SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
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 23
Table of Contents
Form 10-K/A
Part I Page
Item 1 Business....................................................................... 3
Item 2 Properties......................................................................4
Item 3 Legal Proceedings...............................................................5
Item 4 Submission of Matters to Vote of Security Holders...............................5
Part II
Item 5 Market for Registrant's Units and Related Security Holder Matters...............6
Item 6 Selected Financial Data.........................................................8
Item 7 Management's Discussion and Analysis of Financial Conditions and
Results of Operations........................................................10
Item 8 Financial Statements and Supplementary Data....................................20
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................................20
Part III
Item 10 Directors and Executive Officers of the Registrant.............................21
Item 11 Executive Compensation.........................................................21
Item 12 Security Ownership of Certain Beneficial Owners and Management.................22
Item 13 Certain Relationships and Related Transactions.................................22
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................................................23-39
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 Management, LLC ("Everest"), 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 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 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 Properties II,
LLC 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 offer to purchase an
unspecified number of units at a price of $700 per unit. By its
6
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. 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,
---------------------------------------------------
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
The following discussion is based on the financial statements of the Partnership
as of and for the years ended December 31, 2001, 2000 and 1999. This information
should be read in conjunction with the accompanying financial statements and
notes thereto, included in Item 14.
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 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, annually the Partnership is
obligated to contribute, an additional 10%, as defined, 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.
10
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
The Partnership was involved in litigation involving construction defects
at its Properties (see "Construction Defects" for a more comprehensive
discussion of the matter). This litigation was settled during 2001. 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. The settlement proceeds,
including accumulated interest income, which totals approximately $4,585,000 as
of December 31, 2001, will be used to pay all siding related design and
construction expenditures. 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.
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 determined with a high degree
of certainty. Therefore, it is uncertain when cash distributions will resume. As
of the date of this report, the Partnership anticipates that following the
receipt by the Partnership of all settlement proceeds in respect of the
construction defects litigation, the Partnership will have sufficient reserves
to enable it to begin distributions to limited partners during 2002. However,
there can be no assurances given as to when distributions will actually resume
and the level at which any such distributions will be made. The hardboard siding
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. 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
- --------------------
In June 1996, the General Partner became aware of defects in the hardboard
siding used in both of the Partnership's Properties. On September 23, 1996, the
Partnership filed two lawsuits (since settled) seeking recovery of costs to
repair those defects from the manufacturer of the hardboard siding, as well as
the general contractor, the subcontractors, and the architects involved in the
original construction of the two Properties.
Since June 1996, the General Partner has determined that the defects did
not reduce the assets' value to an amount below their net book value, based on a
comparison of future cash flows to the carrying amount of the Properties at the
end of subsequent reporting periods. This continues to be the case at December
31, 2001. The General Partner has also determined that, although the
construction defects may be substantial in nature, the Properties will continue
to function as safe, inhabitable, income-generating Properties without a full
repair of the defects for an indeterminate amount of time. As such, the
Partnership has been under no obligation to undertake a major repair project to
remedy the construction defects at either of the Properties. The Partnership has
made certain emergency repairs to the Properties since June 1996, and has
expensed those repair costs as incurred with no consideration of potential
recoveries from the ongoing litigation or potential settlement
12
thereof. As of December 31, 2001, the cost of emergency repairs charged to
expense since June 1996 totaled approximately $3,457,000. This amount is not
included in the Partnership's current estimates
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
Construction Defects (Continued)
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to repair construction defects.
In 2001, the Partnership's litigation against the responsible parties was
settled. In total, from all Alderwood and Timberleaf settlements, defendants
agreed to pay the Partnership an aggregate of $14,600,000. The Partnership
received net proceeds (after payment of attorney's fees, litigation costs and a
litigation management fee of 3% of the gross settlement amount to an affiliate
of the Partnership's General Partner) of $10,832,000. The net proceeds related
to the Timberleaf property of $4,533,000 were received by the Partnership in
2001. The Alderwood litigation was settled on October 3, 2001 and net settlement
proceeds of $6,299,000 were received by the Partnership on March 5, 2002. As
such, a receivable for the Alderwood net settlement proceeds was recorded as of
December 31, 2001. The General Partner believes that these settlements were, in
substance, payment for non-operating costs to be incurred by the Partnership to
repair the defects at both Properties.
In 2001, upon learning that the defendants in the litigation were willing
to resolve the lawsuits in return for a substantial settlement to the
Partnership, the General Partner made the decision to utilize the proceeds of
the settlement to undertake a major repair project related to the construction
defects. The Partnership then developed an estimate of the cost to repair the
defects. Based on the information available at the current time, the Partnership
estimates the cost to repair the defects to be approximately $12,500,000, an
amount that exceeds the net settlement proceeds received by $1,667,000.
Therefore, based on the General Partner's decision to undertake the repair
project, the Partnership recorded this shortfall as a charge to income in the
accompanying Statement of Income for the year ended December 31, 2001.
The construction defects reserve of $12,500,000 at December 31, 2001 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 the estimated
repair cost. Any changes to this estimate will be adjusted in the subsequent
year in which the change is realized and will be recorded as described in the
following paragraph.
The General Partner is currently engaged in the process of developing an
updated repair plan, and anticipates that the repairs will occur during 2002 and
2003. All siding related design and construction expenditures up to $12,500,000
will be offset against the construction defects reserve. Any expenditures in
excess of $12,500,000 will be expensed in the period in which those additional
costs are incurred. In the unlikely event that this reserve exceeds the costs to
repair the construction defects, the remaining liability would be reversed into
income in the period in which the repairs are completed. None of the
expenditures made to repair the construction defects will be capitalized, due to
the fact that the repairs are not considered a betterment that will extend the
life of the Partnership's assets. The construction defects repairs are intended
to restore the assets to their original condition as though the defects had
never existed.
The expenditures for the repair costs will be made from cash reserves that
the Partnership possesses at December 31, 2001, along with the cash from the net
settlement proceeds received by the Partnership on March 5, 2002, including
accumulated interest on all cash reserves. The terms of
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
Construction Defects (Continued)
- ---------------------
the mortgages on the Properties has required that a security account be
maintained for each Property to cover potential liabilities with respect to
defects in the Properties' hardboard siding, to the extent that the Partnership
was unable to make sufficient recoveries from the responsible parties. These
security accounts serve as additional collateral for the lender and, as of
December 31, 2001, the Partnership has provided $5,852,000 toward these
accounts. 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. Additionally, the
settlement proceeds of $4,585,000 related to the Timberleaf property, included
accumulated interest income, have been segregated by the Partnership in a
reserve bank account. The sum of these two amounts, or $10,437,000, is reflected
as restricted cash in the accompanying balance sheet as of December 31, 2001, as
it will be utilized to fund the repair costs.
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This Annual Report on
Form 10-K/A contains such forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Words such as "anticipate,"
"estimate," "expects," "projects," "intends," "plans," "believes" and words of
similar substance used in connection with any discussion of future operations or
financial performance identify forward-looking statements. In particular,
statements relating to working capital, liquidity and the cost to repair
construction defects are forward-looking statements. 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 judgments based on currently available information. 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
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 estimate of the costs associated with the repairs and
assumptions are reasonable, there can be no assurance that these estimates will
prove to be accurate, and actual results may vary materially from those shown.
These estimates were based upon a variety of estimates and assumptions. It is
expected that there will be differences between the actual and estimated cost to
repair the construction defects and all costs associated with the repairs may be
materially higher or lower than those estimated. Inclusion of these estimates
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.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
Construction Defects (Continued)
- ---------------------
The Partnership is under no obligation, and expressly disclaims any
obligation, to update or alter any forward-looking statements, whether as a
result of new information, future events or otherwise. All forward-looking
statements contained herein are qualified in their entirety by the foregoing
cautionary statements.
Results of Operations
- ---------------------
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2001 TO THE YEAR ENDED DECEMBER 31,
2000.
Following is a table, for comparative purposes, presenting the results of
operations for the years ended December 31, 2001 and 2000.
For the years ended
December 31,
2001 2000
---------- ----------
(In Thousands)
REVENUES
Rental and other resident revenue $7,456 $6,783
Interest 415 464
---------- ---------
Total revenues 7,871 7,247
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EXPENSES
Interest and amortization 1,837 1,860
Operating and administrative 2,763 2,360
Depreciation 682 618
Provision for construction defects repair
costs in excess of net settlement
proceeds received 1,667 --
---------- ---------
Total expenses 6,949 4,838
---------- ---------
NET INCOME $922 $2,409
========== ==========
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
For the years ended December 31, 2001 and 2000, the average occupied rent
obtained from leased units, and the average occupancy percentages were as
follows:
Average Occupied Rental Rates
-----------------------------
2001 2000
---- ----
One Bedroom Units $1,575 $1,641
Two Bedroom Units $1,931 $2,115
Average Occupancy
-----------------
2001 2000
---- ----
Alderwood 96% 98%
Timberleaf 95% 99%
RENTAL AND OTHER RESIDENT REVENUE: Both Properties are located in Santa Clara
County, in an area commonly referred to as Silicon Valley. With the 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. Commencing in the later half of 2000 and continuing into
2001, unemployment rose, new job growth was non-existent with jobs decreasing
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.
As a result, average rental rates obtained from leased units decreased 28.79%
and 27.54% for Alderwood and Timberleaf, respectively from 2000 to 2001.
Concessions were utilized to increase occupancy, and to remain competitive in
the Santa Clara market. At the same time, rental revenue as presented in the
Statements of Income in Item 14 continues to appear strong, increasing 10%
between years, due to residents whose leases had not yet reached the end of
their term. As with newly leased units, upon lease expiration those current
residents who did renew their leases, renewed at significantly reduced market
rental rates. 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. Average quarterly occupancy went from a high of 99% for Alderwood and
Timberleaf, respectively as of the quarter ending December 31, 2000 to a low in
the third quarter 2001 of 94% and 93%, respectively. Given the sharp decrease in
employment, many residents terminated their leases early, while remaining
contractually and economically bound to the terms of their lease agreement until
their respective units were either re-leased or their lease expired. For those
former residents whose units were leased before their lease expiration date,
they remained obligated for the short fall in the rental rates through the end
of their lease term.
INTEREST INCOME: While more cash, including the Timberleaf net settlement
proceeds, were placed in interest bearing accounts in 2001 as compared to 2000,
less interest income was earned due to declining interest rates.
OPERATING AND ADMINISTRATIVE EXPENSES: These 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 increased 17% or
$403,000
17
between 2001 and 2000. The significant increase in expenses from 2000
to 2001 reflected the following.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
The softening residential rental market resulted in an increase in expenditures
of $125,000 in (1) additional personnel for leasing and unit turnover
maintenance; (2) turnover costs for unit cleaning, painting and minor
refurbishment supplies, and labor in those instances where the work could not be
accomplished by the resident staff; and (3) media advertising costs.
Additionally, rising energy costs due to the California energy crisis added
$33,000 in utility costs over 2000. Insurance premiums for liability and
property coverage increased $21,000 year-to-year. Professional services
increased $126,000 year-to-year, principally due to a change in accounting
firms, and to the retention of an independent financial advisor to evaluate the
fairness from a financial point of view of the consideration proposed to be paid
by an affiliate of the General Partner to acquire limited partnership units in
the Partnership held by limited partners unaffiliated with the General Partner.
Management fees increased $56,000 due to the revenue stream (as noted in the
Rental and Other Resident Revenue section above) and for management supervision
fees on contracted major non-recurring maintenance and improvement projects.
INTEREST AND AMORTIZATION: Interest expense on the Notes, which both commenced
in December 1997, is at a fixed rate of 6.99% per annum for Alderwood, and 7.09%
per annum for Timberleaf and decreased $23,000 year-to-year. Monthly principal
and interest payments under these Notes are $114,659 and $63,587, respectively.
Amortization of financing costs remained constant between years at $30,000 per
year.
DEPRECIATION: Depreciation expense was $661,000 and $618,000 in 2001 and 2000,
respectively, primarily due to the acquisition of assets.
PROVISION FOR ESTIMATED CONSTRUCTION DEFECTS REPAIR COSTS IN EXCESS OF NET
SETTLEMENT PROCEEDS: See the "Construction Defects" section of Management's
Discussion and Analysis for further details on this expense in 2001.
NET INCOME: Net income decreased between years to $922,000 in 2001 from
$2,409,000 in 2000, due principally to the $1,667,000 provision for estimated
construction defects repair costs in excess of net settlement proceeds, and
increased levels of expenditures associated with the softening residential
rental market and for professional services.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2000 TO THE YEAR ENDED DECEMBER 31,
1999.
Following is a table, for comparative purposes, presenting the results of
operations for the years ended December 31, 2000 and 1999.
For the years ended
December 31,
2001 2000
---- ----
(In Thousands)
REVENUES
Rental $6,783 $5,856
Interest 464 250
Total revenues 7,247 6,106
----- -----
EXPENSES
Interest and amortization 1,860 1,881
Operating 2,360 2,231
Depreciation 618 573
Total expenses 4,838 4,675
----- -----
NET INCOME $2,409 $1,431
====== ======
For the years ended December 31, 2000 and 1999, the average occupied rent
obtained from leased units, and the average occupancy percentages were as
follows:
Average Occupied Rental Rates
-----------------------------
2000 1999
---- ----
One Bedroom Units $1,641 $1,285
Two Bedroom Units $2,115 $1,567
Average Occupancy
-----------------
2000 1999
---- ----
Alderwood 98% 97%
Timberleaf 99% 97%
RENTAL AND OTHER RESIDENT REVENUE: The Silicon Valley saw continued job growth
and low unemployment between 1999 and 2000. The unemployment rate for the fourth
quarter 2000 decreased to 1.5% from 2.3% in the fourth quarter of 1999. During
2000, 24,100 jobs were created, an increase of 2.4% over 1999. The low
unemployment rate coupled with a robust job market in turn
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
created a housing shortage driving up the value of housing prices -- both home
prices and apartment rents. The strong residential rental market conditions
allowed the maintenance of high occupancy without the need to offer concessions.
Additionally, no new housing units permitted continued market rate growth in
rental rates, as evidenced by average occupied rental rates increasing 28% from
1999 to 2000. While average occupied rent obtained from leased units increased
28% during 2000, the Statements of Income in Item 14, reflect rental revenues
increasing 18%. The lower increase in rental revenue as compared to the average
occupied rental rates from leased units is attributable to current residents
whose leases had not yet reached the end of their term. As with newly leased
units, upon lease expiration those current residents who renewed their leases,
renewed at significantly higher market rental rates. 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.
INTEREST INCOME: Cash flow increased to $1,626,000 in 2000 as compared to
$759,000 in 2001. This increase in cash invested in interest bearing accounts
accounted for the more than doubling the interest earned in 2000 as compared to
1999.
OPERATING AND ADMINISTRATIVE EXPENSES: These 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 increased 6% or
$139,000 between 2000 and 1999. The significant increase in expenses from 1999
to 2000 reflected the following. Payroll increased $67,000 due principally to
higher rental commissions and incentive bonuses related to the stronger market
forcing units to turnover as residents either purchased homes or moved to other
apartments; higher salaries as the shortage of high tech industry applicants
increased salaries for all businesses in the rental market, and increases in
benefits. Insurance premiums for liability and property coverage increased
$12,000 year-to-year. Management fees increased $72,000 due to the revenue
stream (as noted in the Rental and Other Resident Revenue section above) and for
management supervision fees on contracted major non-recurring maintenance and
improvement projects.
INTEREST EXPENSE AND AMORTIZATION: Interest expense on the Notes, which both
commenced in December 1997, is at a fixed rate of 6.99% per annum for Alderwood,
and 7.09% per annum for Timberleaf. Monthly principal and interest payments
under these notes are $114,659 and $63,587, respectively. Amortization of
financing costs remained constant between years at $30,000 per year.
DEPRECIATION: Depreciation expense was $618,000 and $573,000 in 2000 and 1999,
respectively, primarily due to the acquisition of assets.
NET INCOME: Net income increased $978,000 between years to $2,409,000 in 2000
from $1,431,000 in 1999, due principally to the strength of the rental market
which contributed $927,000; interest income contributed $214,000, as reduced by
an increase in expenses of $163,000, principally for expenditures relating to
residential rental market conditions.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
Economic Environment
- --------------------
Both the national and California economy and specifically the economy
of Santa Clara County in which the Partnership owns and manages its two
Properties have been and continue to be in a recession. This has resulted in
reduced occupancy rates, and reductions in market rental rates.
The Partnership's property type and geographic location provide some
degree of risk moderation but are not immune to a prolonged down cycle in the
real estate market in which the Partnership operates. Although the Partnership
believes it is well positioned to meet the challenges ahead, it is possible that
further reductions in occupancy and market rental rates will result in reduction
of rental revenues, operating income, cash flows.
Inflation
- ---------
Inflationary increases would likely have a negative effect on property
operating results and such increases may be at a greater rate of increases than
property rental rates in a period of recession. 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. The Partnership believes it effectively manages its Properties
and other expenses but understands that a return to higher annual rates of
inflation would result in increases to operating expenses.
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, 4 and 6), and Real Estate (Notes 1, 4 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.
22
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.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or executive officers. For
informational purposes only, the following are the names and additional
information relating to controlling persons, directors, executives and senior
management of Prometheus Development Co., Inc., the General Partner of the
Registrant.
Sanford N. Diller. Age 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. 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. 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.
24
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.
25
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...................25
Report of Arthur Andersen LLP, Independent Auditors.................26
Financial Statements:
Balance Sheets as of December 31, 2001 and 2000.....................27
Statements of Income for the years ended
December 31, 2001, 2000 and 1999..................................28
Statements of Partners' Capital (Deficit) for the
years ended December 31, 2001, 2000 and 1999......................29
Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999..................................30
Notes to Financial Statements.......................................31
2. FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts.....................37
yy
Schedule III - Real Estate and Accumulated Depreciation .........38-39
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, with respect to
matters not required to be disclosed in a Form 10-K filing.
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 with respect to
matters not required to be disclosed in a Form 10-K filing.
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.
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.
26
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 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, with respect to the
notification of the Limited Partners summarizing the settlements
reached with the defendants in the Alderwood and Timberleaf
litigations and the impacts on cash flow and future distributions.
(c) No additional exhibits are required pursuant to Item 601(b) of
Regulation S-K.
27
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 four of Note 4, as to which the
date is March 5, 2002.
28
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 each of the two years in the period 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 income 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
29
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 and contingencies (see Notes 4 and 5)
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.
30
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 construction defects repair
costs in excess of net settlement
proceeds received 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.
31
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.
32
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 construction defects in excess of
net settlement proceeds received 1,667 -- --
Increase in restricted cash (5,181) (698) (568)
Decrease (increase) in accounts
receivable and other assets (32) (5) 32
(Decrease) increase in payables
and accrued liabilities (52) 115 (101)
-------- -------- --------
Net cash (used in) provided by operating activities (1,900) 2,469 1,397
-------- -------- --------
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 (309) (288)
-------- -------- --------
Net cash provided by (used in) financing activities 4,203 (309) (288)
-------- -------- --------
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.
33
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., ("Prometheus") a California corporation. The Partnership operates in
one segment, residential real estate.
In accordance with the terms of the Partnership Agreement, income or
loss is allocated 1% to the General Partner and 99% to the Limited Partners. Net
income or loss per limited partner unit is computed by dividing the net income
or loss allocable to the Limited Partners by the number of units outstanding
during the period in which the income or losses are allocated.
The preparation of financial statements in conformity with 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.
34
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.
35
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.
36
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. ("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:
_
|_| 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 the General Partner or its affiliates, other
than Prometheus (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.
37
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 became aware of defects in the hardboard
siding used in both of the Partnership's Properties. On September 23, 1996, the
Partnership filed two lawsuits (since settled) seeking recovery of costs to
repair those defects from the manufacturer of the hardboard siding, as well as
the general contractor, the subcontractors, and the architects involved in the
original construction of the two Properties.
Since June 1996, the General Partner has determined that the defects did
not reduce the assets' value to an amount below their net book value, based on a
comparison of future cash flows to the carrying amount of the Properties at the
end of subsequent reporting periods. This continues to be the case at December
31, 2001. The General Partner has also determined that, although the
construction defects may be substantial in nature, the Properties will continue
to function as safe, inhabitable, income-generating Properties without a full
repair of the defects for an indeterminate amount of time. As such, the
Partnership has been under no obligation to undertake a major repair project to
remedy the construction defects at either of the Properties. The Partnership has
made certain emergency repairs to the Properties since June 1996, and has
expensed those repair costs as incurred with no consideration of potential
recoveries from the ongoing litigation or potential settlement thereof. As of
December 31, 2001, the cost of emergency repairs charged to expense since June
1996 totaled approximately $3,457,000. This amount is not included in the
Partnership's current estimates to repair construction defects.
In 2001, the Partnership's litigation against the responsible parties was
settled. In total, from all Alderwood and Timberleaf settlements, defendants
agreed to pay the Partnership an aggregate of $14,600,000. The Partnership
received net proceeds (after payment of attorney's fees, litigation costs and a
litigation management fee of 3% of the gross settlement amount to an affiliate
of the Partnership's General Partner) of $10,832,000. The net proceeds related
to the Timberleaf property of $4,533,000 were received by the Partnership in
2001. The Alderwood litigation was settled on October 3, 2001 and net settlement
proceeds of $6,299,000 were received by the Partnership on March 5, 2002. As
such, a receivable for the Alderwood net settlement proceeds was recorded as of
December 31, 2001. The General Partner believes that these settlements were, in
substance, payment for non-operating costs to be incurred by the Partnership to
repair the defects at both Properties.
In 2001, upon learning that the defendants in the litigation were willing
to resolve the lawsuits in return for a substantial settlement to the
Partnership, the General Partner made the decision to utilize the proceeds of
the settlement to undertake a major repair project related to the construction
defects. The Partnership then developed an estimate of the cost to repair the
defects. Based on the information available at the current time, the Partnership
estimates the cost to repair the defects to be approximately $12,500,000, an
amount that exceeds the net settlement proceeds received by $1,667,000.
Therefore, based on the General Partner's decision to undertake the repair
project, the Partnership recorded this shortfall as a charge to income in the
accompanying Statement of Income for the year ended December 31, 2001.
38
39
NOTES TO FINANCIAL STATEMENTS (Continued)
5. LITIGATION SETTLEMENT - CONSTRUCTION DEFECTS (Continued)
The construction defects reserve of $12,500,000 at December 31, 2001 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 the estimated
repair cost. Any changes to this estimate will be adjusted in the subsequent
year in which the change is realized.
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.
40
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
41
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
======= ====== ======= ======= ====== ====== ======= ======= ======
42
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.
43
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: April 24, 2002 By /s/ Vicki R. Mullins
-------------- ----------------------------------------
Vicki R. Mullins,
Vice President
Date: April 24, 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
44