PRESTIGIOUS PROPERTIES FOUR LIMITED PARTNERSHIP Consolidated Financial Statements
PRESTIGIOUS PROPERTIES FOUR LiMiTED PARTNERSHIP Index to Consolidated Financial Statements Page REVIEW ENGAGEMENT REPORT 1 FINANCIAL STATEMENTS Consolidated Balance Sheet Consolidated Statement of Loss 3 Consolidated Statement of Partners Capital Consolidated Statement of Cash Flow 6-14
BUCHANAN BARRY LLP CHARTERED ACCOUNTANTS REVIEW ENGAGEMENT REPORT To the unit holders of Prestigious Properties Four Limited Partnership We have reviewed the consolidated balance sheet of Prestigious Properties Four Limited Partnership (the "Partnership") as at December 31, 2010 and the consolidated statements of loss, partners capital and cash flow for the year then ended. Our review was made in accordance with Canadian generally accepted standards for review engagements and accordingly consisted primarily of enquiry, 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 generally accepted accounting principles. Calgary, Alberta March 25, 2011 CHARTERED ACCOUNTANTS 800, 840-6th Avenue SW Calgary, AB, Canada, T2P 3E5 tel 403.262.2116 fax 403.265.0845 www.buchananbarry.ca Serving Calgary since 1960, with associated offices across Canada and affiliated internationally. BHD ASSOC~^~IO~ o~ 1960 1~12010
PRESTIGIOUS PROPERTIES FOUR LIMITED PARTNERSHIP Consolidated Balance Sheet December 31, 2010 2010 2009 (as restated) Cash and cash equivalents (Note 4) Accounts receivable Prepaid expenses Deposits held in trust (Note 5) Escrowed fund (Note 6) Revenue producing properties (Note 7) Deferred finance costs ASSETS $ 34,081 $ 98,379 103,596 62,546 1,582 -.- 22,414 251,373 216,673 15,863,519 16,930,141 72,234 108,352 $ t6,326,385 $ 17,438,505 LiABILITiES Accounts payable and accrued liabilities Tenant deposits (Note 5) Deferred revenue Long-term debt (Note 8) Loan from related party (Note 9) $ 729,259 $ 583,513 86,138 79,030 13,395 33,830 11,582,866 12,212,735 261,600-12,673,258 12,909,108 Cumulative translation adjustment Partners capital PARTNERS CAPITAL 189,446 344,156 3,463,681 4,185,241 3,653,127 4,529,397 $ 16,326,385 $ 17,438,505 APPROVED ON BEHALF OF THE GENERAL PARTNER Director
PRESTIGIOUS PROPERTIES FOUR LIMITED PARTNERSHIP Consolidated Statement of Loss 2010 2009 (as restated) REVENUE Parks of Denton Seward Sudbury!,924,850 =, 588,752 2,142,931 87,064 558,776 2,513,602 2,788,771 OPERATING EXPENSES Parks of Denton Seward Sudbury EXPENSES Amortization Amortization of deferred finance costs Asset management (Note 9) Consulting fees Interest and bank charges Interest on long-term debt Marketing materials Office and administration Professional fees Travel LOSS FROM OPERATIONS 1,076,313 449,492 1,525,805 987,797 606,808 36,117 170,320 1,239 11,288 809,441 2,690 45,834 16,081 9,549 1,709,367 (721,570) 1,441,157 165,274 450,077 2,056,508 732,263 661,212 36,117 199,189 155 2,630 814,681 10,713 46,483 28,389 4,288 1,803,857 (1,071,594) OTHER INCOME (LOSS) Impairment loss Insurance recoveries Interest (Note 9) Loss on disposal of revenue producing property Foreign exchange losses NET LOSS 10 ~1,474,975) (183,222) 239,901 8,529 (271,831) (196,758) 10 (403,381) 3
PRESTIGIOUS PROPERTIES FOUR LIMITED PARTNERSHIP Consolidated Statement of Partners Capital 2010 2009 (as restated) PARTNERS CAPITAL - Beginning of year As previously reported $ 4,532,192 $ 5,742,270 Prior periods restatements (Note 3) (346,951) (82,054) As restated 4,185,241 5,660,216 NET LOSS (721,560) (1,474,975) PARTNERS CAPITAL- End of year $ 3,463,681 $ 4,185,241
PRESTiGiOUS PROPERTIES FOUR LIMITED PARTNERSHIP Consolidated Statement of Cash Flow Year Ended December 3t, 2010 2010 2009 (as restated) OPERATING ACTIVITIES Net loss Items not affecting cash: Amortization of revenue producing properties Loss on disposal of revenue producing property Foreign exchange losses Amortization of deferred financing costs Impairment loss $ (721,560) $ (1,474,975) 606,808 =, 36,117 661,212 271,831 196,758 36,117 183,222 Changes in non-cash working capital (Note 10) (78,635) t12,201 (125,835) 58,971 33,566 (66,864) INVESTING ACTIVITIES Investment in revenue producing properties Proceeds on disposal of revenue producing properties Escrowed fund (Note 6) (161,553) (34,700) (339,260) 114,200 156,943 (196,253) (68,117) FINANCING ACTIVITIES Advances from related parties Repayment of long-term debt 26t,600 (163,211) 214,000 (158,404) 98,389 55,596 NET CHANGE IN CASH AND CASH EQUIVALENTS (64,298) (79,385) CASH AND CASH EQUIVALENTS- Beginning of year 98,379 177,764 CASH AND CASH EQUIVALENTS - End of year (Note 4) 34,081 $ 98,379 CASH FLOW SUPPLEMENTARY INFORMATION Interest paid 800,970 $ 830,883 Interest received 10 $ 78,642
1. NATURE OF OPERATIONS PRESTiGiOUS PROPERTIES FOUR LIMITED PARTNERSHIP Prestigious Properties Four Limited Partnership (the "Partnership") was formed on March 29, 2007 under the laws of the Province of Alberta. The Partnership commenced active operations on April 9, 2007. Prestigious Properties Canada Four Inc. 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 the sole shareholder of Prestigious Properties USA Four Inc. This entity controls Prestigious Properties Dallas One LLC, which owned a property in Detroit, Michigan, USA, and Prestigious Properties Dallas Two LLC, which owns a property in Denton, Texas, USA. The Partnership is in the business of acquiring real property and earning income from its rental operations and eventual disposal. The Partnership has issued 2,316 limited partnership units for a total consideration of $10,494,250. Each unit represents an equal undivided interest in the net assets of the partnership. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the Partnership have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP"). The 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. Partnership These financial statements pertain to the Partnership carried on under the name of Prestigious Properties Four Limited Partnership 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 income of the Partnership is taxable only in the hands of the partners. Basis of consolidation The consolidated financial statements include the accounts of the Partnership and its subsidiaries, each of which is wholly owned and has a December 31 year-end. The results of operations of the subsidiaries are included in the consolidated financial statements from the respective dates of acquisition. All balances and transactions between the Partnership and its subsidiaries have been eliminated. Cash and cash equivalents Cash consists of cash on hand and bank deposits. Highly liquid investments with maturities of three months or less at date of purchase are considered to be cash equivalents. (continues) 6
PRESTIGIOUS PROPERTIES FOUR LIMITED PARTNERSHIP 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue producing properties Revenue producing properties and equipment are stated at cost less accumulated amortization. Revenue producing properties and equipment are amortized over their estimated useful lives at the following rates and methods: Buildings 4% declining balance Chattels 20% declining balance Paving 20% declining balance Computer equipment 55% declining balance Amortization is applied at one half the normal rate in the year of acquisition. impairment of long-lived assets 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 undiscounted future cash flows the long-lived assets are expected to generate. An impairment loss is recognized in the period where the carrying amount exceeds fair value. Deferred financing costs The costs of obtaining long-term financing are deferred and amortized on a straight-line basis over the terms of the debt. Deferred revenue Deferred revenue 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 monthly when collectibility is reasonably assured. Other income is recognized as it is earned. (continues)
PRESTiGiOUS PROPERTIES FOUR LIMITED PARTNERSHIP 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Foreign currency translation All monetary assets and liabilities denominated in currencies other than Canadian dollars have been translated into Canadian dollars at the rate of exchange in effect at the balance sheet date. Nonmonetary assets have been translated at the rate of exchange prevailing at the date of the transaction. Gains and losses resulting from the translation of assets and liabilities are reflected in net earnings of the period. Unrealized gains and losses on long-term monetary items with an ascertainable life extending beyond one year are also included in net earnings for the period. The Partnership has self-sustaining subsidiaries in the United States, which are translated into Canadian dollars using the current rate method. Under this method, assets and liabilities are translated at exchange rates in effect at the balance sheet date (2010-0.995, 2009-1.047). Revenue and expense items are translated at average rates for the period (2010-1.029, 2009-1.142). Gains and losses arising from the translation of these operations are shown in a separate component of partners capital as a cumulative currency translation adjustment. Financial instruments On September 24, 2008, the CICA Accounting Standards Board advised that private enterprises were not required to adopt the revised standards related to financial instruments. These revised standards require that all financial assets and liabilities initially be recognized at their fair value on the balance sheet with subsequent changes in fair value or amortized cost reflected in income or other comprehensive income. These revised standards place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks. The Partnership has chosen not to adopt these revised standards. As a result, the Partnership continues to record financial instruments in accordance with CICA Handbook - Accounting XFI. Measurement uncertainty The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates and assumptions include the estimated useful life of revenue producing properties for amortization purposes, the net recoverable amount of revenue producing properties and accounts receivable, and the amount of accrued liabilities. By their nature, these estimates are subject to measurement uncertainty. The effect of changes in such estimates on the the financial statements in future periods could be significant. 8
PRESTiGiOUS PROPERTIES FOUR LiMiTED PARTNERSHIP 3. PRIOR PERIODS RESTATEMENTS The comparative figures have been restated to reflect two adjustments affecting prior years: (a) The 2009 comparative figures have been restated to accrue asset management fees payable to Prestigious Properties Four inc. as stipulated by the partnership agreement. As a result of the restatement, the 2008 asset management expense increased by $82,054 and the 2009 asset management expense increased by $81,675. As a result of these adjustments, partners capital at the beginning of 2010 has decreased by $163,729 (2009 - $82,054) and accounts payable and accrued liabilities at the beginning of 2010 has increased by $163,729 (2009 - $82,054); and (b) the 2009 comparative figures have been restated to recognize a loss on impairment to the Parks of Denton building due to damage which occurred to the roof. An impairment loss in the amount of $183,222 was recorded, decreasing the net book value of the Parks of Denton building by $183,222. Insurance proceeds in the amount of $239,901 were received in 2009 in compensation for the damage. The insurance proceeds have been reclassified from revenues to other income. As a result of this adjustment, partners capital and revenue producing properties at the beginning of 2010 have decreased by $183,222. The total effect of these restatements on partners capital at the beginning of the year is a decrease of $346,951 (2009 - $82,054). 4. CASH AND CASH EQUIVALENTS CONSISTS OF 2010 2009 Cash $ 34,081 $ 80,188 Money market fund - 18,191 $ 34,081 $ 98,379 5. 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 bank deposit accounts. The portion of the deposit refunded to the tenant is determined at the time the tenant vacates the property. 6. ESCROWED FUND The Partnership has been making installments to an escrowed fund with a mortgage provider. The fund will be used by the mortgage provider to pay applicable insurance and property taxes. 9
PRESTIGIOUS PROPERTIES FOUR LiMiTED PARTNERSHIP 7. REVENUE PRODUCING PROPERTIES 2010 Cost Accumulated Net book amortization value 2009 Net book value Sudbury land Sudbury building Sudbury chattels Parks of Denton land Parks of Denton building Parks of Denton paving Parks of Denton chattels Parks of Denton computers $ 390,090 $ = $ 390,000 $ 3,616,744 346,003 3,270,741 72,835 22,511 50,324 2,686,086-2,686,086 10,606,354 1,419,105 9,187,249 34,189 18,435 15,754 397,813 135,167 262,646 4,894 4,175 719 390 000 3,383 477 34,365 2,826,521 10,062,087 20,723 211,287 1,681 $ 17,808,915 $ 1,945,396 $ 15,863,519 $ 16,930,141 8. LONG-TERM DEBT Capmark - Parks of Denton Monthly installment of US $56,436 including interest at 6.98%, maturing October 11, 2017 and collateralized by assets with a carrying value of $12,312,028 (2009 - $13,303,840). Key Bank Capital = Parks of Denton, second mortgage Monthly installment of US $7,165 including interest at 12.95% per annum, maturing on October 11, 2017 and collateralized by assets with a carrying value of $12,312,028 (2009- $13,303,840). Peoples Trust Company - Sudbury Monthly installment of $15,866 including interest at 4.29% per annum, maturing on May I, 2013 and collateralized by assets with a carrying value of $3,711,065 (2009 - $3,807,842). 2010 2009 $ 8,189,965 $ 8,713,392 644,396 678,982 2,748,505 2,820,361 $ 11,582,866 12,212,735 (continues) 10
PRESTIGIOUS PROPERTIES FOUR LIMITED PARTNERSHIP 8. LONG-TERM DEBT (continued) Principal repayment terms are approximately: 2011 $ 172,093 2012 180,793 2013 2,707,030 2014 119,889 2015 128,654 Thereafter 8,274,407 The current portion of long-term debt due in 2011 has not been segregated on the unclassified balance sheet. 9. 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 Properties Four Inc.- the "General Partner" Pursuant to the agreement dated March 29, 2007 between the founding limited partners and the General Partner, the Partnership has agreed: (a) To pay the General Partner 1% annually quarterly in arrears of the current value of the total assets in the Partnership. Asset management fees of $170,320 (2009 - $199,189) were incurred during the year. Included in accounts payable and accrued liabilities is $258,032 (2009 - $188,236) in asset management fees due to the General Partner; (b) To pay an amount of limited partnership units equal to the total outstanding amount once the original invested capital of the limited partners has been returned in full; and (c) To reimburse in full all third party costs incurred by the General Partner. Included in accounts receivable at year-end is $9,729 (2009 - $9,822) owing from Prestigious Properties Four Inc. in relation to office expenses incurred by the Partnership. Prestigious Investment and Management (PRISM) A LP During the year, the Partnership borrowed $261,600 (2009 - $nil) from Prestigious Investment and Management (PRISM) ALP. The loan is due on demand, bears interest at 12% annually and is payable quarterly in arrears. During the year, interest expense of $10,738 (2009 - $nil) was incurred in relation to this loan and is included in interest on long-term debt and year-end accounts payable and accrued liabilities. (continues) 11
PRESTiGiOUS PROPERTIES FOUR LIMITED PARTNERSHIP 9. RELATED PARTY TRANSACTIONS (continued) Prestigious Properties Capital Four Ltd. During the year the Partnership was reimbursed by Prestigious Properties Capital Four Ltd. for capital fees of $9,650 (2009 - $9,650). The reimbursements have been posted as credits to office and administration expense. Included in accounts receivable is $36,361 (2009 - $26,787) owing from Prestigious Properties Capital Four Ltd. in relation to these fees. Prestigious Properties Canada Ltd. During the year Prestigious Properties Canada Ltd. was reimbursed by the Partnership for overhead charges related to rent, utilities, and administration of $39,729 (2009 - $63,388). These reimbursements were posted as credits to office and administration expense. Included in accounts payable and accrued liabilities is $3,377 (2009 - $5,970) in reimbursements owing to Prestigious Properties Canada Ltd. Strategic Software Management inc. Included in accounts payable is $21,588 (2009- $21,588) in legal fee reimbursements owing to Strategic Software Management Inc. These transactions are 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. 10. CHANGES IN NON-CASH WORKING CAPITAL 2010 2009 Accounts receivable Prepaid expenses Deposits held in trust Accounts payable and accrued liabilities Tenant deposits Deferred revenue Holdbacks receivable Foreign exchange $ (41,050) $ 102,785 (1,582) 9,000 22,414 23,155 145,746 (144,675) 7,108 (14,379) (20,435) 9,095 115,000 (41,010) $ 112,201 $ 58,971 12
PRESTIGIOUS PROPERTIES FOUR LiMiTED PARTNERSHIP 11. CAPITAL MANAGEMENT The financial statements of the Partnership have been prepared on a going concern basis, which contemplates the realization of assets and the payment of liabilities in the ordinary course of business. Management has indicated that the budget for 2011 shows positive cash flows from operations, in the next few years, management plans to increase revenues through rental increases, decreased vacancies, and lower expenses, in addition, the property values are expected to increase over the next few years. The Limited Partnership uses mortgage financing when real estate assets are purchased. Mortgage payments are funded and paid for by the property on a monthly basis. When the term of a mortgage is up and a renewal is required, multiple mortgage providers are usually asked to quote on rates to renew the mortgage. The different quotes are evaluated and the mortgage is renewed with the company providing the most favourable terms. From time to time the limited partnership may access financing from related parties. This is paid back as capital allows. Capital management plays a key role in real estate. Properly managing mortgages ensures maximum return for our partners. Shorter term financing, often accessed from related parties, can play a key role in providing for short term cash deficiencies. There are no externally imposed capital requirements for any of the debt instruments. 13
PRESTIGIOUS PROPERTIES FOUR LiMiTED PARTNERSHIP 12. FINANCIAL INSTRUMENTS The Partnership s financial instruments included in the balance sheet are comprised of cash and cash equivalents, accounts receivable, deposits held in trust, accounts payable and accrued liabilities, tenant deposits, long-term debt, and loan from related party. a) Fair values The fair value of a financial instrument is the estimated amount that the Partnership would receive or pay to settle a financial asset or liability as at the reporting date. The carrying value of cash and cash equivalents, accounts receivable, deposits held in trust, accounts payable and accrued liabilities, and tenant deposits approximates their fair value due to the immediate or short-term maturity of these instruments. The carrying value of the long-term debt approximates the fair value as the interest rates are consistent with the current rates offered to entities with similar risk profiles. The carrying value of loans due to related parties approximates the fair value as the interest rates are consistent with the current rates offered to other parties with similar risk profiles. b) Credit risk The Partnership is exposed to credit risk resulting from the possibility that 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 Partnership s credit risk exposure on cash is minimized substantially by ensuring that cash is held with credible financial institutions. c) Interest rate risk The Partnership is exposed to interest rate price risk to the extent that due to related party and long-term debt are at a fixed rate of interest. d) Currency rate risk The Partnership is exposed to currency rate risk, the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates to the extent that $9,836 USD in cash, $2,343 USD in accounts receivable, $333,532 USD in accounts payable, $40,638 USD in tenant deposits, and $8,882,325 USD in long-term debt are denominated in United States dollars. The Partnership does not use derivative instruments to reduce its exposure to foreign currency risk. 14