10KSB 1 larchdale10k2001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended Commission File Number December 31, 2001 0-24906 LARCHDALE OWNERSHIP COMPANY, LTD. (Exact name of registrant as specified in its charter) California 95-3932760 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6355 Topanga Canyon Boulevard, Suite 435, Woodland Hills, California 91367 (Address of principal executive offices) (Zip code) (818) 346-0509 Registrant's telephone number, including area code 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 checkmark 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 [ ] As of March 15, 2002, the aggregate market value (as computed by reference to the price at which the securities were sold) of the voting securities held by non-affiliates of the registrant was $4,704,423. ITEM 1. BUSINESS. -------- Larchdale Ownership Company, Ltd. (the Partnership) is a California limited partnership formed in June 1984. Effective December 31, 1994, the general partner is LMH Realty, Inc., a California corporation which is wholly owned by L. Mark Hammerschmitt, the President of Preferred Financial Corporation whose business address and telephone number are those of the Partnership: 6355 Topanga Canyon Boulevard, Suite 435, Woodland Hills, California 91367, (818) 346-0509. See Item 4. The Partnership was formed to acquire, operate, and hold for investment the Larchdale Woods Apartments located at 13178 Larchdale Road, Laurel, Maryland (the Property). The Partnership has retained Preferred Financial Corporation, an affiliate of the general partner, as Property Manager to conduct the day-to-day operations of the Property and the Partnership. Preferred Financial Corporation employs all personnel supplying management services to the Partnership, of which nine (9) people are employed full-time at the Property location. ITEM 2. PROPERTY. -------- LARCHDALE WOODS APARTMENT COMPLEX On June 29, 1984, the Partnership purchased the Larchdale Woods Apartments from an unrelated third party. Larchdale Woods is a 526 unit multi-family apartment building located on 40.09 acres of wooded land with two lakes. The apartment complex was constructed in 1967. The exterior of the buildings is brick construction with vertical wood siding over wood frame, supported by block foundation walls. The Property has 41 garden apartment buildings of which 16 have three stories and 25 have four stories. The complex consists of 371 one bedroom/one bath, 102 two bedroom/one bath, and 53 three bedroom/one and a half bath apartments. Property amenities include expansive landscaped grounds with two playground areas, an outdoor Olympic-sized pool and cabana, and laundry facilities in each building. ITEM 3. LEGAL PROCEEDINGS. ----------------- The Partnership has, from time to time, been a party to various legal proceedings consisting of routine litigation incidental to its business, but believes that any potential liabilities resulting from these proceedings are adequately covered by insurance or are otherwise immaterial. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. --------------------------------------------------- Under terms of a Solicitation of Consents dated November 10, 1994, the limited partners authorized the addition of LMH Realty, Inc., a California corporation which is wholly owned by L. Mark Hammerschmitt, the President of Preferred Financial Corporation, as the new general partner of the Partnership. The previous general partners, Alex Gershunoff and Lawrence M. Silk, became limited partners of the Partnership with no management authority for the Partnership. -2- In addition, the limited partners authorized the payment of a deferred asset management fee to LMH Realty, Inc., payable upon the sale of the Property as a management incentive, equal to 1.5% of the sales price. Both proposals were effective as of December 31, 1994 (the "Admission Date"). ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. ----------------------------------------- There currently is no established public market for the limited partnership units of Larchdale Ownership Company, Ltd., nor is such a market likely to develop in the future. There has been no distribution of cash to the unit holders, and there is not expected to be a cash distribution until the Partnership has available cash from operations on a regular basis. ITEM 6. SELECTED FINANCIAL DATA. -----------------------
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2001 2000 1999 Revenue $ 4,146,351 $ 3,642,710 $ 3,214,375 Net loss $ (301,496) $ (1,478,071) $ (859,291) Per limited partnership interest $ (9) $ (42) $ (24) Total assets $ 2,932,406 $ 3,328,285 $ 4,031,375 Long-term obligations $ 13,374,012 $ 13,526,704 $ 13,667,414
-3- ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ----------------------------------- LIQUIDITY AND CAPITAL RESOURCES The Partnership's primary source of liquidity has been funds from operations, proceeds from the initial capitalization, and the exercise of warrants in 1986 and 1987. With the completion of the 1987 warrant offering, the Partnership is fully capitalized. Future capital requirements are expected to be primarily provided by operations. On November 10, 1986, the Partnership obtained a new loan of $12,750,000 from an institutional third-party lender. The note bears interest at a variable rate of 225 basis points over the 11th District Federal Home Loan Bank cost of funds, with a floor of 10%. In May 1992, the Partnership completed a modification of the payment terms of the loan for a one-year period commencing with the payment due January 1, 1992. Under the terms of the modification, monthly interest only payments were made at the reduced rate of 5%, with the difference between interest at the full rate and the reduced payment rate added to the principal amount of the loan. In addition, payments for property taxes were impounded by the lender on a monthly basis. After the end of the modification period, the Partnership made partial monthly payments until April 6, 1993 when payment in full of past due amounts was made and the loan reverted to its unmodified terms. In May 1994, the Partnership completed a second modification of the loan payment terms for a one-year period commencing on November 1, 1993. Under the terms of the second modification, monthly interest only payments were paid at the reduced rate of 9%, with the difference between interest at the full rate of 10% and the reduced payment rate added to the principal amount of the loan. In addition, payments for property taxes were impounded by the lender on a monthly basis. In March 1995, the modification was extended for a one-year period commencing on November 1, 1994. Starting with the payment due on November 1, 1995, the modification expired and monthly payments at the full rate of 10% per annum plus principal amortization were required under the original terms of the note. However, the lender continued to bill the Partnership under the terms of the modification and the Partnership paid the amounts as billed. The Partnership contacted the lender in September 1996 to initiate negotiations to resolve the billing disparity, which had accumulated to $281,000 and the problems of the property taxes due starting in September 1996 and the deferred maintenance of the property. In December 1996, the lender agreed to accept $11,800,000 as payment in full on its loan under the conditions, among others, that payment be received before April 15, 1997, that the property taxes be paid, and that the loan be purchased by a third party independent of the Partnership. The purchase price was reduced by the principal portion of the monthly payments made from January 1, 1997 through the purchase date. The property taxes were paid by the Partnership in December 1996. On February 28, 1997, the Partnership completed the refinancing of the property and paid off the existing loan, which had a balance at closing of $13,245,725 with a cash payment of $11,767,496 for a gain of $1,481,229. The Partnership paid a fee of $50,000 to a third party to purchase the existing loan from the lender and subsequently sell the loan to the Partnership and a fee of $25,213 to a consultant for assistance in making the initial contact with the appropriate lender representative. In addition, the Partnership paid a fee of $140,602 to the general partner, LMH Realty, Inc., equal to 10% of the net gain of -4- $1,406,016 for success in the negotiating of the loan discount and arranging the third party purchase of the loan. The Partnership recognized the remaining gain of $1,265,414 in 1997. The loan was purchased and the refinancing completed with funds from a new loan to the Partnership of $14,000,000 at 8.20% per annum maturing on March 1, 2007 with monthly principal and interest payments of $104,686. The Partnership paid fees to the lender and loan broker of $280,000, loan costs, title insurance, transfer taxes and recording fees of $50,996, and estimated legal fees of $25,000. The new loan provided for reserves for the initial two monthly payments, property taxes and insurance. In addition, the new lender held a reserve of $493,000 for deferred property maintenance items. After the payment of $11,767,496 to the prior lender, the Partnership received net proceeds from the refinancing of $1,316,015. In September 1997, the Partnership completed the pay off of advances due to an affiliate of the general partner of $664,596 plus accrued interest of $430,295. As of the date of this Report, the Partnership does not foresee any trends, demands, commitments, events, or uncertainties which are reasonably likely to result in a material increase or decrease in the Partnership's liquidity. RESULTS OF OPERATIONS. --------------------- Rental operations continued to improve with rental collections for the full year 2001 up by 13.8% over the comparable period in 2000. The rental market has remained stable and positive past the events of September 11, 2001 into the first quarter of 2002. However, the year-to-year comparisons in the future will be less dramatic as the rate of operational recovery levels off. The foundation repairs to the sixth Larchdale building as well as property-wide surface runoff drainage improvements have been completed. In addition, the complete overhaul of the pool, including decking and plumbing, has also been completed and the pool is now a positive amenity for the property. The building roofs have required only minor repairs and, therefore, the roof replacement program has been postponed in order to conserve cash. The biannual county inspection and licensing fee was paid during the second quarter of 2001. The improved operating performance of the property provided the partnership with sufficient cash flow to pay all obligations without additional advances in 2001 from an affiliate of the general partner which remains at $1,335,000. Accrued interest due on these advances at 12% per annum through December 31, 2000 was paid by the partnership in October 2001. However, the accrued interest for 2001 of $160,200 has not yet been paid. Rental operations continued to improve with rental collections for the full year of 2000 increasing by approximately 13.2% over 1999. The foundation repair to the five buildings in the apartment property as well as the repairs to the interiors of the apartment units was completed at the end of December 2000. These repairs have primarily been paid for by funds loaned to the Partnership by an affiliate of the general partner totaling $982,000 in 2000, bringing the total loans from the affiliate to $1,335,000 as of December 31, 2001. -5- A sixth Larchdale building that the structural engineer had thought was stabilized has now shifted causing damage that will require repairs estimated to cost $150,000 and were commenced in April 2001. Additional costs for roof repairs and to redo the pool to meet the County's requirement for a dual drain system makes it unlikely that the Partnership will be able to repay any of the affiliate's loans in 2002. The Partnership made progress in addressing its various problems in 1999. The on-site management team has been stabilized with the hiring of a new manager who had managed Larchdale in 1997 before leaving to pursue another business interest. The local rental market is positive which, combined with a stronger management team and other improvements, has resulted in steadily improving rental collections through the second half of 1999. Rental income increased by $74,086, or 2.4%, to $3,130,937 in 1999, which reversed the decline incurred in 1998. The second issue was related to the completion of the exterior cosmetic improvements, which began in 1997 and were finished in December 1999, as evidenced by the issuance of the County biannual operating permit after clearing all of the County inspection deficiencies. License expenses in 1999 include the County biannual license fee of $26,300. But, by far, the most serious problem for Larchdale has been the ground shifting affecting five buildings in the 526 unit apartment complex. The shifting caused foundation failures in two buildings requiring the buildings consisting of 25 units to be closed and tenants transferred to other buildings plus two units in two other buildings to be unrentable. In addition, there are surface runoff drainage problems that periodically cause water damage to four other units. In March 2000, work commenced to repair the buildings and improve the surface drainage systems at a total cost of approximately $700,000 in 2000, including repairs to the interior of these 31 units, with an estimated completion date at the end of May 2000. These costs were funded in 2000 by additional loans from an affiliate of the general partner which loaned Larchdale $273,000 in 1999 for completion of the exterior cosmetic improvements and preliminary engineering and construction activity on the structural building problems. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ------------------------------------------- The Financial Statements and Schedules listed in the accompanying Index to Financial Statements are incorporated herein and filed as part of this Report. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. ---------------------------------------------------- None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS. -------------------------------- The registrant is a limited partnership and has no executive officers or directors. Effective December 31, 1994, the general partner is LMH Realty, Inc., a California corporation that is wholly owned by L. Mark Hammerschmitt, the President of Preferred Financial Corporation. The previous general partners, Alex Gershunoff and Lawrence M. Silk, became limited partners of the partnership with no management authority for the Partnership. See Item 4. Alex Gershunoff died on February 5, 1995. -6- ITEM 11. EXECUTIVE COMPENSATION. ---------------------- None. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- In December 2000, an affiliate of the general partner acquired 7,030 Partnership Interests, or 19.7% of the outstanding Interests, pursuant to a Repurchase Offer made available to existing limited partners. The Repurchase Offer was extended and in April 2001, an affiliate of the general partner acquired an additional 2,158 Partnership Interests, or 6.1% of the outstanding interests. Including Interests previously acquired, the general partner and its affiliates hold 9,867 Interests or 27.6% of the outstanding Interests at December 31, 2001. The Partnership is a limited partnership and has no officers or directors. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ---------------------------------------------- Affiliates of the registrant's General Partner received certain fees for services and financing provided to the Partnership. Concurrent with the purchase of the Property, the Partnership engaged PFC to manage the Property and the affairs of the Partnership for a combined fee of 6% of the gross rental receipts. Management fees paid in 1999, 2000 and 2001 amounted to $193,263, $220,176 and $249,170 respectively. PFC was further reimbursed for accounting, data processing, tax preparation services, and other out-of-pocket expenses of $37,298 in 1999, $29,748 in 2000 and $29,880 in 2001. In connection with the Repurchase Offer described in Item 12, the General Partner received a fee of $25,133 in December 2000 and $8,222 in April 2001. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. --------------------------------------------------------------- (a) The financial statements and schedules listed in the accompanying Index to Financial Statements and Schedules are attached hereto and filed as part of this Report. (b) Exhibits: None. -7- SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Partnership has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 28, 2002 LARCHDALE OWNERSHIP COMPANY, LTD. By: /s/L. Mark Hammerschmitt -------------------------------- L. Mark Hammerschmitt, President LMH REALTY, INC. GENERAL PARTNER Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following person on behalf of the Partnership in the capacity and on the date indicated. SIGNATURE TITLE DATE --------- ----------- ---------- /s/L. Mark Hammerschmitt L. Mark Hammerschmitt, President LMH Realty, Inc. General Partner March 28, 2002 -8- INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Financial Statements - Under Item 14(a) Report of Cohen Pagano Accountancy Corporation, Certified Public Accountants F-1 Balance Sheets - December 31, 2001 and 2000 F-2 Statements of Operations - for the Years Ended December 31, 2001, 2000 and 1999 F-3 Statement of Changes in Partners' Capital - for the Years Ended December 31, 2001, 2000 and 1999 F-4 Statement of Cash Flows - for the Years Ended December 31, 2001, 2000 and 1999 F-5 Notes to Financial Statements - December 31, 2001 and 2000 F-6 Financial Statement Schedule - Under Item 14(a) Schedule XI - Properties and Accumulated Depreciation - December 31, 2001, 2000 and 1999 F-10 All other schedules are omitted, since they are either not required or not applicable, or the required information is set forth in the Financial Statements or the related notes. -9- COHEN PAGANO ACCOUNTANCY, INC. Certified Public Accountants 12100 Wilshire Blvd., Suite 645 Los Angeles, California 90025 ------------- Tel: (310) 826-3400 Fax: (310) 826-3405 March 27, 2002 To the Partners Larchdale Ownership Company, Ltd. We have audited the accompanying balance sheets of Larchdale Ownership Company, Ltd., a California Limited Partnership (the "Partnership") as of December 31, 2001 and 2000, and the related statements of opreations, changes in partners' capital, and cash flows for the years ended December 31, 2001, 2000, and 1999. 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 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 misstatements. An audit includes examining, on 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 financial position of Larchdale Ownership Company, Ltd. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years ended December 31, 2001, 2000 and 1999 in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule XI - Properties and Accumulated Depreciation is presented for the purpose of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/Cohen Pagano Accountancy COHEN PAGANO ACCOUNTANCY Los Angeles, California F-1
LARCHDALE OWNERSHIP COMPANY, LTD. (A California Limited Partnership) Balance Sheets ASSETS December 31, 2001 2000 ----------- ------------ PROPERTY AT COST - Notes 1 and 3 Land $ 1,679,198 $ 1,679,198 Buildings and improvements 12,081,160 11,949,710 Furniture and fixtures 410,845 410,845 ----------- ----------- 14,171,203 14,039,753 LESS ACCUMULATED DEPRECIATION 11,876,292 11,209,229 ----------- ----------- 2,294,911 2,830,524 CASH - Note 2 131,034 9,260 LOAN FEES - net of accumulated amortization of $175,234 at December 31, 2001 and $138,979 at December 31, 2000 187,319 223,574 PAID EXPENSES AND OTHER ASSETS 319,142 264,927 ------------- ----------- $ 2,932,406 $ 3,328,285 ============= =========== LIABILITIES AND PARTNERS' CAPITAL NOTE PAYABLE - Note 3 $13,374,012 $13,526,704 ACCOUNTS PAYABLE AND ACCRUED EXPENSES 215,975 228,477 ADVANCE DUE TO AFFILIATE - Note 4 1,495,200 1,434,940 TENANT SECURITY DEPOSITS 166,197 155,646 PARTNERS' CAPITAL (DEFICIT) (12,318,978) (12,017,482) ------------- ----------- $ 2,932,406 $ 3,328,285 ============= =========== The accompanying notes are an integral part of the financial statements. F-2
LARCHDALE OWNERSHIP COMPANY, LTD. (A California Limited Partnership) Statements of Operations For The Years Ended December 31, 2001 2000 1999 ------------ ----------- ----------- REVENUE Rental income $ 4,032,818 $ 3,542,811 $ 3,130,937 Other income 113,533 99,899 83,438 ----------- ----------- ----------- 4,146,351 3,642,710 3,214,375 ----------- ----------- ----------- EXPENSES Interest 1,265,813 1,176,639 1,167,620 Depreciation and amortization 703,318 699,668 699,668 Repairs and maintenance 835,737 939,617 818,660 Utilities 349,974 342,425 346,228 Salaries and related expenses 438,602 418,216 407,664 Management and administrative fee 249,170 220,176 193,263 Property taxes 219,466 221,589 221,854 Professional services 71,527 99,362 85,390 Insurance 68,988 53,048 54,653 Administrative costs 24,359 45,888 30,368 Advertising and promotion 29,192 21,450 21,128 Licenses 27,180 500 27,170 Foundation and drainage 164,521 882,203 ----------- ----------- ----------- 4,447,847 5,120,781 4,073,666 NET INCOME (LOSS) $ (301,496) $(1,478,071) $ (859,291) =========== =========== =========== Net loss per weighted number of limited partnership interests outstanding (35,371 in 2001, 2000, and 1999) $ (9) $ (42) $ (24) =========== =========== =========== The accompanying notes are an integral part of the financial statements. F-3
LARCHDALE OWNERSHIP COMPANY, LTD. (A California Limited Partnership) Statement of Changes in Partners' Capital for the Years Ended December 31, 2001, 2000 and 1999 Limited Partner Interests Limited General Outstanding Partners Partners Total ------- ----------- -------- ----------- PARTNERS' CAPITAL BALANCE December 31, 1998 35,371 (9,614,373) (65,747) (9,680,120) NET LOSS for the year ended December 31, 1999 (859,205) (86) (859,291) ------ ---------- -------- ----------- PARTNERS' CAPITAL BALANCE December 31, 1999 35,371 (10,473,578) (65,833) (10,539,411) ====== ========== ======== ========== NET LOSS for the year ended December 31, 2000 (1,477,923) (148) (1,478,071) ------ ---------- -------- ----------- PARTNERS' CAPITAL BALANCE December 31, 2000 35,371 (11,951,501) (65,981) (12,017,482) ====== ========== ======== ========== NET LOSS for the year ended December 31, 2001 ( 301,466) ( 30) ( 301,496) ------ ---------- -------- ----------- PARTNERS' CAPITAL BALANCE December 31, 2001 35,371 (12,252,967) (66,011) (12,318,978) ====== ========== ======== ========== The accompanying notes are an integral part of the financial statements. F-4 LARCHDALE OWNERSHIP COMPANY, LTD. (A California Limited Partnership) Statements of Cash Flows For The Years Ended December 31, 2001 2000 1999 ---------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss from operations $ (301,496) $(1,478,071) $ (859,291) Adjustments to reconcile net loss to net cash provided (used) by operating activities Depreciation and amortization 703,318 699,668 699,668 (Increase) decrease in: Prepaid expenses and other assets (54,215) 11,406 (17,451) Increase (decrease) in: Accounts payable and accrued expenses (12,502) (160,868) (62,234) Accrued interest to affiliate 60,260 60,070 39,870 ----------- ---------- ----------- Net cash provided (used) by operating activities 395,365 (867,795) (199,438) CASH FLOW FROM INVESTING ACTIVITIES Purchases of building improvements (131,450) ----------- ---------- ----------- Net cash used by investing activities (131,450) CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in note payable (152,692) (140,710) (129,668) Advance due to affiliate 982,000 273,000 Increase (decrease) in tenant security deposits 10,551 34,489 9,818 ----------- ---------- ----------- Net cash provided (used) by financing activities (142,141) 875,779 153,150 ----------- ---------- ----------- Net increase (decrease) in cash 121,774 7,984 (46,288) Cash beginning of year 9,260 1,276 47,564 ----------- ---------- ----------- Cash at end of year $ 131,034 $ 9,260 $ 1,276 =========== ========== =========== The accompanying notes are an integral part of the financial statements. F-5 LARCHDALE OWNERSHIP COMPANY, LTD. (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS December 31, 2001 and 2000 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Larchdale Ownership Company, Ltd. (the Partnership) was formed as a California limited partnership on June 13, 1984. Effective December 31, 1994, the general partner is LMH Realty, Inc., which is wholly owned by L. Mark Hammerschmitt, the President of Preferred Financial Corporation (PFC). The previous general partners became limited partners of the Partnership. The Partnership was formed to acquire, on June 28, 1984, a 526-unit garden apartment project on approximately forty acres in Laurel, Maryland, known as Larchdale Woods. The term of the Partnership is 31 years, but it may be dissolved earlier under certain circumstances. The partners share in operating profits and losses in proportion to their respective capital contributions. Any proceeds arising from the sale or refinancing of the Partnership property that are in excess of the limited partners' initial capital contributions, plus a 12% per annum noncompounded cumulative return, will be allocated 25% to the general partners and 75% to the limited partners. DEPRECIATION AND AMORTIZATION Depreciation is provided using the straight-line method over the estimated useful lives of the related assets as follows: Building and improvements - 18 Years Furniture and fixtures - 5 Years Loan fees are amortized over the life of the related loan. NOTE 2 - CASH The Partnership participates in a consolidated cash account administered by PFC to receive and hold cash from various entities it manages and controls in order to make disbursements on behalf of these entities. Amounts so received are accounted for separately, although PFC does not maintain separate bank accounts for the various companies. F-6 LARCHDALE OWNERSHIP COMPANY, LTD. (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2001 and 2000 NOTE 3 - NOTE PAYABLE SECURED BY REAL PROPERTY On November 10, 1986, the Partnership refinanced the property by obtaining a new loan of $12,750,000 from an institutional third-party lender secured by a first trust deed on the property. The note bore interest at a variable rate of 225 basis points over the 11th District Federal Home Loan Bank Cost of Funds, with a floor of 10% and maximum of 15% and was due December 1, 1998. In May 1992, the Partnership completed a modification of the payment terms of the loan for a one-year period commencing with the payment due in January 1, 1992. Under the terms of the modification, monthly interest only payments were made at the reduced rate of 5%, with the difference between interest at the full rate and the reduced payment rate added to the principal amount of the loan. In addition, payments for property taxes were impounded by the lender on a monthly basis. After the end of the modification period, the Partnership made partial monthly payments until April 6, 1993 when payment in full of past due amounts was made and the loan reverted to its unmodified terms. In May 1994, the Partnership completed a second modification of the loan payment terms for a one-year period commencing on November 1, 1993. Under the terms of the second modification, monthly interest only payments were paid at the reduced rate of 9%, with the difference between interest at the full rate of 10% and the reduced payment rate added to the principal amount of the loan. In addition, payments for property taxes were impounded by the lender on a monthly basis. In March 1995, the modification was extended for a one-year period commencing on November 1, 1994. Starting with the payment due on November 1, 1995, the modification expired and monthly payments at the full rate of 10% per annum plus principal amortization were required under the original terms of the note. However, the lender continued to bill the Partnership under the terms of the modification and the Partnership paid the amounts as billed. The Partnership contacted the lender in September 1996 to initiate negotiations to resolve the billing disparity, which had accumulated to $281,000 and the problems of the property taxes due starting in September 1996 and the deferred maintenance of the property. In December 1996, the lender agreed to accept $11,800,000 as payment in full on its loan under the conditions, among others, that payment be received before April 15, 1997, that the property taxes be paid, and that the loan be purchased by a third party independent of the Partnership. The loan payoff amount was reduced by the principal portion of the monthly payments made from January 1, 1997 through the purchase date. The property taxes were paid by the Partnership in December 1996. F-7 LARCHDALE OWNERSHIP COMPANY, LTD. (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2001 and 2000 NOTE 3 - NOTE PAYABLE SECURED BY REAL PROPERTY (CONTINUED) On February 28, 1997, the Partnership completed the refinancing of the property and paid off the existing loan, which had a balance at closing of $13,248,725 with a cash payment of $11,767,496. The Partnership paid a fee of $50,000 to a third party to purchase the existing loan from the lender and subsequently sell the loan to the Partnership, a referral fee of 25,214 to a consultant, and a fee of $140,602 to the general partner, LMH Realty, Inc. for services related to the loan discount. The Partnership recognized the remaining gain of $1,265,414 in 1997. The loan was purchased and the refinancing completed with funds from a new loan to the Partnership of $14,000,000 at 8.20% per annum maturing on March 1, 2007 with monthly principal and interest payments of $104,686. The Partnership paid fees to the lender and loan broker of $280,000, loan costs, title insurance, transfer taxes and recording fees of $50,996, and estimated legal fees of $25,000. NOTE 4 - ADVANCE DUE TO AFFILIATE In 1995, the County enacted a solid waste service charge on property tax bills. However, the County did not bill the charge for 1996, 1997 and 1998 until May 1998. The Partnership paid this charge of $81,530 in July 1998 utilizing funds from an $80,000 loan from an affiliate of the general partner. In 1999 and 2000 an additional $273,000 and $982,000, respectively, was loaned to the Partnership by an affiliate of the general partner for completion of exterior cosmetic improvements and preliminary engineering and construction activity on structural building problems affecting several buildings involving 27 of the 526 units in the apartment complex. Accrued interest at 12% per annum on these advances of $1,335,000 totaled $160,200 at December 31, 2001. NOTE 5 - INCOME TAXES Under provisions of the Internal Revenue Code and the California Revenue and Taxation Code, partnerships are not subject to income taxes; however they are subject to a minimum California tax. As the minimum tax is not material, no provision has been made for such taxes in the accompanying financial statements. For income tax reporting purposes, income or loss is includable in the tax returns of the individual partners. F-8 LARCHDALE OWNERSHIP COMPANY, LTD. (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2001 and 2000 NOTE 5 - INCOME TAXES (CONTINUED) The net loss reported for financial reporting purposes is different from that reported for income tax purposes, as shown below: 2001 2000 ------------ ----------- Net loss for financial reporting purposes $ 301,496 $ 1,478,071 Tax depreciation difference (86,922) (173,248) Interest (160,200) 39,870 ------------ ----------- Net loss for income tax reporting purposes $ 54,374 $ 1,344,693 NOTE 6 - RELATED PARTY TRANSACTIONS Concurrent with the purchase of the property, the Partnership engaged PFC to manage the property and the affairs of the Partnership for a combined fee of 6% of the gross rental receipts. Management fees paid or accrued amounted to $249,170 in 2001, $220,176 in 2000, and $193,263 in 1999. Professional service expenses include $29,880 in 2001, $29,748 in 2000 and $37,298 in 1999 paid to PFC for accounting, data processing, tax services and out-of-pocket expenses. In December 2000, an affiliate of the general partner acquired 7,030 Partnership Interests, or 19.7% of the outstanding Interests, pursuant to a Repurchase Offer made available to existing limited partners. The Repurchase Offer was extended and in April 2001, an affiliate of the General Partner acquired an additional 2,158 Partnership Interests, or 6.1% of the outstanding interests. Including Interests previously acquired, the general partner and its affiliates hold 9,867 Interests, or 27.6% of the outstanding Interests at December 31, 2001. In connection with the Repurchase Offer, the General Partner received a fee of $25,133 in December 2000 and $8,222 in April 2001. F-9
LARCHDALE OWNERSHIP COMPANY, LTD. (A California Limited Partnership) SCHEDULE XI - PROPERTIES AND ACCUMULATED DEPRECIATION for the Years Ended December 31, 2001, 2000 and 1999 Buildings Furniture and and Land Improvements Fixtures Total -------------- ------------ ----------- -------------- COST Balance at December 31, 1998 $ 1,679,198 $11,949,710 $ 410,845 $14,039,753 Additions during the year -------------- ------------ ----------- -------------- Balance at December 31, 1999 1,679,198 11,949,710 410,845 14,039,753 Additions during the year -------------- ------------ ----------- -------------- Balance at December 31, 2000 1,679,198 11,949,710 410,845 14,039,753 Additions during the year 131,450 131,450 -------------- ------------ ----------- -------------- Balance At December 31, 2001 1,679,198 12,081,160 410,845 14,171,203 ============== ============ =========== ============== ACCUMULATED DEPRECIATION Balance at December 31, 1998 9,471,560 410,845 9,882,405 Add depreciation charged to expense during the year 663,412 663,412 ------------ ----------- -------------- Balance at December 31, 1999 10,134,972 410,845 10,545,817 Add depreciation charged to expense during the year 663,412 663,412 ------------ ----------- -------------- Balance at December 31, 2000 10,798,384 410,845 11,209,229 Add depreciation charged to expense during the year 667,063 667,063 ------------ ----------- -------------- Balance At December 31, 2001 11,465,447 410,845 11,876,292 -------------- ------------ ----------- -------------- Net Book Value At December 31, 2001 $ 1,679,198 $ 615,713 $ -0- $ 2,294,911 ============== ============ ============ ==============
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