002 By /s/ John J. Murphy
-------------- ----------------------------------
John J. Murphy,
Vice President
Supplemental Information to be furnished with Report, filed pursuant to
Section 15(d) of the Act by Registrants, which have not registered Securities
pursuant to Section 12 of the Act:
None
36