EXHIBIT (ii)
INDEPENDENT AUDITOR'S REPORT
The Partners
Bluegrass Corporate Centers III and IV Partners
Louisville, Kentucky
We have audited the accompanying balance sheets of Bluegrass Corporate Centers
III and IV Partners as of December 31, 1994 and 1993, and the related
statements of operations, partners' deficit and cash flows for the years then
ended. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Bluegrass Corporate Centers
III and IV Partners as of December 31, 1994 and 1993, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ CARPENTER & MOUNTJOY, PSC
Louisville, Kentucky
February 1, 1995
BLUEGRASS CORPORATE CENTERS III AND IV PARTNERS
BALANCE SHEETS
December 31,
ASSETS 1994 1993
Property And Improvements-
Notes A and B
Land $ 441,515 $ 441,515
Buildings and improvements 5,015,745 5,002,302
----------- -----------
5,457,260 5,443,817
Less accumulated 3,602,951 3,277,908
depreciation ----------- -----------
1,854,309 2,165,909
Other Assets
Cash and equivalents-Note F 238,030 298,368
Accounts receivable --- 9,320
Other current assets 21,806 5,566
Deferred assets, net of
accumulated amortization-
Note A 111,223 19,916
----------- -----------
371,059 333,170
----------- -----------
$ 2,225,368 $ 2,499,079
=========== ===========
LIABILITIES AND PARTNERS'
DEFICIT
Debt-Note B $ 2,789,129 $ 2,805,488
Other Liabilities
Accounts payable- Note D 6,937 1,984
Accrued interest 17,663 24,280
Unearned rent 12,046 12,183
Security deposits 33,714 32,408
----------- -----------
70,360 70,855
Partners' Deficit (634,121) (377,264)
----------- -----------
$ 2,225,368 $ 2,499,079
=========== ===========
See notes to financial statements.
BLUEGRASS CORPORATE CENTERS III AND IV PARTNERS
STATEMENTS OF OPERATIONS
Year ended December 31,
1994 1993
Revenues $ 767,402 $ 725,552
Operating Expenses
Depreciation expense 325,042 337,760
Interest expense 241,197 295,145
Repairs and maintenance 64,349 66,373
Property taxes 41,592 35,688
Management fee 34,166 32,167
Amortization 22,755 36,451
Utilities 16,504 16,450
Leasing fees 14,776 23,758
Insurance 9,210 8,921
Professional fees 4,194 5,193
Miscellaneous expenses 2,399 1,928
----------- -----------
776,184 859,834
----------- -----------
Loss from operations (8,782) (134,282)
Other Income
2
Interest income 746 1,993
Other 1,179 4,124
----------- -----------
Total other income 1,925 6,117
----------- -----------
Net loss $ (6,857) $ (128,165)
=========== ===========
See notes to financial statements.
BLUEGRASS CORPORATE CENTERS III AND IV PARTNERS
STATEMENTS OF PARTNERS' DEFICIT
Years ended December 31, 1994 and 1993
Sturgeon-
LHI Thornton
Development Bluegrass
Inc. Partners Total
Partners' Deficit at December
31, 1992 $ (108,616) $ (140,483) $ (249,099)
1993 Net loss (121,102) (7,063) (128,165)
---------- ---------- ----------
Partners' Deficit at December
31, 1993 (229,718) (147,546) (377,264)
1994 Net loss (24,062) 17,205 (6,857)
1994 Distributions (200,000) (50,000) (250,000)
---------- ---------- ----------
Partners' Deficit at December
31, 1994 $ (453,780) $ (180,341) $ (634,121)
========== ========== ==========
See notes to financial statements.
BLUEGRASS CORPORATE CENTERS III AND IV PARTNERS
STATEMENTS OF OPERATIONS
Year ended December 31,
1994 1993
Cash Flows From Operating
Activities
Net loss $ (6,857) $ (128,165)
Adjustments to reconcile
net loss to cash
provided
by operating activities:
Depreciation and
amortization 347,797 374,211
3
Changes in assets and
liabilities:
Deferred assets (108,784) ---
Other assets (12,197) 25,409
Other liabilities (495) (39,293)
---------- ----------
Total adjustments 226,321 360,327
Net cash provided by
operating activities 219,464 232,162
Cash Flows From Investing
Activities
Purchase of fixed assets (13,443) (19,215)
Cash Flows From Financing
Activities
Principal payments on
long- (2,805,488) (72,500)
term debt
Proceeds from long-term
debt refinancing 2,789,129 ---
Distributions to partners (250,000) ---
---------- ----------
Net Cash used in financing
activities (266,359) (72,500)
Net increase (decrease) in
cash and equivalents (60,338) 140,447
Cash and equivalents at
beginning of year 298,368 157,921
---------- ----------
Cash and equivalents at end
of year $ 238,030 $ 298,368
========== ==========
BLUEGRASS CORPORATE CENTERS III AND IV PARTNERS
NOTES TO FINANCIAL STATEMENTS
December 31, 1994 and 1993
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Partnership Activities: The Partnership derives its revenues from the leasing
of commercial office building space in Louisville, Kentucky.
Accounts Receivable: Accounts receivable consist of rents due from tenants.
The partnership considers all of these to be collectible and as such, no
allowance has been recorded on the books.
Building and Improvements: Property is recorded at cost with depreciation
provided over its estimated useful lives using the straight-line method.
Deferred Assets: Deferred leasing commissions and capitalized leasing costs
are being amortized over the life of the related lease using the straight-line
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method. Loan costs are being amortized over the life of the note. At December
31, 1994 and 1993, deferred assets consisted of the following:
1994 1993
Capitalized leasing costs $ 1,341 $ 1,341
Deferred leasing commissions 18,133 17,124
Deferred loan costs 150,056 41,273
--------- ---------
169,530 59,738
Less accumulated amortization (58,307) (39,822)
--------- ---------
$ 111,223 $ 19,916
========= =========
Statement of Cash Flows: For purposes of the statement of cash flows, the
Partnership considers all short-term highly liquid investments purchased with
a maturity of three months or less to be cash equivalents. Cash paid for
interest was $241,197 and $295,145 for 1994 and 1993, respectively.
Continued
BLUEGRASS CORPORATE CENTERS III AND IV PARTNERS
NOTES TO FINANCIAL STATEMENTS-CONTINUED
December 31, 1994 and 1993
NOTE B--LONG-TERM DEBT
Long-term debt consists of the following:
December 31
1994 1993
9.75% mortgage note payable due
in monthly installments of
$11,528, including interest.
Note refinanced on April 25,
1994. $ --- $ 1,022,639
10.75% mortgage note payable
due in monthly installments of
$19,687, including interest.
Note refinanced on April 25,
1994. --- 1,782,849
7.6% mortgage note payable due
in monthly installments of
$26,582, including interest.
Final lump sum payment due
April 25, 2001. 2,789,129 ---
----------- -----------
$ 2,789,129 $ 2,805,488
=========== ===========
Maturities on long-term debt
are as follows:
1995 $ 110,526
1996 119,224
5
1997 128,608
1998 138,730
1999 149,648
2000 and thereafter 2,142,393
-----------
$ 2,789,129
===========
NOTE C--INCOME TAXES
Income taxes on net earnings are payable by the partners pursuant to the
provision of Subchapter K of the Internal Revenue Code. Accordingly, no
provision has been made for income taxes.
Continued
BLUEGRASS CORPORATE CENTERS III AND IV PARTNERS
NOTES TO FINANCIAL STATEMENTS-CONTINUED
December 31, 1994 and 1993
NOTE D--TRANSACTIONS WITH RELATED PARTIES
The Partnership has entered into a building management contract with Sturgeon
and Associates to manage the project. The owner of Sturgeon and Associates is
also a partner of Sturgeon-Thornton Bluegrass Partners, which is a 20% partner
in the Partnership. The management fee, which amounted to $34,166 and $32,167
for 1994 and 1993, respectively, is 4.5% of the monthly gross rents collected.
The Partnership also pays leasing commissions to Sturgeon and Associates at
3.5% on new tenant leases and 1.5% on renewal. These commissions amounted to
$14,776 for 1994 and $23,758 for 1993.
Another related party is a tenant of the Partnership and paid rent of $2,667
in 1994 and $8,000 in 1993. The lease expired April 30, 1994 and was not
renewed.
Included in accounts payable at December 31, 1994 is a payable to Sturgeon and
Associates of $3,600.
NOTE E--FUTURE MINIMUM RENTALS
At December 31, 1994, the Partnership had the following future minimum rentals
under noncancellable operating leases, not including renewal options or any
re-leasing:
Year ended December 31,
1995 $ 614,028
1996 372,652
1997 212,174
1998 107,536
1999 28,800
2000 and thereafter 12,000
-----------
$ 1,347,190
===========
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Continued
BLUEGRASS CORPORATE CENTERS III AND IV PARTNERS
NOTES TO FINANCIAL STATEMENTS-CONTINUED
December 31, 1994 and 1993
NOTE F--CONCENTRATIONS OF CREDIT RISK
Cash is insured by the Federal Deposit Insurance Corporation (FDIC) up to
$100,000. At December 31, 1994, the Company had bank balances exceeding
individual FDIC insurance limits as follows:
Amount
Financial in Excess
Statement Reconciling Bank of FDIC
Balance Items Balance Insurance
Cash deposit in
excess of FDIC insurance
limit $ 238,030 $ 5,841 $ 243,921 $ 143,921
=========== ========== ========== ==========
BLUEGRASS CORPORATE CENTER
Estimated Pro Forma Statement
of Net Operating Income
(Unaudited)
The Estimated Pro Forma Statement of Net Operating Income represents the
amount of estimated income which would be realized by the Registrant during
twelve months of ownership of the Property, based upon the assumptions set
forth in the accompanying notes (See Note 1).
Revenue:
Rental Income $815,000
Other Income 7,000
--------
Total Revenues $822,000
--------
Property Operating 71,000
Utilities 17,000
Real Estate Taxes 44,000
Depreciation (See
Note 2) 104,000
Insurance 10,000
Management Fee (See
Note 3) 33,000
Repairs and Maintenance 119,000
Interest (See Note 4) 213,000
7
Administration and
Other 7,000
--------
Total Expenses 618,000
--------
Pro Forma Revenue in
Excess of Expenses $204,000
========
Pro Forma Funds from
Operations (See Note 5) $308,000
========
The accompanying notes are an integral part of the estimated pro forma
statement.
Bluegrass Corporate Center
Notes to Estimated Pro Forma Statement
1) This statement does not propose to forecast actual operating
results for any period in the future and thus, the following
assumptions may not be valid for future years and actual results
may differ. These statements should be read in conjunction with
the Statement of Revenue and Certain Expenses for the year ended
December 31, 1994 which were modified by Management for known
changes in revenues and expenses associated with the Registrant's
ownership of the Property in order to estimate the pro forma
statement.
2) Depreciation expense which represents a non-cash expenditure has
been included for informational purposes only. Depreciation is
calculated on a depreciable basis of approximately $4,160,000
using the straight line method based on a useful life of 40 years.
3) The Property will be managed by an unaffiliated third party for
initial management fee of 4.0% of gross revenues.
4) The Bluegrass Corporate Center serves as collateral for a
nonrecourse first mortgage loan in the amount of approximately
$2,707,000 which bears interest at a fixed rate of 8%, matures on
April 25, 2001, and requires monthly payments of principal and
interest based upon a twenty year amortization schedule. The loan
requires a balloon payment for the remaining unpaid principal
balance upon its maturity.
5) Funds From Operations (or "FFO") has been provided in the Pro
Forma Statement as supplemental information to the property's
projected operating results. FFO is used by the real estate
investment trust industry as a measure of a property's performance
and is defined as net operating income from a property's
operations, plus certain non-cash items including depreciation and
amortization and excluding an extraordinary capital items.
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