PRESTIGIOUS INVESTMENT & MANAGEMENT (PRISM) A LP Consolidated Financial Statements Year Ended December 31, 2012 (Unaudited)

Transcription

1 Consolidated Financial Statements

2 Index to Consolidated Financial Statements Page REVIEW ENGAGEMENT REPORT FINANCIAL STATEMENTS Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Partners Capital Consolidated Statement of Cash Flows 6-17

3 BUCHANAN BARRY LLP CHARTERED ACCOUNTANTS REVIEW ENGAGEMENT REPORT To the unit holders of Prestigious Investment & Management (PRISM) ALP We have reviewed the consolidated balance sheet of Prestigious Investment & Management (PRISM) A LP (the "Partnership") as at December 31, 2012 and the consolidated statements of income, partners capital and cash flows for the year then ended. Our review was made in accordance with Canadian generally accepted standards for review engagements and, accordingly, consisted primarily of inquiry, analytical procedures and discussion related to information supplied to us by the Partnership. A review does not constitute an audit and, consequently, we do not express an audit opinion on these consolidated financial statements. Based on our review, nothing has come to our attention that causes us to believe that these consolidated financial statements are not, in all material respects, in accordance with Canadian accounting standards for private enterprises. Calgary, Alberta April 4, 2013 CHARTERED ACCOUNTANTS 800, 840-6th Avenue SW Calgary, AB, Canada, T2P 3E5 tel fax Serving Calgary since 1960, with associated offices across Canada and affiliated internationally. RHD ASSOCIATION OF

4 Consolidated Balance Sheet December 31, CURRENT Cash Accounts receivable Prepaid expenses Deposits in trust (Note 3) Holdback receivable LONG-TERM INVESTMENT (Note 4) DUE FROM RELATED PARTIES (Note 5) PROPERTY HELD FOR SALE (Note 6) ASSETS 1,359,456 $ 168, , ,700 55,122 69, , , ,731, ,830 1,236, , , , ,983 REVENUE PRODUCING PROPERTIES (Note 7) MORTGAGE RECEIVABLE (Note 8) 22,641,797 27,467,810 1,726,603 2,893,354 $ 28,690,397 $ 31,826,323 CURRENT Accounts payable and accrued liabilities (Note 9) Tenant deposits (Note 3) Current portion of long-term debt (Note 10) Deferred income LIABILITIES 329,892 $ 267, , , ,670 1,511,364 48,211 44, ,262 1,944,006 LONG-TERM DEBT (Note 10) 16,322,654 18,530,934 17,267,916 20,474,940 UNIT HOLDERS EQUITY PARTNERS CAPITAL 11,422,481 11,351,383 $ 28,690,397 $ 31,826,323 CONTINGENT LIABILITY (Note 12) APPROVED ON BEHALF OF THE GENERAL PARTNER Director Director

5 Consolidated Statement of Income REVENUE Abby Glen Apartments Castleview Park Apartments Westview Manor 794,658 $ 798,378 1,070,073 1,016, , ,831 2,375,122 2,278,681 OPERATING EXPENSES Abby Glen Apartments Castleview Park Apartments Westview Manor 519, , , , , ,363 1,164,312 1,193,307. GROSS PROFIT EXPENSES Advertising and promotion Amortization of deferred financing costs Amortization of revenue producing properties Asset management fees Interest and bank charges Interest on long-term debt Meals and entertainment Office and administration Pre-acquisition costs Professional fees 1,210,810 1,085,374 4,427 5,206 93, , , , , ,788 9,827 2, , ,658 3,487 3, , ,752 1,575-36,125 21,175 2,030,069 1,925,894 LOSS FROM OPERATIONS OTHER INCOME Interest LOSS BEFORE DISCONTINUED OPERATIONS DISCONTINUED OPERATIONS (Note 11) Revenue Operating expenses Amortization of revenue producing properties Interest on long-term debt Gain on disposal of assets (819,259) (840,520) 170, ,974 (648,734) (669,546) 460, ,695 (278,336) (582,242) (108,442) (209,436) (131,938) (233,039) 900,550 1,489, ,422 1,364,660 NET INCOME 193,688 $ 695,114

6 Consolidated Statement of Partners Capital PARTNERS CAPITAL- Beginning of year NET INCOME FOR THE YEAR $ 11,351,383 $ 10,898, , ,114 11,545,071 11,593,748 SUBSCRIPTIONS CASH DISTRIBUTIONS AND WlTHHOLDINGS REDEMPTIONS DISTRIBUTION REINVESTMENT PLAN ("DRIP") PARTNERS CAPITAL- End of year 990, ,039 (91,774) (91,693) (30,816) (150,672) (990,170) (811,039). $ 11,422,481 $ 11,351,383

7 Consolidated Statement of Cash Flows OPERATING ACTIVITIES Net income Items not affecting cash: Amortization of revenue producing properties Amortization of deferred financing costs Interest income, accrued to mortgages receivable Gains on disposal of assets Changes in non-cash working capital (Note 13) $ 193, , ,965 93,263 (119,014) (~00,550) 121,352 46, , ,148 (102,246) (1,489,682) 202,685 (286,291) 167,470 (83,606) INVESTING ACTIVITIES Investment in property held for sale Investment in revenue producing properties Proceeds on disposal of revenue producing properties Advances to related parties FINANCING ACTIVITIES Partners subscription redemptions Proceeds from refinanced long-term debt Cash distributions Repayment of long-term debt Increase in deferred finance costs (1,708) (212,027) 1,800,575 (367,500) 1,219,340 (30,816) 525,322 (91,774) (511,519) (86,593) (1,911) (170,523) 576,968 (322,477) 82,057 (150,671) (91,693) (545,922) (1,500) (195,380) (789,786) NET CHANGE IN CASH AND CASH EQUIVALENTS CASH - Beginning of year CASH - End of year 1,191,430 (791,335) 168, ,361 1,359, ,026

8 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of the Partnership have been prepared by management in accordance with Canadian accounting standards for private entities ("ASPE"). The consolidated financial statements have, in management s opinion, been properly prepared using careful judgment with reasonable limits of materiality and within the framework of the significant accounting policies summarized below. Basis of consolidation The consolidated financial statements include the accounts of the Partnership and its subsidiaries. As a result, figures as at December 31,2012 or for the years then ended include the financial position of those subsidiaries and the results of their operations for the years then ended. The results of operations of the subsidiaries are included in the consolidated financial statements from the respective dates of acquisition or incorporation. Partnership These consolidated financial statements pertain to the Partnership carried on under the name Prestigious Investments & Management (PRISM) A LP and accordingly do not include the assets, liabilities, revenue and expenses of the individual partners. No provision for income taxes has been made in these financial statements since the income of the Partnership is taxable only in the hands of the partners. Cash and cash equivalents Cash consists of cash on hand and bank deposits. Highly liquid investments with maturities of three months or less at the date of purchase are considered to be cash equivalents. Revenue producing properties Revenue producing properties are stated at cost less accumulated amortization. Revenue producing properties are amortized over their estimated useful lives using the following rates and methods: Buildings 4% declining balance Chattels 20% declining balance The Partnership reviews revenue producing properties and equipment for impairment whenever events or circumstances arise that indicate that the carrying amount may not be recoverable. Recoverability is assessed by comparing the carrying amount of the asset or group of assets to its fair value, as determined by the non-discounted future cash flows that the long-lived assets are expected to generate. An impairment loss is recognized in the period where the carrying amount exceeds fair value. (continues)

9 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Investment in joint venture Investments in economic activities subject to joint control are accounted for using the proportionate consolidation method. The Partnership owns a 75% joint venture share of the Castleview Park Apartments Joint Venture. The remaining 25% share is owned by Kings Castle LP, a party related by virtue of common control. The Partnership s pro-rata share of the assets, liabilities, revenues and expenses of the joint venture have been combined on a line-by-line basis with similar items of the Partnership. Investment in subsidiary The Partnership accounts for controlled subsidiaries using the consolidation method. Long-term investment The Partnership s long-term investment consists of common shares of a private entity which the Partnership does not control nor does it exercise significant influence. The investment is recorded using the cost method. Property held for sale Property held for sale is measured at the lower of its carrying amount and fair value less cost to sell. Deferred income Deferred income represents payments received in advance from tenants for rents related to subsequent periods. Issue costs All costs directly attributable to raising money for the offering are deemed to be issue costs and are recorded as a deduction against partners capital. Revenue recognition Rental revenue is recognized on an accrual basis as it is earned when collectability is reasonably assured. Other income is recognized as it is earned. Financial instruments policy Measurement The Partnership initially measures its financial assets and liabilities at fair value, except for certain related party transactions which are measured at the carrying amount or exchange amount. The Partnership subsequently measures all financial assets and financial liabilities at amortized cost, except equity instruments quoted in an active market, which are reported at fair value with any unrealized gains and losses reported in net income. (continues)

10 ,PRESTIGIOUS INVESTMENT & MANAGEMENT (PRISM) A LP 1. SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (continued) Financial assets measured at amortized cost include cash, accounts receivable, deposits held in trust, holdback receivable and mortgage receivable. Financial liabilities measured at amortized cost include accounts payable and accrued liabilities, tenant deposits, and long-term debt. Impairment Financial assets measured at cost are tested for impairment when there are indications that an impairment exists. The amount of write-down is recognized as an impairment loss in net income. A previously recognized impairment loss may be reversed to the extent of an improvement, provided it is no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously. The amount of the reversal is recognized in net income in the period the reversal occurs. Transaction costs The Partnership recognizes transaction costs on financial instruments measured at fair value in net income in the period incurred. Financial instruments subsequently measured at amortized cost are adjusted for financing fees and transaction costs which are directly attributable to the origination and acquisition of the financial instrument. Financing fees and transaction costs are subsequently amortized over the life of the financial instrument to which they are directly attributable. Measurement uncertainty The preparation of financial statements in conformity with ASPE requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Estimates and assumptions include the estimated useful life of revenue producing properties for amortization purposes, the net recoverable amount of revenue producing properties, property held for sale, accounts receivable, due from related parties, long-term investment and mortgage receivable and the amount of accrued liabilities. By their nature, these estimates are subject to measurement uncertainty, and the effect on the consolidated financial statements of changes in such estimates in future periods could be significant.

11 2. NATURE OF OPERATIONS PRESTIGIOUS INVESTMENT & MANAGEMENT (PRISM) A LP Prestigious Investment & Management (PRISM) ALP was formed on January 30, 2008 under the laws of the Province of Alberta. Prestigious Investment & Management (PRISM) A Inc. (the "General Partner") is the General Partner. With the exception of the General Partner, and any limited partner who participates in the management of the Partnership, the liability of the partners is restricted to their investment in the Partnership. The Partnership is in the business of acquiring real property, earning income from its rental operations and eventual disposal of same and through limited investment in real estate development opportunities. The Partnership issued ( ) limited partnership units with a value of $990,170 ( $811,039) as part of the Partnership s dividend reinvestment income plan. The partnership redeemed 7.57 units ( ) for consideration of $30,816 ( $150,672). At December 31, 2012 the Partnership was fully subscribed and closed to investment. Each unit represents an equal undivided interest in the net assets of the Partnership. 3. DEPOSITS HELD IN TRUST AND TENANT DEPOSITS Deposits held in trust consist of security deposits received by the Partnership from tenants at the time of property rental. Security deposits are held in an interest bearing deposit account. The portion of the deposit refunded to the tenant is determined at the time the tenant vacates the property. 4. LONG-TERM INVESTMENT In 2011, the Partnership extended a loan of $1,000,000 to Prestigious Properties Inc. During the year, the Partnership converted its loan and related accrued interest of $236,274 in exchange for 1,236,274 Class B common non-voting shares of Prestigious Properties Inc. at $1 per share. 5. RELATED PARTY TRANSACTIONS During the period, the Partnership entered into related party transactions with the following related entities, which are related to the Partnership by way of common management and a common director: Prestigious Investment & Management (PRISM) A Inc.- the "General Partner" (a) Pursuant to the agreement dated January 30, 2008 between the Partnership and the General Partner, the Partnership has agreed: i) To pay the General Partner 0.5% annually, calculated quarterly in arrears, of the current value of the total assets in the Partnership. Asset management fees of $196,748 ( $190,788) were paid to the General Partner during the fiscal year ended December 31,2012; (continues)

12 5. RELATED PARTY TRANSACTIONS (continued) ii) To pay the General Partner 1% of any asset acquired, after the asset has been acquired. No assets were acquired during the fiscal year ended December 31, 2012 and the fiscal year ended December 31, Therefore, no fees were paid out in either fiscal year. iii) To pay 40% of the earnings quarterly in arrears once limited partnership unit holders have received their investment back. Once the limited partnership unit holders have doubled their investment the General Partner will received 60% of the distributable cash flow paid quarterly in arrears. No distributions were made to the General Partner during the fiscal year ended December 31,2012; and iv) To reimburse in full all third party costs incurred by the General Partner. During the years ended December 31, 2012 and December 31,2011, no third party costs were incurred. Included in accounts payable is $44,188 ( $41,339) owing to the General Partner. Prestigious Properties Four Limited Partnership (a) At December 31,2012, the Partnership had a loan receivable from Prestigious Properties Four Limited Partnership of $949,100 ( $581,600) which is included in due from related parties. The loan is due on demand, bears interest at 8% per annum (2011-8%), and is payable quarterly in arrears. (b) Interest income of $49,094 ( $47,183) was included in other income in relation to the above loan balance. Included in accounts receivable is $107,015 ( $57,921) in interest receivable from Prestigious Properties Four Limited Partnership. Prestigious Properties Three Canada Limited Partnership Included in accounts receivable is $7,500 ( $Nil) owing from Prestigious Properties Three Canada Limited Partnership. This amount relates to a loan from the Castleview property, jointly owned by the Partnership, to a property owned by Prestigious Properties Three Canada Limited Partnership. The loan is short term and non-interest bearing. Prestigious Properties Canada Ltd. (a) Included in accounts payable is $6,007 ( $8,540) payable to Prestigious Properties Canada Ltd. (b) Transaction management fees of 1.25% were paid for marketing and sales assistance on the disposition of the Discovery Village property. The total fees recorded as a reduction to gain on disposal of assets were $68,150 ( $Nil). (continues) 10

13 5. RELATED PARTY TRANSACTIONS (continued) Prestigious Properties Europa Inc. During 2009 the Partnership acquired the Westview Manor Apartments property from Prestigious Properties Europa Inc, a company controlled by Thomas Beyer, a director of the Partnership. The transaction was recorded at the carrying amount valued at less than the property s appraised value. The vendor take back mortgage of $500,000 extended at the time of acquisition of the property was repaid during the year (Note 10). Included in interest on long-term debt is interest in the amount of $23,499 ( $25,000) paid in respect of this loan. Fireside Property Group Ltd. During the period, the Partnership paid property management fees of $141,512 ( $163,774) to Fireside Property Group Ltd. Prestigious Properties Inc. Included in due from related parties is $2,746 ( $2,746) due from Prestigious Properties Inc. The Partnership converted its loan plus accrued interest receivable to Class B shares of Prestigious Properties Inc. (Note 4). During the year interest on the loan of $69,918 ( $102,247) was included in other income. Kings Castle GP Included in accounts receivable is $Nil ( $14,437) related to planning fees paid by the Partnership on behalf of Kings Castle GP. Kings Castle LP (a) During the year, funds that were due to the Partnership s joint venture with Kings Castle LP were issued directly to the Partnership. Kings Castle LP s portion of the funds was $4,700, which is included in accounts payable at year end. (b) At the end of the year, the Partnership s joint venture with Kings Castle LP issued short-term loans to properties owned by the Partnership. Kings Castle LP s portion of these loans in the amount of $8,750 ( $Nil) is included in accounts payable at year end. These transactions occurred in the normal course of operations and have been recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties. 6. PROPERTY HELD FOR SALE Property held for sale consists of bare land in Yorkton, Saskatchewan which was listed for sal~ during the year ended December 31,2010.

14 7. REVENUE PRODUCING PROPERTIES Cost Accumulated Net book Net book amortization value value Abby Glen building Abby Glen chattels Abby Glen land Castleview Park Apts buildings Castleview Park Apts chattels Castleview Park Apts land Discovery Village building Discovery Village chattels Discovery Village land Westview Manor building Westview Manor chattels W estview Manor land 6,677,912 $ 876,871 $ 5,801,041 $ 5,996, ,508 66,162 78,346 80,728 2,200,000-2,200,000 2,200,000 8,951, ,436 8,092,663 8,341,139 74,037 23,427 50,610 39,615 2,238,000-2,238,000 2,238, ,728, , ,506,000 3,756, ,898 3,396,083 3,510,302 32,620 12,566 20,054 23, , , ,000 $ 24,840,157 $ 2,198,360 $ 22,641,797 $ 27,467, MORTGAGE RECEIVABLE During 2011, the Partnership accepted a vendor take back mortgage in the amount of $1,717,120 on the sale of the Highland Estates, Sherbrooke House, and Parkview Place properties to an unrelated party. The mortgage bears interest at 3% per annum, payable monthly in arrears. The principal is due in full on September 26, The mortgage is secured by the underlying property. A mortgage receivable in the amount of $1,000,000 plus accrued interest extended to a related party, Prestigious Properties Inc., was converted into shares of the related party during the year (Note 4). 9. GOVERNMENT REMITTANCES PAYABLE Included in accounts payable and accrued liabilities are the following government remittances owing: Withholding tax $ - $ 12,322 12

15 10. LONG-TERM DEBT Firm Capital - Vendor Take-Back Mortgage - Abby Glen Apartments Monthly interest payments at 4.50% per annum, maturing on May 4, The mortgage is collateralized by assets with a carrying value of $8,079,387 ( $8,277,051). Peoples Trust Company - Abby Glen Apartments Monthly instalments of $28,722 including interest at 3.50% per annum, maturing on May 5, 2014 and collateralized by assets with a carrying value of $8,079,387 ( $8,227,051). Peoples Trust Company- Discovery Village Monthly instalments of $20,204 including interest at 4.37% per annum, maturing on September 1, The mortgage was assumed by the purchaser of the Discovery Village property which was sold during Peoples Trust Company- Westview Manor Mortgage #1 MonthlY instalments of $11,613 including interest at 5.40% per annum, maturing on May 1, The mortgage was refinanced during Peoples Trust Company- Westview Manor Mortgage #2 Monthly instalments of $6,474 including interest at 4.83% per annum, maturing on June 1,2012. The mortgage was refinanced during Prestigious Properties Europa Inc- Vendor Take-Back Mortgage - Westview Manor Monthly interest payments based on 5.00% per annum, maturing on April 30, The mortgage was refinanced during $ 1,000,000 $ 1,000,000 5,201,260 5,362,152 3,412,028 1,577,945 1,013, ,000 (continues) 13

16 10. LONG-TERM DEBT (continued) TD Canada Trust - Castleview Park Monthly instalments of $40,283 including interest at 4.14% per annum, maturing on January 1, 2016 and collateralized by assets with a carrying value of $10,381,273 ( $10,618,754). TD Canada Trust- Westview Manor Refinanced mortgage with monthly instalments of $16,914 including interest at 3.03% per annum, maturing on September 1, 2017 and collateralized by assets with a carrying value of $4,181,137 ( $4,299,032). 7,202,753 7,386,396 3,538,441 $ 16,942,454 20,252,300 Less current portion of long-term debt (455,670) (1,511,364) 16,486,784 18,740,936 Deferred financing costs, net of accumulated amortization (164,130) (210,002) $ 16,322,654 $ 18,530,934 Principal repayment terms are approximately: 2013 $ 455,67O ,334, , ,711, ,129,075 $ ~454 In order to satisfy the refinanced W estview mortgage and Castleview mortgage with TD Canada Trust, the Partnership must maintain throughout the year a debt service coverage ratio greater than 1.2. For the purposes of this calculation, a debt service coverage ratio is defined as the ratio of cash flow available to service debt to interest expense and scheduled principal payments in respect to the mortgage. Cash flow available to service debt is defined as earnings before interest, income taxes, depreciation and amortization divided by principal and interest. At December 31, 2012 the Partnership was in compliance with this bank covenant. 14

17 11. DISCONTINUED OPERATIONS Discontinued operations for the year ended December 31, 2012 consist of one revenue producing property which was sold on November 26, The property was sold in order to realize the increase in fair market value. In the opinion of the Partnership, the results of the operations during the year have not been substantially affected by any item, transaction or event of a material or unusual nature, other than the gain arising from the disposal of this property. Comparative results have been reclassified accordingly. Discontinued operations for the year ended December 31, 2011 consist of three revenue producing properties sold on September 26, The property was sold in order to realize the increase in fair market value. In the opinion of the Partnership, the results of the operations during the year have not been substantially affected by any item, transaction or event of a material or unusual nature, other than the gain arising from the disposal of this property. The result of the discontinued operations for 2012 and 2011 are as follows: Revenue Expenses Gain on sale Total Effect on 2012 Discovery Village $ 460,588 $ 518,716 $ 900,550 $ 842,422 Effect on 2011 Discovery Village $ 472,128 $ 587,432 $ - $ (115;,304) Parkview Place 253, , , ,894 Sherbrooke House 132, , , ,042 Highland Estates 40,995 31, , ,028 Effect on 2011 $ 899,695 $ 1,024,717 $ 1,489,682 $ 1,364, CONTINGENT LIABILITY The Partnership is subject to an action commenced by a utilities company claiming that the Partnership, along with Prestigious Properties Three Limited Partnership, were required by contract to continue to pay utility costs for jointly owned properties sold in The amount of the claim is $106,697 plus interest and costs. Management believes $75,000 is the most likely amount to be paid. Of the $75,000 estimated by management, $46,500 relates to the Partnership which had a 62% ownership interest in the jointly owned properties. At December 31, 2012, $46,500 is included as a contingent liability and expensed in office and administration expense. 15

18 13. CHANGES IN NON-CASH WORKING CAPITAL Accounts receivable Prepaid expenses Deposits in trust Holdback receivable Accounts payable and accrued liabilities Tenant deposits Deferred income S (33,178) $ (72,970) 14,171 (53,403) 8,322 22,719 (147) 7,500 61,947 (180,009) (8,322) (22,844) 3,325 12,716 $ 46,118 $ /286,291) 14. FINANCIAL INSTRUMENTS The Partnership is exposed to various risks through its financial instruments. The following analysis provides a measure of the entity s risk exposure and concentrations at the balance sheet date. Credit Risk Credit risk arises from the possibility that third parties may default on their financial obligations. The Partnership is exposed to credit risk from tenants, however, the Partnership has a significant number of tenants which minimizes concentration of credit risk. The mortgage receivable is secured by the underlying properties where the mortgage is placed. The Partnership is exposed to credit risk relating to the default on the payments on the mortgages receivable by the borrower. Mortgages receivable are subject to the borrower s ability to pay which is subject to the business activities, asset values and net income of the borrower. The Partnership s credit risk exposure on cash is minimized substantially by ensuring that cash is held with credible financial institutions. Currency Risk Currency risk is the risk that the value of financial instruments denominated in currencies other than the reporting currency of the Partnership will fluctuate due to changes in foreign exchange rates. The Partnership is not exposed to currency rate risk as all financial instruments are denominated in Canadian currency. Interest Rate Risk Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in the interest rates. The Partnership is exposed to interest rate risk to the extent that the long-term debt and mortgage receivable are at a fixed rate of interest. (continues) 16

19 14. FINANCIAL INSTRUMENTS (continued) Liquidity Risk Liquidity risk is the risk that the Partnership will encounter difficulty in meeting obligations associated with financial liabilities. The Partnership is currently not exposed to liquidity risk. Other Price Risk Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. The Partnership is not exposed to other price risk. 15. COMPARATIVE FIGURES Some of the comparative figures have been reclassified to conform to the current year s presentation. 17