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SCHEDULE 14A INFORMATION
CONSENT SOLICITATION PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. 1)
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Consent Solicitation [ ] Confidential, for Use of the Commission
Only
[X] Definitive Consent Solicitation (as permitted by Rule 14c-5(d)(2))
</TABLE>
DAMSON/BIRTCHER REALTY INCOME FUND-I
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(Name of Registrant As Specified in Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14c-5(g).
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
DAMSON/BIRTCHER PARTNERS
27611 LA PAZ ROAD
LAGUNA NIGUEL, CALIFORNIA 92656
TO THE LIMITED PARTNERS OF
DAMSON/BIRTCHER REALTY INCOME FUND -- I
(THE "PARTNERSHIP")
February 18, 1997
Dear Limited Partner:
We are very pleased to present the enclosed Consent Solicitation to the
limited partners of the Partnership. This Consent Solicitation is, in many ways,
a follow-up to the 1993 Solicitation, in which the Partnership sought and
received the limited partners' consent to a comprehensive proposal to prepare
the Partnership's properties for sale. Pursuant to that proposal the Partnership
began the liquidation process.
Now, the Partnership is seeking the consent of the limited partners to
dissolve the Partnership and sell and liquidate all of its remaining properties.
The proposal to dissolve the Partnership is discussed in more detail in the
Consent Solicitation under "Summary of Proposal" and "Description of Proposal."
Accompanying the Consent Solicitation is the Partnership's Form 10-K for
the year ended December 31, 1995 and its most recent Form 10-Q for the quarter
ended September 30, 1996.
We urge you to read the enclosed document carefully and to return your
signed consent as quickly as possible to The Herman Group, Inc., 2121 San
Jacinto Street, 26th Floor, Dallas, Texas 75201. For your convenience a
postage-paid return envelope has been included. If you have any questions about
the enclosed material, please call The Herman Group, Inc., at 1 (800) 657-8814.
Very truly yours,
DAMSON/BIRTCHER PARTNERS
By: /s/ Arthur Birtcher
By: /s/ Richard Wollack
YOUR VOTE IS IMPORTANT
Please sign and date the enclosed Consent Card and return it immediately so
that your vote can be counted.
<PAGE> 3
DAMSON/BIRTCHER REALTY INCOME FUND-I
27611 LA PAZ ROAD
LAGUNA NIGUEL, CALIFORNIA 92627-0009
------------------------------
CONSENT SOLICITATION
FEBRUARY 18, 1997
------------------------------
INTRODUCTION
This Solicitation of written consents (the "Consent Solicitation") is
furnished by Damson/Birtcher Partners, the general partner (the "General
Partner") of Damson/Birtcher Realty Income Fund-I, a Pennsylvania limited
partnership (the "Partnership"), in connection with the Partnership's
solicitation of consents from the Partnership's limited partners (the "Limited
Partners") to dissolve the Partnership and sell and liquidate all of its
remaining properties (collectively, the "Dissolution"). If the Dissolution is
consented to by a majority in interest of the Limited Partners as described
herein, the Partnership's remaining properties will be sold and liquidated as
soon as is practicable, consistent with obtaining reasonable value for the
properties, and the net proceeds will be distributed to the Limited Partners.
For the reasons discussed below, the General Partner recommends that the Limited
Partners consent to the Dissolution.
This Consent Solicitation, and the enclosed consent form (the "Consent"),
are first being mailed to the Limited Partners on or about February 18, 1997.
DESCRIPTION OF DISSOLUTION
BACKGROUND AND REASONS FOR DISSOLUTION
The Partnership was organized in 1984 for the purpose of acquiring,
operating and ultimately selling or disposing of its properties. The
Partnership's original investment objectives contemplated that the properties
would be held for at least five years, with decisions about the timing of
eventual property sales or other dispositions to be left to the General
Partner's discretion based on the anticipated economic benefits of continued
ownership and other factors. Subsequent changes in the federal tax laws,
however, made real estate less attractive to many previously active purchasers,
including REITs and pension funds, and lenders such as savings and loans,
commercial banks and insurance companies. As a result, the amount of capital
investment in real estate began to decline sharply in 1988. Overbuilding in many
markets, the general recessionary economy in the United States throughout 1990
and 1991 and subsequent corporate downsizing further contributed to the
imbalance of supply and demand for commercial and industrial properties. In
addition, rapid expansion of new retail formats such as discounters and
"category-killers" depressed the value of neighborhood retail shopping centers.
The combined effect of these factors resulted in significant reductions in real
estate values in many geographic areas.
Instead of selling the Partnership's properties at what appeared to be the
bottom of the market, in May 1993, the General Partner solicited the Limited
Partners' consent (the "1993 Solicitation") to a series of amendments to the
Partnership's Amended and Restated Partnership Agreement (the "Partnership
Agreement") as part of a comprehensive proposal to prepare the Partnership's
properties for sale based on the General Partner's expectations regarding
possible improvements in market conditions. The 1993 Solicitation, which was
approved by the Limited Partners, mandated that the General Partner seek a vote
of the Limited
<PAGE> 4
Partners regarding the liquidation of the Partnership in the event that
properties representing at least one-half of the aggregate appraised values of
all Partnership properties as of January 1, 1993 were not sold (or under
contract for sale) by the end of 1996. The General Partner agreed that, in
conjunction with the vote, it would provide an analysis and recommendation
regarding the advisability of liquidating the Partnership.
Since the adoption of the 1993 Solicitation, the Partnership has sold
Arlington Executive Plaza ("Arlington") in Arlington Heights, Illinois, but it
continues to own six other properties shown in the table on page 6. Since the
Partnership will not have satisfied the requirements of the 1993 Solicitation to
sell half of its properties by the end of 1996, in accordance with the 1993
Solicitation mandate, the General Partner is soliciting the Limited Partners'
consent to the Dissolution.
At the time of the 1993 Solicitation, the General Partner believed that
local conditions in the markets in which the Partnership's properties are
located could be expected to improve sufficiently to sell a substantial portion
of the properties in the ensuing three years. Since the adoption of the 1993
Solicitation, the General Partner has considered several preliminary indications
of interest from third parties to acquire some or all of the Partnership's
properties. Apart from the recent sale of Arlington, however, these transactions
never materialized, primarily because the General Partner rejected as too low
the valuations of the Partnership's properties proposed by the potential
purchasers. The General Partner believes that the low valuations stemmed
primarily from the scarcity of institutional buyers, ongoing liquidations by the
Resolution Trust Corporation of the property portfolios of failed savings and
loans and thrift institutions, which contributed to an oversupply of properties
in certain markets, and differing expectations regarding the recovery from
generally weak economic conditions in the markets in which the properties are
located. Until recently, these markets had not recovered significantly from the
conditions that existed at or about the time of the 1993 Solicitation.
The General Partner believes that over the past three years attempts to
liquidate the Partnership's properties would have been likely to achieve no more
than "fire sale" prices, for at least some of the properties. Recently, however,
the Partnership was able to sell Arlington at a price slightly in excess of its
most recent appraised value, and the General Partner believes that the gradual
turnaround in effective rental rates for commercial and industrial properties in
many markets in the recent past is beginning to be reflected in higher property
values for the Partnership's portfolio. Occupancy and rental rates appear to be
stabilizing or improving, as reflected in the increase in leased space in the
Partnership's remaining properties during 1996 as shown in the table on page 6.
Moreover, institutional money has begun to flow back into real estate
investments as pension funds and real estate investment trusts have become more
active buyers. In the General Partner's view, the Dissolution is warranted by
the current, more favorable environment and the mandate of the 1993 Solicitation
that the General Partner consider a liquidation of the Partnership at this time.
The General Partner also is mindful that the Partnership has continued well
beyond the period anticipated by its original investment objectives, and it does
not foresee any significant short-term, inflationary increases in real estate
prices generally, or in the values of the Partnership's properties, in
particular, that might justify postponing the Dissolution.
For the foregoing reasons, the General Partner believes that it is in the
best interests of the Partnership and the Limited Partners to dissolve the
Partnership and seek to sell and liquidate the remaining Partnership properties
and wind up the Partnership. In the meantime, the Partnership would continue to
operate largely as it has in the past and to make quarterly distributions to the
Limited Partners as cash flow permits. Attached as Exhibit A to this Consent
Solicitation is a schedule showing the historical distributions to the Limited
Partners.
EFFECTS OF THE DISSOLUTION
The Dissolution does not alter the Partnership's original investment
objectives or change the voting or economic rights of the Limited Partners.
Under the Pennsylvania Revised Uniform Limited Partnership Act, a limited
partnership may be dissolved at the time or upon the happening of events
specified in its partnership agreement. The Partnership Agreement provides that
the Partnership shall be dissolved upon the vote or written consent of Limited
Partners who own a majority in interest of the outstanding limited partner
interests
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("Interests") in the Partnership. Under the terms of the Partnership Agreement
and applicable law, upon dissolution of the Partnership the General Partner is
to take full account of the Partnership's assets and liabilities, liquidate the
Partnership's remaining assets and apply and distribute the liquidation proceeds
in the order specified in the Partnership Agreement. See "Liquidation and
Winding Up" below. During the winding up process, the Partnership's legal
existence would continue solely for purposes relating to the liquidation and
winding up.
Neither the Partnership Agreement nor Pennsylvania law provides for a
specified period of time for completing the liquidation and winding up of the
Partnership. If the Dissolution is consented to by the requisite number of
Limited Partners, the General Partner would be authorized and directed to carry
out the sale or other disposition of all of the Partnership's properties as soon
as is practicable, consistent with selling the Partnership's properties to the
best advantage under the circumstances. In so doing, the General Partner would
continue to have broad discretion to manage the business and affairs of the
Partnership and the winding up process and to determine the timing, terms and
conditions of property sales and other dispositions. Upon the dissolution and
completion of the winding up process, the Partnership will file a certificate of
cancellation with the Pennsylvania Department of State and will be terminated.
There are no federal or state regulatory requirements that must be complied with
or approvals that must be obtained in connection with the Dissolution.
Arlington was sold by the Partnership in November 1996 for $3,041,250. It
had been appraised as of January 1, 1996 at a value of $2,860,000. The
Partnership realized approximately $2,699,000 from the sale, of which
approximately $1,500,000 was distributed to the Limited Partners in December
1996, approximately $700,000 was used to retire Partnership indebtedness and
approximately $500,000 was used to replenish capital reserves. The General
Partner did not receive a property disposition fee or other compensation or
distribution in connection with the Arlington sale.
There can be no assurance as to the prices at which the Partnership's
remaining properties can be sold or disposed of, or as to the amount of net
proceeds that will be available for distribution to the Limited Partners. The
aggregate appraised value of the Partnership's remaining properties as of
January 1, 1996 was approximately $37,530,000 as reflected in the table on page
6. The appraisals of the properties are a year old, however, and current
appraised values may differ. (The properties are in the process of being
appraised as part of the usual annual appraisal process. The results of these
appraisals will be reported in the Partnership's annual report, which will be
mailed to you at the end of April 1997.) Further, sales prices may differ from
appraised values because of several factors, including the leasing and operating
status of each property and local market conditions. If the Dissolution is
consented to by the Limited Partners, among the strategies the General Partner
will consider to accomplish the Dissolution is a sale of the Partnership's
portfolio in a single transaction, or a sale of some or all of the Partnership's
properties in a "package" with properties of affiliated partnerships. Such sales
would most likely result in a lower aggregate sale price, but more rapid
distribution of Dissolution Proceeds to the Limited Partners, as compared to a
series of individual property sale transactions.
Although there have not been a significant number of comparable sales
within the last twelve months, based on recent offers, input from commercial
real estate brokers in the local markets, and other indications of interest from
third parties, and on the appraised value of the Partnership's remaining
properties, the General Partner anticipates that the properties could be sold
for an aggregate price ranging from approximately $32,000,000 to $39,000,000,
depending upon, among other things, whether the properties are sold quickly as a
portfolio to a single purchaser or if the properties are sold individually or in
groups of assets over a more extended period of months or years. Assuming, for
purposes of illustration, that the remaining properties were sold all at once
for an aggregate price equal to their appraised value as of January 1, 1996, the
General Partner believes that approximately $32,200,000 (the "Dissolution
Proceeds") of such amount would be available for distribution after deducting
estimated fees and expenses of the sale and repayment of related indebtedness,
which currently are anticipated to total approximately $5,300,000 (the "Selling
Expenses"). The estimated Dissolution Proceeds do not take into account any
operating expenses or any net income or net loss of the Partnership for any
period prior to the time the remaining properties are sold, which could affect
the amount of Dissolution Proceeds actually available for distribution to the
Limited Partners.
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The Dissolution Proceeds would be distributed to the Limited Partners.
Assuming Dissolution Proceeds of $32,200,000, for each $1,000 invested in the
Partnership, the Limited Partners would receive out of the Dissolution Proceeds
approximately $332 (the "Distribution Per Interest"). This compares favorably to
recent prices at which Interests have traded in the limited secondary market for
the Interests and to prices offered in recent third-party tender offers for
Interests. Certain information regarding these prices is attached as Exhibit B
to this Consent Solicitation. Assuming the Selling Expenses remain fixed, and
without giving effect to any operating expenses or net income or net loss of the
Partnership for any period prior to the sale of the remaining properties, each
such $1,000 investment by the Limited Partners would entitle the Limited Partner
to receive Dissolution Proceeds of approximately $10 more or less than the
Distribution Per Interest for each $1,000,000 increment that actual Dissolution
Proceeds exceed or are less than $32,200,000. See "Interest of the General
Partner in the Dissolution" below.
The foregoing estimates are presented for the Limited Partners' reference
only and should not be relied upon in determining whether to consent to the
Dissolution. The estimates are based on a variety of assumptions relating to the
remaining properties, general business and economic conditions and other
matters, which are subject to significant uncertainties and contingencies, many
of which are beyond the Partnership's control. Such estimates are inherently
imprecise and there can be no assurance that they will be realized. They also do
not give effect to the operating expenses or net income or net loss of the
Partnership for any period prior to the time the remaining properties are sold,
which could affect the amount of Dissolution Proceeds available for
distribution. For these reasons, the actual proceeds to be received by the
Limited Partners may vary materially from the Distribution Per Unit, and
therefore possibly be substantially less.
The timing of the Limited Partners' receipt of any Dissolution Proceeds
will depend on when a sale or other disposition of the Partnership's properties
can be completed, which cannot be predicted. As has been true in the past, the
timing and manner (e.g., bulk-sale versus individual property sales) of any
sales of properties will be determined by the General Partner in its discretion,
based on its assessment of the benefits to the Limited Partners of holding the
properties versus an immediate sale, including the availability of prospective
buyers as well as other factors. There is no current agreement or understanding
to sell or dispose of any property, and there can be no assurance as to when any
or all of the remaining Partnership properties can be sold or disposed of or
when any Dissolution Proceeds will actually be distributed. The General Partner
will endeavor to distribute funds as expeditiously as possible after any sale.
LIQUIDATION AND WINDING UP
Pursuant to the Partnership Agreement, if the Dissolution is consented to
by the requisite number of Limited Partners, the General Partner is to take full
account of the Partnership's assets and liabilities, liquidate the Partnership's
assets and discharge or make adequate provision for the liabilities of the
Partnership in the following order:
(a) First, all Partnership debts and liabilities to persons other than
partners;
(b) Second, all Partnership debts and liabilities to the Limited
Partners;
(c) Third, all such debts and liabilities to the General Partner;
(d) After all such liabilities have been either discharged or
adequately provided for, to the Partners, in proportion to their "Adjusted
Capital Accounts" (as defined in the Partnership Agreement), after giving
effect to all contributions and distributions and reallocations for all
periods, including the period during which such distribution occurs; and
(e) the balance, if any, 99% to the Limited Partners and 1% to the
General Partner.
It is not anticipated that the General Partner will receive any of the
proceeds from the Dissolution. The General Partner is not aware of any
liabilities or obligations of the Partnership, contingent or otherwise, except
as set forth on the Partnership's balance sheet included as part of its
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (a copy
of which accompanies this Consent Solicitation and is
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incorporated herein by reference) and liabilities and obligations incurred since
September 30, 1996 in the ordinary course of the Partnership's business.
Upon approval of the Dissolution, the General Partner will use its best
efforts to accomplish a sale or other disposition of the Partnership's remaining
properties upon terms and conditions which the General Partner deems consistent
with obtaining fair value for the properties. Although none of the terms of the
sale of the Partnership's remaining properties can be determined at present, the
General Partner currently intends not to sell or dispose of the remaining
properties except for cash or cash equivalents. If necessary or appropriate,
however, the Partnership may extend seller financing in connection with the sale
of one or more properties in the form of secured promissory notes from the
buyers. Market conditions permitting, the General Partner would seek to complete
the liquidation (including the establishment of a liquidating trust to
distribute the proceeds of any promissory notes received from buyers) within a
reasonable period of time; however, there will be no specified period of time
for completing the winding up process.
CERTAIN CONSIDERATIONS
The General Partner cannot predict when any of the Partnership's properties
can be sold or disposed of, or when the eventual liquidation will occur, nor can
the General Partner estimate the amount of Dissolution Proceeds that will be
available to distribute to the Limited Partners upon the sale or other
disposition of the Partnership's remaining properties and completion of the
liquidation. Moreover, there can be no assurance that the properties will be
sold or disposed of at a price equal to their appraised value or that the value
of the properties will not increase after they are sold or disposed of by the
Partnership.
In considering whether to approve the Dissolution, the Limited Partners
should bear in mind that the General Partner has broad discretion to manage the
business and affairs of the Partnership. If the Dissolution is not adopted, the
General Partner intends to continue to manage the Partnership and its properties
substantially as they are currently being managed and to continue to entertain
and consider indications of interest from third parties to acquire all or a
portion of the Partnership's properties. There can be no assurance that the
Dissolution will result in greater returns to the Limited Partners than a
continuation of the Partnership and eventual sale or disposition of its
properties at a later time.
For the three years beginning January 1, 1993, the General Partner received
an annual asset management fee from the Partnership equal to 0.75% of the
aggregate appraised value of the Partnership's properties. As mandated by the
1993 Solicitation, the fee was reduced by 10 "basis" points (e.g., from 0.75% to
0.65%) beginning January 1, 1997 and will be reduced 10 "basis" points for each
year thereafter until the liquidation of the remaining properties is completed.
In seeking to sell or dispose of the Partnership's remaining properties if
the Dissolution is approved, the General Partner does not intend to place any
restrictions on indications of interest it may solicit from third parties in
connection with the Dissolution. The Limited Partners are advised in this regard
that, because of the General Partner's long-standing experience with the
Partnership properties, transactions may be structured that provide that the
General Partner or its affiliates agree to continue managing the Partnership's
properties following their sale, to make or retain an investment interest in the
properties, or otherwise to participate or be involved in a transaction entered
into pursuant to the Dissolution.
If the Limited Partners consent to the Dissolution, they also will be
deemed to have consented to any transaction that may be undertaken to accomplish
the liquidation and winding up of the Partnership and will not be entitled to
approve or disapprove of any such transaction, including transactions which may
involve the General Partner's participation or involvement. However, a
"Reorganization Transaction" (as defined in the Partnership Agreement) sponsored
by the General Partner or its affiliates would continue to require approval of
80% in interest of the Limited Partners. There is no current agreement or
understanding with respect to any Reorganization Transaction.
Neither Pennsylvania law nor the Partnership Agreement provides the Limited
Partners with any right to dissent from, or seek an independent appraisal of,
the value of the Partnership or its assets. Thus, the Limited
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Partners will be bound to accept the consideration upon the sale of the
Partnership's properties if the Dissolution is consented to by the Limited
Partners.
RECOMMENDATION OF THE GENERAL PARTNER
THE GENERAL PARTNER BELIEVES THAT THE DISSOLUTION IS IN THE BEST INTERESTS
OF THE LIMITED PARTNERS AND RECOMMENDS THAT THE LIMITED PARTNERS VOTE "FOR" AND
CONSENT TO THE DISSOLUTION.
PARTNERSHIP PROPERTIES
The following table sets forth certain information with respect to the
Partnership's remaining properties:
<TABLE>
<CAPTION>
PERCENTAGE
LEASED
------------- APPRAISED
VALUE
SEPTEMBER 30, -----------
GROSS LEASABLE ------------- JANUARY 1,
PROPERTY AREA (SQ. FT.) 1996 1995 1996
- --------------------------------------------------- -------------- ---- ---- -----------
<S> <C> <C> <C> <C>
Certified Distribution Center(1), Salt Lake City,
UT............................................... 312,260 100% 100% $ 9,250,000
The Cornerstone, Tempe, AZ......................... 117,688 56% 58% $ 9,120,000
Ladera-I Shopping Center(2), Albuquerque, NM....... 89,544 95% 93% $ 6,260,000
Oakpointe(3), Arlington Heights, IL................ 96,213 100% 76% $ 7,700,000
Terracentre, Denver, CO............................ 95,723 68% 65% $ 2,500,000
Washington Technical Center, Seattle, WA........... 50,973 94% 96% $ 2,700,000
------- --- --- -----------
Total.................................... 762,401 88% 85% $37,530,000
======= === === ===========
</TABLE>
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(1) This property is leased to a single tenant, whose lease expires in late
1997. The General Partner is in the process of negotiating a renewal of the
lease, but there can be no assurance as to whether, or on what terms, it
will be renewed.
(2) Approximately 13,000 square feet (14.5% of the gross leasable space) has
been vacant since April 1995. The lessee (Walgreens) continues to pay rent
under the lease, which expires in October 1998.
(3) Approximately 11,360 square feet (or 11.8% of the gross leasable space) of
this property has been vacant since March 1995. The lessee (NCR) continues
to pay the rent under the lease, which expires in May 1998.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
As stated above, if the Dissolution is consented to by the Limited
Partners, the General Partner will seek to sell and liquidate the Partnership's
remaining properties and distribute the proceeds to Limited Partners after
payment of certain expenses and priority items as described above under
"Description of Dissolution - Liquidation and Winding Up." Such sale and
distribution will result in certain federal income tax consequences described
below. Section references below are to the Internal Revenue Code of 1986, as
amended (the "Code").
IN GENERAL
As long as the Partnership is treated as a partnership for federal income
tax purposes, it will not be subject to federal income tax. Rather, each Limited
Partner and the General Partner is required to report on his or her own federal
income tax return its share of the Partnership items of income, gain, loss,
deduction and credit, including amounts realized on the sale of the
Partnership's properties. Accordingly, each Limited Partner may be subject to
tax on its distributive share of Partnership income regardless of whether the
Limited Partner receives any cash distribution. Each Limited Partner's basis in
its Interest is increased by the amount by which the Limited Partner's
distributable share of income exceeds any distributions made or deemed to be
made (e.g., as a result of the reduction of his or her share of partnership
liability) to it during such year.
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LOSS OR GAIN FROM SALE OF PARTNERSHIP PROPERTY
Partnership real property and depreciable property used in the
Partnership's business (which is not held for sale to customers in the ordinary
course of business) and held more than one year is "section 1231 property."
Losses realized by the Partnership from the sale of section 1231 property
generally will constitute "passive activity losses" with respect to a Limited
Partner, other than certain Limited Partners eligible to treat all of their
rental real estate activities as a single activity. Passive activity losses
generally can only offset passive activity income; however, upon completion of
the liquidation of the Partnership if the Dissolution is consented to by the
Limited Partners, the Limited Partner's share of any losses from the Partnership
previously suspended pursuant to the passive activity loss rules may be used,
first, to offset the gain, if any, realized as a result of the liquidation and,
then, to offset certain taxable income from other sources.
If realized, any gain will be "section 1231 gain" except as to depreciation
subject to recapture under section 1245 of the Code and rent recapture under
section 467 of the Code. A Limited Partner's share of any section 1231 gain from
the Partnership in any year will first offset any current passive activity
losses and suspended passive activity losses from the Partnership and other
passive activities of the Limited Partner; any excess will be combined with any
other section 1231 gains or losses (exclusive of passive activity losses)
incurred by the Limited Partner from such Limited Partner's other investments.
Since the Partnership's properties were originally acquired without the use of
mortgage loans or other leverage for prices that substantially exceeded their
most recent appraised values, it is anticipated that any section 1231 gain
realized from the sale of a single Partnership property will be offset by losses
realized from the sale of other Partnership properties. If the section 1231
gains exceed the section 1231 losses, such net gains will be treated as
long-term capital gains. However, a Limited Partner's net section 1231 gains
will be treated as ordinary income (rather than capital gain) to the extent of
such taxpayer's net section 1231 losses within the preceding five years.
The distribution of cash to a Limited Partner pursuant to the Dissolution
may give rise to taxable loss (or gain), with the amount of taxable loss (or
gain) realized equal to the difference between (i) the amount of cash received
plus such Limited Partner's share of any reduction of Partnership liabilities
and (ii) the tax basis of its Interest.
Loss (or gain) realized on the liquidation will be treated as capital loss
(or gain), and will be long-term if the Limited Partner has held its Interest
for more than one year when the liquidation of the Partnership is consummated.
Capital losses generally are deductible only to the extent of capital gains
plus, in the case of a non-corporate Limited Partner, up to $3,000 of ordinary
income. Capital losses realized upon the liquidation may be utilized to offset
capital gains from other sources and may be carried forward, subject to
applicable limitations.
The foregoing is a summary only, and special considerations may be
applicable to particular types of Limited Partners. Each Limited Partner is
advised to consult its own tax advisor regarding the specific tax consequences
of the Dissolution, under the federal income tax laws, as well applicable state,
local, foreign or other tax laws not discussed herein.
CONSENT REQUIREMENTS AND WRITTEN CONSENTS
RECORD DATE
The General Partner has fixed 5:00 P.M. Eastern Time on February 15, 1997,
three days before the date this Consent Solicitation is first being mailed to
the Limited Partners, as the record date (the "Record Date") for determining the
Limited Partners entitled to notice of and to act on the Dissolution. As of the
close of business on the Record Date, the General Partner anticipates that there
will be approximately 9,960 Limited Partners of record.
COMPLETION OF CONSENTS; DEADLINE FOR CONSENTING
A form of written consent (the "Consent") accompanies this Consent
Solicitation. Under the terms of the Partnership Agreement, the deadline for
consenting may not be less than 10 nor more than 50 days
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following the mailing to the Limited Partners. EACH LIMITED PARTNER IS URGED TO
COMPLETE, SIGN, DATE AND RETURN THE CONSENT BY NOT LATER THAN APRIL 7, 1997 (THE
"CONSENT DEADLINE"), WHICH IS THE DATE 50 DAYS FOLLOWING THE MAILING OF THIS
CONSENT SOLICITATION. This date may be extended from time to time by the General
Partner in its discretion until not later than December 31, 1997, subject to
applicable requirements to update this Consent Solicitation.
A postage-paid, pre-addressed envelope has been provided for the Limited
Partners' convenience in returning Consents. Completed Consents should be
returned as soon as possible to The Herman Group, Inc., 2121 San Jacinto Street,
26th Floor, Dallas, Texas 75201. Limited Partners may also return their Consents
to the General Partner, c/o The Herman Group, Inc. via facsimile at
214-999-9323; Attention: Birtcher Partnerships. Consents may be marked either
"FOR," "AGAINST," or "ABSTAIN" with respect to the Dissolution. If a Limited
Partner fails to return a Consent, or returns a Consent marked "ABSTAIN," it
will have the same effect as a disapproval of the Dissolution. If a Consent is
returned signed, but not marked "AGAINST" or "ABSTAIN," the Limited Partner will
be deemed to have consented to the Dissolution. THE GENERAL PARTNER RECOMMENDS
THAT THE LIMITED PARTNERS VOTE "FOR" AND CONSENT TO THE DISSOLUTION.
APPROVAL OF DISSOLUTION
The Dissolution will be approved if consented to by the Consent Deadline by
a majority in interest of the Limited Partners as determined based upon the
Partnership's total original "Invested Capital" (as defined in the Partnership
Agreement) of $97,198,135.
REVOCATION OF CONSENTS
A Consent may be revoked by a Limited Partner by delivery to the General
Partner of a subsequent writing revoking the Consent. The writing must bear a
later date than the previously executed Consent and must be signed by the
Limited Partner. To be effective, any such revocation must be received by The
Herman Group, Inc. or the General Partner, as described above, on or before the
Consent Deadline or such earlier date as of which the Dissolution shall have
been consented to by the requisite number of Limited Partners.
EXPENSES OF SOLICITATION
The Partnership will bear all expenses of the solicitation of Consents,
whether or not the Dissolution is approved. After this Consent Solicitation is
mailed to the Limited Partners, Consents may be solicited by means of the mails,
facsimile transmissions, telephone or telegraph by the General Partner and its
general partners, as well as by their respective partners, regular employees and
affiliates, none of whom will receive any special or additional compensation for
their services. The Partnership has retained The Herman Group, Inc., an
independent solicitation firm, to aid in the solicitation of Consents. The cost
to the Partnership of doing so is currently estimated to be $162,000.
The General Partner will request brokers, nominees and other fiduciaries
and custodians who hold Interests in their names to furnish this Consent
Solicitation and any accompanying materials to the beneficial owners of such
Interests. The Partnership will reimburse such persons, if requested, for their
reasonable fees and expenses incurred in complying with this request.
IF YOU ARE A LIMITED PARTNER ON THE RECORD DATE, YOU ARE RESPECTFULLY
REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ACCOMPANYING CONSENT IN THE
ENCLOSED ENVELOPE AT YOUR EARLIEST CONVENIENCE, BUT IN ANY EVENT PRIOR TO THE
CONSENT DEADLINE.
INTEREST OF THE GENERAL PARTNER IN THE DISSOLUTION
GENERAL
Under subsection 9.1.9 of the Partnership Agreement, the General Partner
and its affiliates are entitled to a property disposition fee for real estate
brokerage services rendered in connection with the sale or disposition
8
<PAGE> 11
of the Partnership's properties, including any sales or dispositions during the
liquidation and winding up of the Partnership following the Dissolution. The fee
is to be equal to 50% of the competitive real estate brokerage commission that
would be charged by unaffiliated third parties providing comparable services in
the area in which the property is located, but in no event more than 3% of the
gross sale price of a property, and is to be reduced by the amount by which any
brokerage or similar commissions paid to any unaffiliated third parties in
connection with the sale of the property exceed 3% of the gross sale price. The
fee is not payable, however, unless and to the extent that the sale price of the
property in question, net of any other brokerage commissions (but not other
costs of sale), exceeds the appraised value of the property as of January 1,
1993.
DISSOLUTION PROCEEDS
Subject to the payment of certain expenses and priority items as described
above under "Description of Dissolution -- Liquidation and Winding Up," the
General Partner would be entitled to receive 1% of the net proceeds available
for distribution to the Partners resulting from sales or other dispositions of
the Partnership's remaining properties pursuant to the Dissolution. However, if
the Partnership's properties are sold for an aggregate price within the
anticipated range, the General Partner will not receive any of the sales
proceeds. If the Dissolution were not consented to, it is unlikely that the
General Partner would receive any portion of the proceeds from future sales of
the Partnership's properties in the ordinary course of its business.
POTENTIAL CONFLICT OF INTEREST
LF Special Fund II, L.P. ("Liquidity Fund II"), one of the general partners
of the General Partner, owes a fiduciary duty to the Limited Partners of the
Partnership. The general partner of Liquidity Fund II also owes a fiduciary duty
to the third parties who invested in Liquidity Fund II as its limited partners.
These relationships may create a conflict of interest in connection with
Liquidity Fund II's evaluation and recommendation of the Dissolution. See
"Management."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
According to information available from the Partnership's transfer agent
and public records, as of the date of this Consent Solicitation, no person or
entity owned beneficially 5% or more of the outstanding Interests. The
Partnership has not issued any options, warrants or other rights to purchase
securities of the Partnership, nor has the General Partner loaned money to the
Partnership.
As a partnership, the Partnership has neither officers nor directors.
Moreover, as of December 31, 1996, neither the General Partner nor its partners,
or the partners, directors or officers of its partners, owned beneficially any
Interests. Although certain family members of the partners of the General
Partner hold Interests, such Interests in the aggregate represent less than 1%
of all Interests outstanding.
MANAGEMENT
The Partnership is a limited partnership and, as such, has no executive
officers or directors. The General Partner of the Partnership is Damson/Birtcher
Partners, a California general partnership, of which Birtcher Partners, a
California general partnership, and Equity Properties, Inc. ("EPI"), a wholly
owned subsidiary of Damson Oil Corporation, were the original general partners.
In December 1989, LF Special Fund II, L.P., an affiliate of Liquidity
Financial Group, L.P., purchased all of EPI's economic interest in the General
Partner and on December 31, 1992 was substituted as a general partner of the
General Partner. Under the terms of the General Partner's Partnership Agreement,
Birtcher Partners remains responsible for the day-to-day management of the
Partnership's assets.
The following sets forth certain biographical information with respect to
the respective general partners and officers of Birtcher Partners and Liquidity
Fund II:
9
<PAGE> 12
BIRTCHER PARTNERS
ARTHUR B. BIRTCHER. Mr. Birtcher, age 57, is a member of the Board of
Directors of Birtcher Enterprises. Since 1961, he has been active in the
management of all Birtcher-affiliated real estate companies (collectively, "The
Birtcher Organization") and has been primarily responsible for the financial and
legal administration of The Birtcher Organization's real estate projects as well
as the organization and administration of its regional offices nationwide. He is
active in the management of a diversified portfolio of real estate across the
United States, with his brother, Ronald E. Birtcher. In 1996, The Birtcher
Organization maintained a network of ten domestic regional offices in eight
states. Often recognized for his many achievements, Mr. Birtcher was named
Developer of the Year by NAIOP in 1989 and was voted Real Estate Man of the Year
in 1985 by the Real Estate and Construction division of the Anti-Defamation
League of B'nai B'rith. His numerous professional and community affiliations
include: Board of Trustees positions with University of San Diego and Mount St.
Mary's College; American Business Conference; U.S. Papal Foundation; Mission
Hospital Regional Medical Center; Policy Advisory Board of the Center for Real
Estate and Urban Economics for the University of California, Berkeley;
International Business Advisors for the University of San Diego; Orange County
United Way; and, O.P.T.I.M.A. Prevention and Treatment Integrated Medical
Assistance. Mr. Birtcher is also chairman of the board for the South County
Community Clinic and the Mission San Juan Capistrano Restoration Fund; a member
of the National Society of Real Estate Finance; a Land Board and Construction
Board member of the Catholic Diocese of Orange County; a member of the
Equestrian Order of the Knights of the Holy Sepulcher; and, a member of the
Order of the Knights of Malta, where he is designated a steward of St. Peter. In
addition, he is a leader in gang intervention programs that deal with emergency
and long-term prevention in South Orange County. Mr. Birtcher is a graduate of
Claremont Men's College and holds a bachelor of arts degree in business
economics. He also is a general partner of affiliated partnerships which serve
as the general partner of Damson/Birtcher Realty Income Fund-II and Real Estate
Income Partners III, both of which are public partnerships.
RONALD E. BIRTCHER. Mr. Birtcher, age 65, is a member of the Board of
Directors of Birtcher Enterprises. Since 1967, Mr. Birtcher has been active in
the management of all of the Birtcher real estate companies, and is primarily
responsible for evaluating proposed real estate development projects, which
encompasses architectural design, construction, market research, lease
negotiation and sales. He joined The Birtcher Organization in 1951 to engage in
the real estate development business with his father, Fayette E. Birtcher, who
founded the family business in 1939. He is active in the management of a
diversified portfolio of real estate nationwide, with his brother, Arthur B.
Birtcher. Mr. Birtcher holds a bachelor of arts degree in business
administration from the University of Arizona. His many accolades include:
election to Lambda Alpha, an honorary land economics society; Developer of the
Year awarded by the NAIOP in 1989; the Medal of Honor from the Building Industry
Association (the association's highest award); the Entrepreneur of the Year
awarded in 1991 by the United States-Mexico Foundation; and, the 1994 Sumigarden
Award presented at the annual UCI Real Estate Conference. Mr. Birtcher's
professional affiliations include membership in the National Association of
Industrial and Office Parks; he serves as a board member for a number of
community organizations such as the Wellness Clinic and Coachella Valley
Tomorrow (Palm Springs area economic development council); and, he is Chairman
of the Advisory Board to the University of California, Irvine, Graduate School
of Management in Real Estate. In addition, Mr. Birtcher has been the director
and past president of the YMCA Camping Association of Orange County, past
president and elder of the San Juan Capistrano Presbyterian Church, and past
chairman of the Orange County Sheriff's Association. Mr. Birtcher is also a
general partner of affiliated partnerships which serve as the general partner of
Damson/Birtcher Realty Income Fund-II and Real Estate Income Partners III, both
of which are public partnerships.
ROBERT M. ANDERSON. Mr. Anderson, age 38, is Co-chairman of the Board of
Directors of Birtcher Enterprises and President of Birtcher Property Services. A
member of The Birtcher Organization since 1988, he is responsible for the
operation and management of over six million square feet of real estate for the
Birtcher family and a variety of clients including various public institutions,
private institutions, and private individuals. He oversees all third-party real
estate services activity including asset management, property management,
property acquisitions and property dispositions. Mr. Anderson heads up the
day-to-day management team responsible for the Partnership's properties. Prior
to joining The Birtcher Organization, he
10
<PAGE> 13
worked at the Irvine Company, a Newport Beach, California based land owner and
real estate developer, where he was responsible for project finance and capital
markets activity. He is also active in a variety of real estate industry groups
and charitable organizations. Mr. Anderson received a bachelor of arts degrees
in Economics and Accounting from Augustana College and holds a masters in
business administration from Harvard Business School. Mr. Anderson is the
son-in-law of Mr. Arthur B. Birtcher.
MICHAEL S. BUZAR. Mr. Buzar, age 44, has been involved in the sale,
leasing, management and marketing of commercial real estate since 1978. He
joined The Birtcher Organization as a senior vice president of marketing and
leasing in 1988. In November 1991, he was promoted to Asset Manager, responsible
for all aspects of the performance of the Partnership's portfolio. Prior to
joining The Birtcher Organization, Mr. Buzar served as vice president of
marketing and leasing for the Birtcher/Welsh joint venture from 1985 through
1987. From 1978 to December 1985, he was an industrial specialist in
Minneapolis/St. Paul, Minnesota at Coldwell Banker Commercial Real Estate
Services (now CB Commercial Real Estate Group), a national real estate brokerage
company. Mr. Buzar holds a bachelor of arts degree from the University of
Michigan, and he is a licensed real estate broker in the State of Minnesota. He
maintains various professional affiliations, including memberships in the
International Council of Shopping Centers and the National Association of
Realtors.
LF SPECIAL FUND II, L.P.
RICHARD G. WOLLACK. Mr. Wollack, age 51, joined Koll Real Estate Services
(formerly Koll Holding) in 1995 as its Executive Vice President and Chief
Financial Officer and became President of its investment advisory subsidiary,
Koll Investment Management ("Koll") in 1996. Koll is one the nation's largest
property services firms with over 175 million square feet of assets managed in
over 275 U.S. cities. Prior to joining Koll, Mr. Wollack founded, in 1980,
Liquidity Fund, the country's largest purchaser of real estate limited
partnership interests in the secondary market. In 1995, Koll acquired from
Liquidity Fund two lines of business: i) investment management of traded real
estate equity securities, most particularly REITs; and, ii) the National Real
Estate Index (the "Index") research and publishing company. The Index databases,
developed in the course of analyzing property assets over the last fifteen
years, contains in-depth information on over 300 traded real estate securities
and 45,000 property transactions and provides the foundation for the various
National Real Estate Index products, published in cooperation with Ernst &
Young. The Index is the nation's only transaction-based research service (used
by over 1,500 firms) and reports in-depth data and trends on the 65 largest U.S.
markets each quarter.
Mr. Wollack has been involved in all phases of the real estate investment
business since 1971, when he was co-founder and president of First Capital
Companies, a large investment manager now based in Chicago. From 1981 to 1986
(when it was sold) he was a principal and co-president of Consolidated Capital,
at the time one of the nation's largest real estate investment firms. In total,
he has been a principal in dozens of real estate entities capitalized at over $2
billion. He is widely known throughout the real estate and financial
communities, is involved in numerous industry activities and is a nationally
recognized speaker and author. Mr. Wollack holds a bachelor of arts degree from
University of Illinois and a masters of business administration with distinction
from Stanford Graduate School of Business. He is currently a member of the Board
of Advisors of the Institutional Real Estate Index. Mr. Wollack is also a
licensed real estate broker in the State of California and he maintains his
designation as a Principal and Financial Principal with the NASD.
BRENT R. DONALDSON. Brent R. Donaldson, age 43, is co-founder and president
of the Liquidity Financial Group companies and it predecessors ("LFG"). He has
been responsible for the growth and managed the operations of LFG since
inception in 1980. Mr. Donaldson has pioneered research and trading in otherwise
illiquid real estate securities -- originally real estate limited partnerships
("RELPs") and more recently institutional commingled real estate funds
("CREFs"). He has managed accounts and conducted research in real estate
investment trusts ("REITs") and participated in the creation and publishing of
the National Real Estate Index, the nation's largest transaction-based real
estate index. Most recently, Mr. Donaldson has established LFG as an advisor to
listed REITs or "opportunity funds" in acquisitions of property portfolios.
11
<PAGE> 14
In 1980, under Mr. Donaldson's leadership, LFG created the partnership
secondary market, leading that market for 14 years in both assets under
management and annual trading/transaction volume, as well as research coverage
(focusing primarily on SEC registered partnerships which issued approximately
$60 billion). Also under his management, LFG's investment advisor subsidiary has
managed accounts in traded real estate equity securities, such as REITs, since
1987. Having invested in REITs and analyzed their performance during up and down
markets for both properties and securities has provided perspective on valuation
of equity portfolios in both public and private real estate markets. This line
of LFG's business was recently sold to the Koll Companies in Newport Beach,
California. In 1994, Mr. Donaldson expanded the activities of LFG's
broker/dealer subsidiary conducting research on CREFs (in the context of
valuation consulting) and he initiated the nation's first secondary market for
institutional CREFs. Mr. Donaldson has used the information databases which LFG
compiled over the years in providing investment advisory services to nationally
known investors, managers, and institutions with respect to valuation and
transactions -- particularly as related to portfolio acquisitions and tender
offers. He is widely known throughout the real estate and financial communities,
is involved in numerous industry activities and is a nationally recognized
speaker and author. Mr. Donaldson holds a bachelor of arts degree from
University of California, Davis and a masters of business administration from
University of California, Berkeley, Graduate School of Business. He is currently
a member of the Board of Advisors of the Real Estate Financial Journal and a
past member of the National Association of Securities Dealers ("NASD") Direct
Participation Subcommittee on Trading Standardization and the Securities
Industry Association Direct Participation Committee. Mr. Donaldson also
maintains his designation as a General Securities Principal with the NASD.
In a matter not involving Damson/Birtcher Realty Income Fund-I or
Damson/Birtcher Partners, in 1991, the NASD Business Conduct Committee for the
Northern District of California initiated a complaint against Liquidity Fund
Investment Corporation ("LFIC") alleging violations of the NASD's Rules of Fair
Practice. Specifically, the complaint alleged that LFIC (i) bought and sold
limited partnership units in the secondary market, from or to unaffiliated
parties, subject to mark-ups or mark-downs in excess of the NASD's guidelines
and (ii) failed to disclose the amount or existence of such mark-ups and
mark-downs to buyers and sellers of limited partnership units. Brent Donaldson
and Richard Wollack were also named as respondents in the complaint in their
capacities as principals of LFIC. The complaint was settled as of January 3,
1992 on the following terms: the NASD made findings, which were neither admitted
nor denied, of violations by LFIC and Mr. Donaldson of the NASD's guidelines
with respect to mark-ups or mark-downs, and of the failure by LFIC (but not Mr.
Donaldson) to disclose the amount of such mark-ups or mark-downs. Both
allegations were dismissed as to Mr. Wollack. Under the settlement, LFIC was
censured and fined $125,000 and Mr. Donaldson was censured and fined $7,500.
TERMINATION AND CHANGE IN CONTROL ARRANGEMENTS
The General Partner knows of no termination or change-in-control
arrangement affecting the Partnership, except as contemplated by the Partnership
Agreement. The Partnership Agreement provides generally that the bankruptcy or
dissolution of the General Partner will cause a dissolution of the Partnership
unless there is a remaining general partner that elects to continue the business
of the Partnership. In the event there is no remaining general partner, the
Partnership may nonetheless be continued by vote of a majority in interest of
the Limited Partners. The Partnership Agreement also permits the General Partner
to withdraw from the Partnership subject to certain conditions. In such event,
the withdrawing General Partner is obliged to offer to resell its interest in
the Partnership to the Partnership or, at its election, to convert its interest
to that of a Limited Partner.
ADDITIONAL INFORMATION
This Consent Solicitation is accompanied by copies of the Partnership's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and its
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, as filed
with the Securities and Exchange Commission. The information in these reports is
incorporated herein by reference. The exhibits to such reports are not included
with this Consent Solicitation, but are available without charge to any person
entitled to receive this Consent Solicitation, upon
12
<PAGE> 15
written request, from the General Partner, 27611 La Paz Road, P.O. Box 30009,
Laguna Niguel, California 92607-0009; Attention: Damson/Birtcher Realty Income
Fund-I. A requested exhibit will be furnished by first-class mail, as other
equally prompt means, within two business days of such request.
DAMSON/BIRTCHER PARTNERS,
a California general partnership
By: Birtcher Partners, a California general
partnership,
General Partner of Damson/Birtcher
Partners
By: Birtcher Investments, a California
general partnership,
General Partner of Birtcher Partners
By: Birtcher Limited, a California
limited partnership,
General Partner of Birtcher
Investments
By: BREICORP, a California
corporation formerly
known as Birtcher Real Estate
Inc., General Partner of
Birtcher Limited
By: /s/ Arthur B. Birtcher
--------------------------------
Arthur B. Birtcher
Co-chairman, BREICORP
By: /s/ Ronald E. Birtcher
--------------------------------
Ronald E. Birtcher
Co-chairman, BREICORP
By: /s/ Robert M. Anderson
--------------------------------
Robert M. Anderson
Executive Director, BREICORP
By: LF Special Fund II, L.P.,
A California limited partnership
By: Liquidity Fund Asset
Management, Inc.,
a California corporation
General Partner of LF Special
Fund II, L.P.
By: /s/ Richard G. Wollack
---------------------------------
Richard G. Wollack,
Chairman, Liquidity Fund Asset
Management, Inc.
By: /s/ Brent R. Donaldson
---------------------------------
Brent R. Donaldson,
President, Liquidity Fund Asset
Management, Inc.
13
<PAGE> 16
EXHIBIT A
DISTRIBUTIONS TO LIMITED PARTNERS
Following is a summary of distributions to the Limited Partners for the
periods shown:
<TABLE>
<CAPTION>
DISTRIBUTIONS PER $1,000 OF ORIGINAL
INVESTED CAPITAL
---------------------------------------
FROM OPERATIONS FROM PROPERTY SALES
--------------- -------------------
<S> <C> <C>
1996
1st Quarter....................... $ 0.00 $ N/A
2nd Quarter....................... 0.00 N/A
3rd Quarter....................... 2.60 N/A
4th Quarter....................... 2.60 15.43
1995
1st Quarter....................... 2.60 N/A
2nd Quarter....................... 2.60 N/A
3rd Quarter....................... 2.60 N/A
4th Quarter....................... 0.00 N/A
1994
1st Quarter....................... 3.80 N/A
2nd Quarter....................... 3.80 N/A
3rd Quarter....................... 3.80 N/A
4th Quarter....................... 3.80 N/A
Since Inception..................... $283.13 $ 15.43
</TABLE>
A-1
<PAGE> 17
EXHIBIT B
RECENT SECONDARY TRADING AND
TENDER OFFER PRICES FOR
LIMITED PARTNER INTERESTS
Following is a summary, based on information available to the General
Partner, of prices at which Interests have been sold and purchased in secondary
transactions (other than pursuant to a tender offer) during the periods shown
and the number of such transactions. The General Partner is aware that this
information is incomplete and that other, unreported transactions have occurred
during the period shown. The prices shown are per $1,000 of original Invested
Capital and do not give effect to any markups, markdowns, discounts or
commissions which may have been paid in connection with the transactions.
1996 SECONDARY TRADING RANGES
<TABLE>
<CAPTION>
NO. OF
INTERESTS
MONTH LOW HIGH TRADED
- --------------------------------------------------------------- ------- ------- ---------
<S> <C> <C> <C>
November....................................................... $210.00 $248.40 156
October........................................................ 105.00 257.58 253
September...................................................... 150.00 223.79 77
August......................................................... 219.99 230.00 115
July........................................................... 190.00 228.77 123
June........................................................... 125.00 226.85 105
May............................................................ 100.00 240.00 118
April.......................................................... 100.00 294.99 322
March.......................................................... 170.00 238.86 33
February....................................................... 95.00 236.00 369
January........................................................ 120.00 245.92 115
</TABLE>
The Interests also have been the subject of two recent tender offers by
unaffiliated third parties, in each case for up to 4.9% of the outstanding
Interests. The following table sets forth certain information with respect to
these tender offers:
RECENT TENDER OFFERS
<TABLE>
<CAPTION>
COMMENCEMENT
DATE OF PRICE NO. OF
NAME OF TENDER OFFEROR TENDER OFFERED INTERESTS TENDERED
- --------------------------------------------------- ------------ ------- ------------------
<S> <C> <C> <C>
July 3,
Grape Investors, LLC............................... 1996 $170.00 2,995
Equity Resource Fund XVII.......................... May 10, 1996 $125.00 2,766
</TABLE>
B-1
<PAGE> 18
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 DECEMBER 31, 1995 COMMISSION FILE NUMBER 0-13563
DAMSON/BIRTCHER REALTY INCOME FUND-I
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
PENNSYLVANIA 13-3264491
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION
27611 LA PAZ ROAD, LAGUNA NIGUEL, CALIFORNIA 92656
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(714) 643-7700
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ---------------------------------------------
<S> <C>
NONE NONE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months and (2) has been subject to such filing
requirements for the past ninety days.
YES X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-11
(COMMISSION FILE NO. 2-91065), DATED JUNE 22, 1985, AS SUPPLEMENTED, FILED UNDER
THE SECURITIES ACT OF 1933 ARE INCORPORATED BY REFERENCE INTO PART IV OF THIS
REPORT.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 19
DAMSON/BIRTCHER REALTY INCOME FUND-I
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1995
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I
Item 1. Business................................................................ 2
Item 2. Properties.............................................................. 3
Item 3. Legal Proceedings....................................................... 3
Item 4. Submission of Matters to a Vote of Security Holders..................... 4
PART II
Item 5. Market for the Registrant's Limited Partnership Interests and Related
Security Holder Matters.............................................. 4
Item 6. Selected Financial Data................................................. 5
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................ 5
Item 8. Financial Statements and Supplementary Data............................. 11
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 27
PART III
Item 10. Directors and Executive Officers of the Registrant...................... 27
Item 11. Executive Compensation.................................................. 27
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 27
Item 13. Certain Relationships and Related Transactions.......................... 28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 28
Signatures.............................................................. 30
</TABLE>
1
<PAGE> 20
DAMSON/BIRTCHER REALTY INCOME FUND-I
PART I
ITEM 1. BUSINESS
Damson/Birtcher Realty Income Fund-I (the "Partnership") is a limited
partnership formed on May 7, 1984, under the laws of the Commonwealth of
Pennsylvania. The General Partner of the Partnership is Damson/Birtcher
Partners, a general partnership consisting of LF Special Fund II, L.P., a
California limited partnership and Birtcher Partners, a California general
partnership. The Partnership is engaged in the business of operating
income-producing office buildings, research and development facilities, shopping
centers and other commercial or industrial properties acquired by the
Partnership in 1984 and 1985. Each of the Partnership's properties was specified
in its prospectus (Commission File No. 2-91065) dated June 22, 1985, as amended.
See Item 2 for a description of the properties acquired by the Partnership.
The Partnership commenced operations on December 18, 1984. As of September
17, 1985, the Partnership was fully subscribed and had admitted Limited Partners
with total capital contributions of $97,198,000.
The Partnership acquired the properties during the period from December 19,
1984 through September 18, 1985, entirely for cash, free and clear of mortgage
indebtedness. In September 1987, the Partnership borrowed $4,000,000 pursuant to
a loan agreement secured by a First Deed of Trust on the Certified Distribution
Center in Salt Lake City, Utah. The net proceeds were used primarily for capital
improvements and leasing commissions on certain of the Partnership's properties,
the Partnership's working capital reserves and certain general and
administrative expenses. On July 30, 1993, the Partnership refinanced this loan
to obtain a more favorable interest rate. In March 1996, the Partnership entered
into a loan agreement pursuant to which it may borrow up to $1,500,000,
evidenced by a note secured by a first deed of trust and financing statement on
the Ladera I Shopping Center in Albuquerque, New Mexico. The net proceeds of the
foregoing loan will be used to fund a portion of the renovation and tenant
improvements at The Cornerstone and tenant improvements at Oakpointe, with any
remainder added to the Partnership's working capital reserves. Additionally, the
Partnership may incur unsecured indebtedness from time to time to supplement its
working capital needs. See Note 5 to Financial Statements in Item 8.
The Partnership's objectives in operating the properties are: (i) to make
regular quarterly cash distributions to the Partners, of which a portion will be
tax sheltered; (ii) to achieve capital appreciation over a holding period of at
least five years; and (iii) to preserve and protect the Partnership's capital.
An Information Statement, dated May 5, 1993, mandates that the General Partner
shall seek a vote of the Limited Partners no later than December 31, 1996,
regarding prompt liquidation of the Partnership in the event that properties
with appraised values as of January 1993, which constituted at least one-half of
the aggregate appraised values of all Partnership properties as of that date,
are not sold or under contract for sale by the end of 1996.
Given the mandate of the May 5, 1993 Information Statement, the General
Partner has decided to account for the Partnership's properties as assets held
for sale, instead of for investment. Accordingly, the General Partner compared
the carrying value of each property to its appraised value as of January 1,
1996.
If the carrying value of a property and certain related assets was greater
than its appraised value, the General Partner reduced the carrying value of the
property by the difference. Using this methodology, the General Partner
determined that The Cornerstone, Ladera I Shopping Center, Terracentre,
Arlington Executive Plaza and Washington Technical Center, had carrying values
greater than their appraised values, and therefore reduced their carrying values
to $9,032,000, $6,234,000, $2,397,000, $2,740,000, and $2,612,000, respectively.
The Partnership derives most of its revenue from rental income. Both
Certified Warehouse and Transfer Company,Inc. ("Certified") and FIserv, Inc.
("FIserv", formerly dba Citicorp CIR, Inc.) represent significant portions of
such income. Rental income from Certified totaled $984,000 in 1995, 1994 and
1993, or approximately 17%, 16% and 15%, respectively, of the Partnership's
total rental income. Rental income from
2
<PAGE> 21
FIserv totaled $880,000 in 1995, $886,000 in 1994 and $916,000 in 1993, or
approximately 15%, 14% and 14%, respectively, of the Partnership's total rental
income.
The Partnership's investments in real estate are subject to competition for
tenants from similar types of properties in the vicinities in which they are
located. The Partnership has no investments in real estate located outside the
United States.
The Partnership has no employees and, accordingly, the General Partner and
its affiliates perform services on behalf of the Partnership in connection with
administering the affairs of the Partnership and operating the Partnership's
properties. The General Partner and its affiliates receive compensation in
connection with such activities. See Item 11 and Note 3 to the Financial
Statements in Item 8 for a description of such charges.
ITEM 2. PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF
TENANT PERCENTAGE
NET LEASES OCCUPIED
RENTABLE AS OF AS OF
PURCHASE AREA IN DECEMBER 31, DECEMBER 31,
NAME/LOCATION/DATE ACQUIRED PRICE(1) DESCRIPTION SQ. FT. 1995 1995
- ----------------------------- ----------- ----------------------------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Washington Technical Center, $ 3,874,000 Four business center 50,973 5 96%
Phase I buildings located on 4.87
Renton, Washington acres of land.
December 19, 1984
Arlington Executive Plaza 7,315,000 Seven single-story office 72,977 28 70%
Arlington Heights, Illinois buildings located on 7.2
February 15, 1985 acres of land.
Certified Distribution Center 9,327,000 Two warehouse/distribution 312,260 2 100%
Salt Lake City, Utah buildings located on 12.65
April 2, 1985 acres of land.
Ladera Shopping Center, 8,543,000 A neighborhood retail 89,544 18 95%
Phase I shopping center located on
Albuquerque, New Mexico 10.9 acres of land.
May 10, 1985
The Cornerstone 17,618,000 A seven-building specialty 114,441 25 70%
Tempe, Arizona retail center located on 10.9
July 19, 1985 acres of land.
Terracentre 20,037,000 A 15-story office building 95,723 16 68%
Denver, Colorado located on .41 acres of land.
September 6, 1985
Oakpointe 9,517,000 Office building located on 96,213 2 76%
Arlington Heights, Illinois 6.8 acres of land.
September 18, 1985
----------- -------
TOTAL $76,231,000 832,131
=========== =======
</TABLE>
- ---------------
(1) The purchase price does not include an allocable share of the $4,860,000 of
acquisition fees paid to the General Partner. Also, for certain properties,
the purchase price has been reduced by cash received after acquisition under
rental agreements for non-occupied space.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is not a party to any material pending legal proceedings,
other than ordinary routine litigation incidental to its business. It is the
General Partner's belief that the outcome of these proceedings, will not be
material to the business, financial condition, or results of operations of the
Partnership.
NASD Matter. In a matter not directly involving the Partnership or its
General Partner, in 1991, the National Association of Securities Dealers, Inc.
(the "Association") Business Conduct Committee for the Northern District of
California initiated a complaint against a broker-dealer affiliate of LF Special
Fund II, L.P., (a general partner of the General Partner of the Partnership),
alleging violations of the Association's Rules of Fair Practice. Specifically,
the complaint alleged that the affiliate (i) bought and sold limited partnership
units (but not interests in the Partnership) in the secondary market, from or to
unaffiliated parties,
3
<PAGE> 22
subject to mark-ups or mark-downs in excess of the Association's guidelines and
(ii) failed to disclose the amount or existence of such mark-ups and mark-downs
to buyers and sellers of limited partnership units. Brent Donaldson and Richard
Wollack, executive officers of LF Special Fund II, L.P., were also named as
respondents in the complaint in their capacities as principals of the affiliate.
The complaint was settled as of January 3, 1992 on the following terms: the
Association made findings, which were neither admitted nor denied, of violations
by the affiliate and Mr. Donaldson of the Association's guidelines with respect
to mark-ups or mark-downs, and of the failure of the affiliate (but not Mr.
Donaldson) to disclose the amount of such mark-ups or markdowns. Both
allegations were dismissed as to Mr. Wollack. The settlement further provided
that the affiliate would be censured and fined $125,000 and that Mr. Donaldson
would be censured and fined $7,500.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S LIMITED PARTNERSHIP INTERESTS AND RELATED
SECURITY HOLDER MATTERS
There is no public market for the limited partnership interests and a
market is not expected to develop as such limited partnership interests are not
publicly traded or freely transferable.
As of February 29, 1996, the number of holders of the Partnership's
interests is as follows:
<TABLE>
<S> <C>
General Partner............................................. 1
Limited Partners............................................ 10,873
------
10,874
======
</TABLE>
The Partnership makes quarterly cash distributions to its partners out of
distributable cash pursuant to the Partnership's Agreement of Limited
Partnership. Distributable cash is generally paid 99% to the Limited Partners
and 1% to the General Partner.
The Partnership has paid the following quarterly cash distributions to its
Limited Partners:
<TABLE>
<CAPTION>
CALENDAR
QUARTERS 1996 1995 1994 1993 1992 1991
-------------------- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
First............... 0 $253,000 $370,000 $662,000 $487,000 $730,000
Second.............. 253,000 370,000 486,000 0 486,000
Third............... 253,000 360,000 350,000 0 486,000
Fourth.............. 0 369,000 370,000 642,000 487,000
</TABLE>
The Limited Partners and the General Partner are entitled to receive
quarterly cash distributions, as available, in the future. During 1995, the
General Partner temporarily suspended distributions for two or more quarters,
commencing with the last quarter of 1995, to fund a portion of the renovation
and tenant improvements at The Cornerstone and tenant improvements at Oakpointe,
and Washington Technical Center.
4
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Total Revenues................. $ 5,973,000 $ 6,307,000 $ 6,525,000 $ 7,403,000 $ 7,606,000
=========== =========== =========== ============ ===========
Net Income (Loss):
General Partner.............. $ (50,000) $ (56,000) $ (2,000) $ (138,000) $ 4,000
Limited Partners............. (4,922,000) (5,535,000) (193,000) (13,654,000) 374,000
----------- ----------- ----------- ------------ -----------
$(4,972,000) $(5,591,000) $ (195,000) $(13,792,000) $ 378,000
=========== =========== =========== ============ ===========
Total Distributions:
General Partner.............. $ 8,000 $ 15,000 $ 19,000 $ 11,000 $ 22,000
=========== =========== =========== ============ ===========
Limited Partners............. $ 759,000 $ 1,469,000 $ 1,868,000 $ 1,129,000 $ 2,189,000
=========== =========== =========== ============ ===========
Total Assets................... $38,493,000 $44,292,000 $51,460,000 $ 54,144,000 $69,157,000
=========== =========== =========== ============ ===========
Secured Loan Payable........... $ 3,116,000 $ 3,285,000 $ 3,440,000 $ 4,000,000 $ 4,000,000
=========== =========== =========== ============ ===========
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Since the completion of its acquisition program in September 1985, the
Partnership has been primarily engaged in the operation of its properties. The
Partnership's objective has been to hold its properties as long-term
investments, although properties may be sold at any time, depending upon the
General Partner's judgment of the anticipated remaining economic benefits of
continued ownership. That notwithstanding, the Information Statement, dated May
5, 1993, as described below, mandates that the General Partner shall seek a vote
of the Limited Partners no later than December 31, 1996, regarding prompt
liquidation of the Partnership in the event that properties with appraised
values as of January 1993 which constituted at least one half of the aggregate
appraised values of all Partnership properties as of that date are not sold or
under contract for sale by the end of 1996. Given the mandate of the May 5, 1993
Information Statement, the General Partner has decided to account for the
Partnership's properties as assets held for sale, instead of for investment.
Working capital is and will be principally provided from the operation of the
Partnership's properties and the working capital reserve established for the
properties. The Partnership may incur mortgage indebtedness relating to such
properties by borrowing funds primarily to fund capital improvements or to
obtain financing proceeds for distribution to the partners.
Distributions for the year ended December 31, 1995, represent net cash flow
generated from operations of the Partnership's properties and interest earned on
the temporary investment of working capital, net of capital reserve
requirements. Future cash distributions will be made to the extent available
from net cash flow generated from operations and sales of the Partnership's
properties and interest earned on the investment of capital reserves, after
providing for capital reserves and payment for capital improvements and repairs
to the Partnership's properties. See Item 5 for a description of the
Partnership's distribution history. The Partnership believes that the cash
generated from its operations will provide the Partnership the funds necessary
to meet all of its ordinary obligations.
Certain of the Partnership's properties are not fully leased. The
Partnership is actively marketing the vacant space in these properties, subject
to the competitive environment in each of the market areas. To the extent the
Partnership is not successful in maintaining or increasing occupancy levels at
these properties, the Partnership's future cash flow and distributions may be
reduced.
The Partnership began renovation of The Cornerstone, located in Tempe,
Arizona in August 1995 and is scheduled to be completed during first quarter of
1996. The General Partner currently estimates the cost of the planned capital
improvements which include exterior facade modifications, hardscape and
softscape changes and signage upgrades, to be approximately $1,200,000, plus
$600,000 for tenant improvements and leasing commissions. To pay for a portion
of these improvements and commissions the Partnership has temporarily suspended
distributions to its partners.
5
<PAGE> 24
In June 1993, the Partnership completed its solicitation of written
consents from its Limited Partners. A majority in interest of the Partnership's
Limited Partners approved each of the proposals contained in the Information
Statement, dated May 5, 1993. Those proposals have been implemented by amending
the Partnership Agreement as contemplated by the Information Statement. The
amendments include, among other things, the future payment of asset management
and leasing fees to the General Partner and the elimination of the General
Partner's residual interest and deferred leasing fees that were previously
subordinated to return of the Limited Partners' 9% Preferential Return. See Item
8, Note 3 to the Financial Statements for discussion of fees paid to the General
Partner for the year ended December 31, 1995.
The General Partner elected to terminate the Partnership's Property
Management Agreement with Glenborough Management Corporation ("Glenborough")
effective November 1, 1993. On that date, the General Partner caused the
Partnership to enter a new property management agreement with Birtcher
Properties, an affiliate of the General Partner. Pursuant to the Partnership
Management Agreements, Birtcher Properties will act as the Partnership's
exclusive agent to operate, rent, manage and maintain the Partnership's
properties. Birtcher Properties will perform substantially the same services
that Glenborough performed during the previous two-year period at fees similar
to (and not larger than) the fees it used to pay Glenborough, plus certain costs
associated with property management, as before. The contracts are terminable
upon a minimum of 60 days' written notice by either party. As before, the
General Partner will continue to oversee the day-today management of the
Partnership.
In September 1987, the Partnership borrowed $4,000,000 pursuant to a loan
agreement secured by a First Deed of Trust on the Certified Distribution Center
in Salt Lake City, Utah. The net proceeds were used primarily for capital
improvements and leasing commissions on certain of the Partnership's properties,
the Partnership's working capital reserves and certain general and
administrative expenses. That loan matured on December 1, 1990, however, the
General Partner obtained a loan extension that was to mature December 1, 1993.
On July 20, 1993, the Partnership obtained a new loan secured by a First Deed of
Trust on the Certified Distribution Center in Salt Lake City, Utah. The new
loan, in the amount of $3,500,000, carries a fixed interest rate of 9% per annum
over a 13-year fully amortizing term. The Partnership's first payment of $38,000
was paid on September 1, 1993, with monthly installments due thereafter.
In March 1996, the Partnership entered into a loan agreement pursuant to
which it may borrow up to $1,500,000, evidenced by a note secured by a first
deed of trust and financing statement on the Ladera I Shopping Center in
Albuquerque, New Mexico. Pursuant to the note and loan agreement, until March 3,
1997 the Partnership is to pay interest only at the rate of 1% over prime
(currently, the loan rate is 9.25%) on the amounts it borrows. Thereafter, the
outstanding balance of all advances made under the note is to be converted to a
fully amortizing loan payable in 24 equal monthly payments of principal plus
accrued interest, commencing April 3, 1997. The Partnership has agreed to repay
the loan from the first sale of the Partnership's property. The net proceeds of
the foregoing loan are to be used to fund a portion of the renovation and tenant
improvements at The Cornerstone and tenant improvements at Oakpointe, with any
remainder added to the Partnership's working capital reserves.
JANUARY 1, 1996 PROPERTY APPRAISALS AND NET ASSET VALUE
In accordance with the terms of the Partnership Agreement, each year the
Partnership secures an independent appraisal of each of the Partnership's
properties as of January 1. Prior to the January 1, 1995 appraisals, the
independent appraiser had estimated each property's "Investment Value,"
utilizing a seven to ten-year cash flow model to estimate value based upon an
income approach.
The amendment to the Partnership Agreement consented to by the Limited
Partners in June 1993 mandates, among other things, that the General Partner
seek a vote of (and provide an analysis and recommendation to) the Limited
Partners no later than December 31, 1996 regarding the prompt liquidation of the
Partnership in the event that properties with (then) current appraised values
(constituting at least one-half of the total (then) current appraised values) of
all of the Partnership's properties are not sold or under contract for sale by
the end of 1996.
6
<PAGE> 25
Given this mandate, the General Partner has requested that the appraiser
provide an assessment of value that reflects a shorter investment holding term.
Although the General Partner does not currently have a specific liquidation plan
for the Partnership's properties, it requested that the appraiser assume that
the entire portfolio would be sold over four years, in connection with the
January 1995 appraisals and over three years in connection with the January 1996
appraisals.
Using the shorter-term investment methodology that is consistent with the
mandate of the 1993 amendment to the Partnership agreement, the appraiser
estimated the value of the Partnership's properties at January 1, 1996 to be
$40,390,000, or $4,155 per $10,000 original investor subscription.
Over the past year, the General Partner has examined several alternative
methods to achieve the Partnership's goal of selling the Partnership's
properties and liquidating the Partnership at the earliest practicable time
consistent with achieving reasonable value for the Limited Partners' investment.
As explained in the Partnership's May 5, 1993 Information Statement, "achieving
reasonable value" has meant for the Partnership to balance receiving higher
sales prices per property than their 1993 values while at the same time not
waiting forever to sell at a theoretical "top of the market." Alternatives under
consideration by the General Partner may include a property-by-property
liquidation or selling all of the properties as a single portfolio. The General
Partner has had preliminary discussions regarding disposition, in whole or in
part, of the Partnership's properties with various potential purchasers of some
or all of the Partnership's portfolio.
In connection with its consideration of these alternatives, the General
Partner has decided to treat its properties as held for sale, instead of for
investment, for financial statement purposes. In accordance with Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (see Note 2 to
the Financial Statements in Item 8), the carrying value of these properties was
evaluated to ensure that each property was carried on the Partnership's balance
sheet at the lower of cost or fair value less selling costs. The General Partner
estimated fair value for this purpose based on appraisals performed as of
January 1, 1996. However, fair value can only be determined based upon sales to
third parties, and sales proceeds could differ substantially.
Based upon the General Partner's survey of the current marketplace, the
General Partner believes, in fact, that in the relatively short term the
Partnership's properties could generate sales prices that, in the aggregate,
could be materially less than their aggregate appraised values based upon an
"Investment Value" appraisal model. The amount of the possible variance between
the aggregate appraised values and potential sales prices cannot be reliably
estimated at this time, because of the numerous variables that could affect the
sales prices, including but not limited to the time frame in which the
properties must be sold, method of sale (property-by-property or single
transaction), prevailing capitalization rates at which comparable properties are
being sold at the time of the Partnership's sales, constantly changing local
market conditions and the state of leasing negotiations and capital expenditures
for the properties at the time of sale.
The foregoing appraised value of the properties indicates an estimated net
asset value of the Partnership of $37,618,000, or $3,870 per $10,000 of original
investor subscription. (Net asset value represents the appraised value of the
Partnership's properties, cash and all other assets less secured loans payable
and all other liabilities.) This equates to a net asset value of $193 per $500
par value of Partnership Interest. This compares to original purchase prices
aggregating $7,979 and the January 1, 1995 appraised value of $4,167 per $10,000
of original investor subscription.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
The decrease in rental income for the year ended December 31, 1995, as
compared to 1994, was primarily attributable to reduced rental income at The
Cornerstone and Oakpointe. At The Cornerstone, several small tenants terminated
their leases prior to or upon their respective scheduled termination during
1995. The respective terminations resulted in a decrease in the property's
occupancy rate to the current level of 70% and decrease in rental income of
$338,000. At Oakpointe, revenue decreased by $153,000, which was primarily the
result of the termination of the Illinois Department of Employment Security
lease in March 1994.
7
<PAGE> 26
Additionally, common area expense reconciliations at Oakpointe resulted in a
$36,000 refund of tenant overpayment during 1995. The aforementioned decreases
were partially offset by an increase in rental income at Washington Technical
Center and Terracentre office building. At Washington Technical Centre, revenue
increased by $108,000 because the Partnership entered into three leases
encompassing 25,698 square feet in late 1994, and at Terracentre, revenue
increased $103,000 because the Partnership entered into a 9,259 square foot
lease.
Interest income resulted from the temporary investment of Partnership
working capital. Interest income was generally comparable to 1994. Other
miscellaneous income decreased at Terracentre and Oakpointe by $38,000 during
1995.
The decrease in operating expenses for the year ended December 31, 1995, as
compared to 1994, was primarily attributable to the overall decrease in legal
and professional services associated with minor tenant disputes and real estate
tax appeals relating to the Partnership's properties ($67,000).
The increase in real estate taxes for the year ended December 31, 1995, as
compared to 1994, was primarily attributable to the increases in taxes at The
Cornerstone and Oakpointe ($51,000). The aforementioned increase was partially
offset by a lower tax assessment at Washington Technical Center, which was the
result of a successful tax appeal during 1995 ($13,000) and a lower tax expense
at Arlington Executive Plaza ($28,000).
General and administrative expenses for the year ended December 31, 1995
include charges of $588,000 from the General Partner and its affiliates for
services rendered in connection with administering the affairs of the
Partnership and operating the Partnership's properties. Also included in general
and administrative expenses were direct charges of $417,000 relating to audit
and tax preparation fees, annual appraisal fees, legal fees, insurance expense,
costs incurred in providing information to the Limited Partners and other
miscellaneous costs.
The increase in general and administrative expenses for the year ended
December 31, 1995 as compared to 1994, was primarily attributable to the
increase in legal and professional services, administrative wages and leasing
fees. The aforementioned increases were partially offset by lower asset
management fees paid to the General Partner.
Interest expense resulted from interest on the first deed of trust on
Certified Distribution Center. The decrease in interest expense for the year
ended December 31, 1995, as compared to 1994, was attributable to the increase
in principal payment of the loan, which carries a fixed rate of 9% per annum
over a 13-year fully amortized term.
The decrease in depreciation and amortization for the year ended December
31, 1995, as compared to 1994, was attributable to the $5,500,000 adjustment to
the carrying value of real estate assets during 1994. As part of this
adjustment, the depreciable bases of Cornerstone Shopping Center, Terracentre
office building and Oakpointe were reduced in December 1994 by $3,150,000,
$466,000 and $704,000, respectively, with the remaining adjustment of $1,180,000
being allocated to land.
Given the mandate of the May 5, 1993 Information Statement, the General
Partner has decided to account for the Partnership's properties as assets held
for sale, instead of for investment. Accordingly, the General Partner compared
the carrying value of each property to its appraised value as of January 1,
1996. If the carrying value of a property and certain related assets was greater
than its appraised value, the General Partner reduced the carrying value of the
property by the difference. Using this methodology, the General Partner
determined that The Cornerstone, Ladera I Shopping Center, Terracentre,
Arlington Executive Plaza, and Washington Technical Center, had carrying values
greater than their appraised values, and therefore reduced their carrying values
by $1,600,000, $560,000, $590,000, $1,250,000, and $770,000 to $9,032,000,
$6,234,000, $2,397,000, $2,740,000, and $2,612,000 respectively.
YEAR ENDED DECEMBER 31, 1994
The decrease in rental income for the year ended December 31, 1994, as
compared to 1993, was primarily attributable to reduced rental income at
Oakpointe and Washington Technical Center. At Oakpointe, revenue decreased by
$71,000, primarily as a result of two factors. The FIserv, Inc. lease was
successfully renegotiated
8
<PAGE> 27
in 1993, in exchange for a reduced rental rate. In addition, the Illinois
Department of Employment Security lease encompassing 14,580 square feet was
terminated in March 1994. The tenant vacated the premises, which resulted in an
occupancy decrease to 76%. At Washington Technical Center, rental income
decreased by $139,000. This decrease was a result of the following factors:
Legent Corporation and Boeing Support Services terminated their leases upon
expiration in October 1993 and Jon Marie Portrait terminated its lease prior to
the scheduled expiration date in late 1993. The aforementioned decreases were
partially offset by an increase in rental income as a result of successful
negotiation on three new leases encompassing 25,698 square feet in September and
November 1994 at Washington Technical Center.
Interest income resulted from the temporary investment of Partnership
working capital. Interest and other income was generally comparable to 1993.
The increase in operating expenses for the year ended December 31, 1994, as
compared to 1993, was primarily attributable to the increase in legal and
professional services associated with minor tenant disputes and real estate tax
appeals relating to the Partnership's properties ($88,000).
The increase in real estate taxes for the year ended December 31, 1994, as
compared to 1993, was primarily attributable to an increase in real estate taxes
at Oakpointe and Arlington.
General and administrative expenses for the year ended December 31, 1994
include charges of $568,000 from the General Partner and its affiliates for
services rendered in connection with administering the affairs of the
Partnership and operating the Partnership's properties. Also included in general
and administrative expenses were direct charges of $413,000 relating to audit
and tax preparation fees, annual appraisal fees, legal fees, insurance expense,
costs incurred in providing information to the Limited Partners and other
miscellaneous costs.
The decrease in general and administrative expenses for the year ended
December 31, 1994, as compared to 1993, was primarily attributable to a decrease
in legal fees and professional services, postage, mailing expenses and printing
costs associated with the amendment of the Partnership Agreement, which occurred
in 1993.
Interest expense resulted from interest on the first deed of trust on
Certified Distribution Center. The decrease in interest expense for the year
ended December 31, 1994, as compared to 1993, was attributable to the retirement
of the Partnership's previous loan and a reduced loan balance with a lower
interest rate on the take-out financing arrangement.
Provision was made for impairment loss if the General Partner determined
that the carrying amount of the Partnership's investment in a real estate asset
may not have been recoverable. The General Partner obtained third party
appraisals on the Partnership's properties as required by the Partnership
Agreement. If these appraisals indicated that certain of the Partnership's
properties had market values below their then-current carrying values, the
General Partner considered the appraisals and analyzed the current and
anticipated market conditions of the respective properties and determined if an
impairment had occurred. At December 31, 1994, after evaluation of The
Cornerstone, Terracentre and Oakpointe the General Partner estimated a
$5,500,000 impairment of value as compared to its respective carrying value.
YEAR ENDED DECEMBER 31, 1993
The decrease in rental income for the year ended December 31, 1993, as
compared to 1992, was primarily attributable to reduced rental income at
Oakpointe, Arlington Executive Plaza, Cornerstone Shopping Center and Washington
Technical Center. At Oakpointe, the FIserv, Inc. lease (encompassing 62,052
square feet) was successfully renegotiated for an additional six year term in
exchange for a reduced rental rate ($355,000). In addition, Incredible
Technologies terminated its lease upon scheduled expiration in November 1992
($145,000). At Arlington Executive Plaza, several tenants terminated their
leases prior to or upon their respective scheduled expirations resulting in a
decrease in revenues of $225,000 for the year ended December 31, 1993, when
compared to 1992. At Cornerstone Shopping Center, early termination of four
small leases encompassing 3,380 square feet, resulted in a lower occupancy rate
and decrease in rental income ($124,000), when compared to 1992. At Washington
Technical Center, Legent Corporation and Boeing Support Services terminated
their leases upon expiration in October 1993 and Jon Marie Portrait terminated
9
<PAGE> 28
its lease prior to scheduled expiration date resulting in a 40% decrease in the
property's occupancy and a $60,000 decrease in rental income in 1993, when
compared to 1992.
Interest income resulted from the temporary investment of partnership
working capital. The decrease from 1992 to 1993 was attributable to a decrease
in working capital available for short-term investment. The decrease in working
capital was primarily a result of the $500,000 payment to the Partnership's
lender in July 1993. See Item 7, Capital Resources and Liquidity, for further
discussion.
The increase in operating expenses for the year ended December 31, 1993, as
compared to 1992, was primarily attributable to an increase in parking cleaning,
snow removal, and repairs and maintenance at Oakpointe. In addition, legal and
professional services related to tax appeals and tenant disputes were generally
higher in 1993, when compared to 1992. The aforementioned increases were
partially offset by a decrease in HVAC repairs and maintenance and parking lot
rental expense at Terracentre.
The decrease in real estate taxes for the year ended December 31, 1993, as
compared to 1992, was primarily attributable to successful tax appeals at
Terracentre, Cornerstone and Oakpointe. The aforementioned decreases were
partially offset by higher tax assessments at Arlington Executive Plaza and
Washington Technical Center.
The decrease in depreciation expenses for the year ended December 31, 1993,
as compared to 1992, was a result of the $13,900,000 adjustment to the carrying
value of real estate assets in 1992. As part of this adjustment, in December
1992, the depreciable bases (buildings and improvements) of Terracentre Office
Building and Arlington Executive Plaza were reduced by $10,700,000 and
$2,100,000, respectively, with the remaining adjustment of $1,100,000 allocated
to land.
General and administrative expenses for the year ended December 31, 1993
include charges of $580,000 from the General Partner and its affiliates for
services rendered in connection with administering the affairs of the
Partnership and operating the Partnership's properties. Also included in general
and administrative expenses were direct charges of $736,000 relating to audit
and tax preparation fees, annual appraisal fees, legal fees, insurance expense,
costs incurred in providing information to the Limited Partners and other
miscellaneous costs.
The increase in general and administrative expenses for the year ended
December 31, 1993, as compared to 1992, was primarily attributable to the
payment of asset management fees ($351,000) and leasing fees ($47,000) to the
General Partner and its affiliates pursuant to the amended Partnership
Agreement. In addition, legal and professional services, printing, postage and
mailing expenses increased as a result of the Partnership's solicitation of the
Limited Partners for the Information Statements, dated May 5, 1993.
Interest expenses resulted from interest on the first deed of trust on
Certified Distribution Center. The decrease in interest expenses for the year
ended December 31, 1993, as compared to 1992, was attributable to the retirement
of the Partnership's previous loan and a lower interest rate on the take-out
financing arrangement.
The General Partner elected to terminate the Partnership's Property
Management Agreement with Glenborough Management Corporation ("Glenborough")
effective November 1, 1993. On that date, the General Partner caused the
Partnership to enter a new property management agreement with Birtcher
Properties, an affiliate of the General Partner. Pursuant to the Property
Management Agreement, Birtcher Properties will act as the Partnership's
exclusive agent to operate, rent, manage and maintain the Partnership's
properties. In its capacity as property manager for the Partnership's
properties, Birtcher Properties will perform substantially the same services
that Glenborough performed during the previous two-year period at fees similar
to (and not larger than) the fees it used to pay Glenborough, plus certain costs
associated with property management, as before. The contract is terminable upon
a minimum of 60 days' written notice by either party. As before, the General
Partner will continue to oversee the day-to-day management of the Partnership.
10
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... 12
Financial Statements:
Balance Sheets as of December 31, 1995 and 1994..................................... 13
Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993....... 14
Statements of Changes in Partners' Capital for the Years Ended December 31, 1995,
1994 and 1993.................................................................... 15
Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993....... 16
Notes to Financial Statements....................................................... 17
Schedule:
III -- Real Estate and Accumulated Depreciation as of December 31, 1995............. 25
</TABLE>
Information required by other schedules called for under Regulation S-X is
either not applicable or is included in the financial statements.
11
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
To Damson/Birtcher Partners, as General Partner of
Damson/Birtcher Realty Income Fund-I:
We have audited the financial statements of Damson/Birtcher Realty Income
Fund-I, a limited partnership as listed in the accompanying index. In connection
with our audits of the financial statements, we also have audited the financial
statement schedule listed in the accompanying index. These financial statements
and the financial statement schedule are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule 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 Damson/Birtcher Realty
Income Fund-I as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in note to the financial statements, on December 31, 1995
Damson/Birtcher Realty Income Fund-I adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
LongLived Assets to Be Disposed Of."
KPMG PEAT MARWICK LLP
Orange County, California
March 28, 1996
12
<PAGE> 31
DAMSON/BIRTCHER REALTY INCOME FUND-I
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994
----------- ------------
<S> <C> <C>
ASSETS
Properties held for sale (net of valuation allowance of
$4,770,000)................................................... $36,996,000 $ --
----------- ------------
Investments in real estate, net:
Land.......................................................... -- 10,016,000
Buildings and improvements.................................... -- 57,851,000
----------- ------------
-- 67,867,000
Less accumulated depreciation................................. -- (25,396,000)
----------- ------------
-- 42,471,000
Cash and cash equivalents....................................... 301,000 648,000
Accounts receivable (net of allowance for doubtful accounts of
$63,000 in 1995).............................................. 43,000 84,000
Accrued rent receivable......................................... 443,000 416,000
Prepaid expenses and other assets, net.......................... 710,000 673,000
----------- ------------
$38,493,000 $ 44,292,000
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities........................ $ 1,153,000 $ 1,044,000
Secured loan payable............................................ 3,116,000 3,285,000
----------- ------------
Total liabilities............................................. 4,269,000 4,329,000
----------- ------------
Partners' capital (deficit):
Limited Partners.............................................. 34,714,000 40,395,000
General Partner............................................... (490,000) (432,000)
----------- ------------
34,224,000 39,963,000
Commitments and contingencies................................... -- --
----------- ------------
$38,493,000 $ 44,292,000
=========== ============
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
13
<PAGE> 32
DAMSON/BIRTCHER REALTY INCOME FUND-I
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
REVENUES:
Rental income...................................... $5,917,000 $6,215,000 $6,434,000
Interest and other income.......................... 56,000 92,000 91,000
----------- ----------- ----------
Total revenues............................. 5,973,000 6,307,000 6,525,000
----------- ----------- ----------
EXPENSES:
Operating expenses................................. 1,845,000 1,914,000 1,828,000
Real estate taxes.................................. 967,000 959,000 893,000
Depreciation and amortization...................... 2,069,000 2,241,000 2,326,000
General and administrative......................... 1,005,000 981,000 1,316,000
Interest........................................... 289,000 303,000 357,000
Adjustment to carrying value of real estate........ 4,770,000 5,500,000 --
----------- ----------- ----------
Total expenses............................. 10,945,000 11,898,000 6,720,000
----------- ----------- ----------
NET LOSS............................................. $(4,972,000) $(5,591,000) $(195,000)
=========== =========== ==========
NET LOSS ALLOCABLE TO:
General Partner.................................... $ (50,000) $ (56,000) $ (2,000)
=========== =========== ==========
Limited Partners................................... $(4,922,000) $(5,535,000) $(193,000)
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
14
<PAGE> 33
DAMSON/BIRTCHER REALTY INCOME FUND-I
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1995, 1994 AND 1993
---------------------------------------
GENERAL LIMITED
PARTNER PARTNER TOTAL
--------- ---------- ----------
<S> <C> <C> <C>
Balance, December 31, 1992........................... $(340,000) $49,460,000 $49,120,000
Net loss........................................... (2,000) (193,000) (195,000)
Distributions...................................... (19,000) (1,868,000) (1,887,000)
-------- ----------- -----------
Balance, December 31, 1993........................... (361,000) 47,399,000 47,038,000
Net loss........................................... (56,000) (5,535,000) (5,591,000)
Distributions...................................... (15,000) (1,469,000) (1,484,000)
-------- ----------- -----------
Balance, December 31, 1994........................... (432,000) 40,395,000 39,963,000
Net loss........................................... (50,000) (4,922,000) (4,972,000)
Distributions...................................... (8,000) (759,000) (767,000)
-------- ----------- -----------
Balance, December 31, 1995........................... $(490,000) $34,714,000 $34,224,000
======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
15
<PAGE> 34
DAMON/BIRTCHER REALTY INCOME FUND-I
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(4,972,000) $(5,591,000) $ (195,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization..................... 2,069,000 2,241,000 2,326,000
Adjustment to carrying value of real estate....... 4,770,000 5,500,000 --
Changes in:
Accounts receivable............................... 41,000 58,000 33,000
Due from affiliate................................ -- -- 21,000
Accrued rent receivable........................... (27,000) (150,000) (179,000)
Prepaid expenses and other assets................. (213,000) (191,000) (175,000)
Accounts payable and accrued liabilities.......... 109,000 62,000 (42,000)
----------- ----------- -----------
Net cash provided by operating activities........... 1,777,000 1,929,000 1,789,000
----------- ----------- -----------
Cash flows from investing activities:
Investments in real estate........................ (1,188,000) (710,000) (689,000)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on secured loan payable........ (169,000) (155,000) (560,000)
Distributions..................................... (767,000) (1,484,000) (1,887,000)
----------- ----------- -----------
Net cash used in financing activities............... (936,000) (1,639,000) (2,447,000)
Net decrease in cash and cash equivalents........... (347,000) (420,000) (1,347,000)
----------- ----------- -----------
Cash and cash equivalents, beginning of year........ 648,000 1,068,000 2,415,000
----------- ----------- -----------
Cash and cash equivalents, end of year.............. $ 301,000 $ 648,000 $ 1,068,000
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest....................................... $ 289,000 $ 303,000 $ 357,000
=========== =========== ===========
Non-cash transactions:
Repayment of secured loan payable in
1993 -- see Note 5
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
16
<PAGE> 35
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND OPERATIONS
Damson/Birtcher Realty Income Fund-I (the "Partnership") is a limited
partnership formed on May 7, 1984, under the laws of the Commonwealth of
Pennsylvania, for the purpose of acquiring and operating income-producing
retail, commercial and industrial properties. The General Partner of the
Partnership is Damson/Birtcher Partners, a general partnership originally
consisting of Equity Properties, Inc. ("EPI"), an indirect, wholly-owned
subsidiary of Damson Oil Corporation and Birtcher Partners, a California general
partnership. In December 1992, EPI withdrew as a general partner of the
Damson/Birtcher Partners and LF Special Fund II, L.P. was added as a general
partner of the General Partner. Under the terms of the General Partner's
Partnership Agreement, Birtcher Partners or its affiliates, remains responsible
for the day-to-day management of the Partnership's assets.
In January 1993, the General Partner filed an Information Statement with
the Securities and Exchange Commission seeking consent of the Limited Partners
to amend the Partnership Agreement. On June 24, 1993, the Partnership completed
its solicitation of written consent from its Limited Partners. A majority in
interest of the Partnership's Limited Partners approved each of the proposals
contained in the Information Statements, dated May 5, 1993. Those proposals have
been implemented by the Partnership as contemplated by the Information Statement
as amendments to the Partnership Agreement, and are reflected in these Financial
Statements as such.
The amendment modifies the Partnership Agreement to eliminate the General
Partner's 10% subordinated interest in distributions of Distributable Cash (net
cash from operations) and reduce its subordinated interest in such distributions
from 10% to 1%. The amendment also modifies the Partnership Agreement to
eliminate the General Partner's 10% subordinated interest in Sale or Financing
Proceeds (net cash from sale or financing of Partnership property) and to reduce
its subordinated interest in such proceeds from 15% to 1%. In lieu thereof, the
Partnership Agreement now provides for the Partnership's payment to the General
Partner of an annual asset management fee equal initially to .75% of the
aggregate appraised value of the Partnership's properties. At January 1, 1995
and 1994 the portfolio was appraised at an aggregate value of approximately
$40,505,000 (unaudited) and $47,060,000 (unaudited), respectively. The factor
used to calculate the annual asset management fee will be reduced by .10% each
year beginning after December 31, 1996 (e.g., from .75% in 1996 to .65% in
1997).
The amendment modifies the Partnership Agreement to eliminate the
subordination provisions with respect to future leasing fees payable under that
subsection. The amendment also eliminated the deferred leasing fees earned by
the General Partner or its affiliates (approximately $448,000 as of December 31,
1992) on or after the effective date of the amendment. Fees for future leasing
services rendered by the General Partner or its affiliates will be payable by
the Partnership on a current basis and would not be subordinated to the Limited
Partners Preferred Return and Adjusted Invested Capital or any other amount.
The amendment modifies the Partnership Agreement to eliminate the
subordination provision with respect to future property disposition fees payable
under that section. The amendment authorizes payment to the General Partner and
its affiliates of the property disposition fee as earned. The fee would not be
subordinated to the Limited Partners Preferred Return and Adjusted Invested
Capital or any other amount.
The disposition fees are to be paid to the General Partner or its
affiliates in an amount equal to 50% of the competitive real estate brokerage
commission that would be charged by unaffiliated third-parties providing
comparable services in the area in which a property is located, but in no event
more than three percent of the gross sale price of the property, and are to be
reduced by the amount by which any brokerage or similar commissions paid to any
unaffiliated third-parties in connection with the sale of property exceed three
percent of the gross sale price. This amount is not payable, unless and to the
extent that the sale price of the property in question, net of any other
brokerage commissions (but not other costs of sale), exceeds the appraised value
of the property as of January 1, 1993.
17
<PAGE> 36
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The amendment states that the Partnership is no longer authorized to pay
the General Partner or its affiliates any insurance commissions or any property
financing fees. No such commissions or fees have been paid or accrued by the
Partnership since its inception.
The amendment modifies the provisions of the Partnership Agreement
regarding allocations of Partnership income, gain and other tax items between
the General Partner and the Limited Partners primarily to conform to the changes
in the General Partner's interest in distributions of Distributable Cash and
Sale or Financing Proceeds, as defined, effected by the amendment.
It is not anticipated that the adoption and implementation of the amendment
will have any material adverse effect on future allocations of income, gain,
loss or other tax items to the Limited Partners. However, if any of the
Partnership's properties are sold for a gain, a special allocation to the
General Partner would have the effect of reducing the amount of Sale or
Financing Proceeds otherwise distributable to the Limited Partners and
correspondingly increasing the amount of such distributions to be retained by
the General Partner. The amount of such distributions to be affected would be
approximately equal to any deficit balance in the General Partner's capital
account in the Partnership at the time of the allocation.
The Limited Partners have certain priorities in the allocation of cash
distributions by the Partnership. Out of each distribution of net cash, the
Limited Partners generally have certain preferential rights to receive payments
that, together with all previous payments to them, would provide an overall 9%
per annum (cumulative non-compounded) return (a "9% Preferential Return") on
their investment in the Partnership. Any distributions not equaling this 9%
Preferential Return in any quarter are to be made up in subsequent periods if
and to the extent distributable cash is available.
Distributable cash from operations is paid out each quarter in the
following manner: 99% to the Limited Partners and 1% to the General Partner.
These payments are made each quarter to the extent that there is sufficient
distributable cash available.
The Partnership began renovation of The Cornerstone, located in Tempe,
Arizona in August 1995 and is scheduled to be completed during the first quarter
of 1996. The General Partner currently estimates the cost of the planned capital
improvements which include exterior facade modifications, hardscape and
softscape changes and signage upgrades, to be approximately $1,200,000, plus
$600,000 for tenant improvements and leasing commissions. To pay for a portion
of these improvements and commissions the Partnership has temporarily suspended
distributions to its Limited Partners.
Sale or financing proceeds are to be distributed, to the extent available,
as follows: (i) to the Limited Partners until all cash distributions to them
amount to a 9% Preferential Return on their investment cumulatively from the
date of their admission to the Partnership; (ii) then to the Limited Partners in
an amount equal to their investment; and (iii) the remainder, 99% to Limited
Partners and 1% to the General Partner.
The unpaid 9% Preferential Return to the Limited Partners' aggregates
$63,109,000 as of December 31, 1995.
Income or loss for financial statement purposes is allocated 99% to the
Limited Partners and 1% to the General Partner.
The amendment modifies the Partnership Agreement so as to restrict the
Partnership from entering into a future "Reorganization Transaction" (as defined
in the amendment) sponsored by the General Partner or any of its affiliates
unless such transaction is approved by a "supermajority" of at least 80% in
interest of the Limited Partners and the General Partner. The amendment also
prohibits the modification of this restriction on Reorganization Transactions
without the approval of at least 80% in interest of the Limited Partners.
18
<PAGE> 37
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Partnership's original investment objectives contemplated that it would
hold its properties for a period of at least five years, with decisions about
the actual timing of property sales or other dispositions to be left to the
General Partner's discretion based on the anticipated remaining economic
benefits of continued ownership and other factors.
Although the current market for real estate is depressed, the General
Partner is committed to selling the Partnership's properties as soon as
reasonably practicable. To that end, the amendment mandates that the General
Partner seek a vote of the Limited Partners no later than December 31, 1996
regarding the prompt liquidation of the Partnership in the event that properties
with appraised values as of January 1993 which constituted at least one-half of
the aggregate appraised value of all Partnership properties as of that date are
not sold or under contract for sale by the end of 1996. In conjunction with the
vote, the General Partner will provide an analysis and recommendation regarding
the advisability of liquidating the Partnership.
Over the past year, the General Partner has examined several alternative
methods to achieve the Partnership's goal of selling the Partnership's
properties and liquidating the Partnership at the earliest practicable time
consistent with achieving reasonable value for the Limited Partners' investment.
As explained in the Partnership's May 5, 1993 Information Statement, "achieving
reasonable value" has meant for the Partnership to balance receiving higher
sales prices per property than their 1993 values while at the same time not
waiting forever to sell at a theoretical "top of the market." Alternatives under
consideration by the General Partner may include a property-by-property
liquidation or selling all of the properties as a single portfolio. The General
Partner has had preliminary discussions regarding disposition, in whole or in
part, of the Partnership's properties with various potential purchasers of some
or all of the Partnership's portfolio.
In connection with its consideration of these alternatives, the General
Partner has decided to treat its properties as held for sale, instead of for
investment, for financial statement purposes. In accordance with Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (see Note 2), the
carrying value of these properties was evaluated to ensure that each property
was carried on the Partnership's balance sheet at the lower of cost or fair
value less selling costs. The General Partner estimated fair value for this
purpose based on appraisals performed as of January 1, 1996. However, fair value
can only be determined based upon sales to third parties, and sales proceeds
could differ substantially.
Based upon the General Partner's survey of the current marketplace, the
General Partner believes, in fact, that in the relatively short term the
Partnership's properties could generate sales prices that, in the aggregate,
could be materially less than their aggregate appraised values based upon an
"Investment Value" appraisal model. The amount of the possible variance between
the aggregate appraised values and potential sales prices cannot be reliably
estimated at this time, because of the numerous variables that could affect the
sales prices, including but not limited to the time frame in which the
properties must be sold, method of sale (property-by-property or single
transaction), prevailing capitalization rates at which comparable properties are
being sold at the time of the Partnership's sales, constantly changing local
market conditions and the state of leasing negotiations and capital expenditures
for the properties at the time of sale.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Carrying Value of Real Estate
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("FAS 121").
This Statement requires that if the General Partner believes factors are present
that may indicate longlived assets are impaired, the undiscounted cash flows,
before debt service, related to the assets should be estimated. If these
estimated cash flows are less than the carrying value of the asset, then
19
<PAGE> 38
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
impairment is deemed to exist. If impairment exists, the asset should be written
down to the estimated fair value.
Further, assets held for sale, including any unrecoverable accrued rent
receivable or capitalized leasing commissions, should be carried at the lower of
carrying value or fair value less estimated selling costs. Any adjustment to
carrying value is recorded as a valuation allowance against property held for
sale. Each reporting period, the General Partner will review their estimates of
fair value, which may be decreased or increased up to the original carrying
value. Finally, assets held for sale are no longer depreciated. The General
Partner adopted FAS 121 at December 31, 1995 and the adoption did not have a
material impact on the Partnership's operations or financial position as prior
to December 31, 1995, the Partnership had not had any properties held for sale.
As, noted above, as of December 31, 1995 the General Partner decided to
account for the Partnership's properties as assets held for sale, instead of for
investment. Assuming an average 12 month holding period, the General Partner
compared the carrying value of each property to its appraised value as of
January 1, 1996. If the carrying value of a property and certain related assets
was greater than its appraised value, less selling costs, the General Partner
reduced the carrying value of the property by the difference. Using this
methodology, the General Partner determined that The Cornerstone, Ladera I
Shopping Center, Terracentre, Arlington Executive Plaza, and Washington
Technical Center had carrying values greater than they had appraised values, and
therefore reduced their carrying values by $1,600,000, $560,000, $590,000,
$1,250,000, and $770,000 to $9,032,000, $6,234,000, $2,397,000, $2,740,000, and
$2,612,000, respectively.
Prior to the adoption of FAS 121, provision was made for impairment loss if
the General Partner determined that the carrying amount of the Partnership's
investment in a real estate asset was not recoverable. The General Partner
obtained third party appraisals on the Partnership's properties as required by
the Partnership Agreement. If these appraisals indicated that certain of the
Partnership's properties had market values below their then-current carrying
values, the General Partner considered the appraisals and analyzed the current
and anticipated market conditions of the respective properties and determined if
an impairment had occurred.
At December 31, 1994, after evaluation of the Cornerstone Shopping Center
Terracentre, and Oakpointe, the General Partner estimated a $5,500,000
impairment of value as compared to their respective carrying values.
Cash and Cash Equivalents
The Partnership invests its excess cash balances in short-term investments
(cash equivalents). These investments are stated at cost, which approximates
market, and consist of money market, certificates of deposit and other
non-equity-type cash investments. Cash equivalents at December 31, 1995 and
1994, totaled $301,000 and $609,000, respectively. Cash equivalents are defined
as temporary non-equity investments with original maturities of three months or
less, which can be readily converted into cash and are not subject to changes in
market value.
Depreciation
Through December 31, 1995, depreciation expense was computed using the
straight-line method. Rates used in the determination of depreciation were based
upon the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Buildings................................................... 30
Building improvements....................................... 3 to 30
</TABLE>
20
<PAGE> 39
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
Rental income pertaining to operating lease agreements which specify
scheduled rent increases or free rent periods, is recognized on a straight-line
basis over the period of the related lease agreement.
Income Taxes
Income taxes are not levied at the Partnership level, but rather on the
individual partners; therefore, no provision or liability for Federal and State
income taxes has been reflected in the accompanying financial statements.
Following are the Partnership's assets and liabilities as determined in
accordance with generally accepted accounting principles ("GAAP") and for
federal income tax reporting purposes at December 31:
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
GAAP BASIS TAX BASIS GAAP BASIS TAX BASIS
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Total Assets.................. $38,493,000 $55,330,000 $44,292,000 $59,659,000
Total Liabilities............. $4,269,000 $4,269,000 $4,329,000 $4,329,000
</TABLE>
Following are the differences between Financial Statement and tax return
income:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net loss per Financial Statements........... $(4,972,000) $(5,591,000) $ (195,000)
Adjustment to carrying value of real
estate.................................... 4,770,000 5,500,000 --
Depreciation differences on investments in
real estate............................... (1,157,000) (888,000) (883,000)
Other....................................... 85,000 (196,000) (113,000)
----------- ----------- -----------
Taxable income (loss) per Federal tax return
(unaudited)............................... $(1,274,000) $(1,175,000) $(1,191,000)
=========== =========== ===========
</TABLE>
Significant Tenants
Rental income from Certified Warehouse and Transfer Company, Inc., totaled
$984,000 in 1995, 1994 and 1993, or approximately 17%, 16% and 15%,
respectively, of the Partnership's total rental income. Rental income from
FIserv, Inc. (formerly dba Citicorp CIR, Inc.) totaled $880,000 in 1995,
$886,000 in 1994 and $916,000 in 1993, or approximately 15%, 14% and 14%,
respectively, of the Partnership's total rental income.
Earnings and Distributions Per Unit
The Partnership Agreement does not designate investment interests in units.
All investment interests are calculated on a "percent of Partnership" basis, in
part to accommodate original reduced rates on sales commissions for
subscriptions in excess of certain specified amounts. A Limited Partner who was
charged a reduced sales commission or no sales commission was credited with
proportionately larger Invested Capital and therefore had a disproportionately
greater interest in the capital and revenues of the Partnership than a Limited
Partner who paid commissions at a higher rate.
As a result, the Partnership has no set unit value as all accounting,
investor reporting and tax information is based upon each investor's relative
percentage of Invested Capital. Accordingly, earnings or loss per unit is not
presented in the accompanying financial statements.
21
<PAGE> 40
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Estimations
The preparation of financial statements in conformity with generally
accepted accounting principles requires the General Partner to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to
the 1995 presentation.
(3) TRANSACTIONS WITH AFFILIATES
The Partnership has no employees and, accordingly, the General Partner and
its affiliates perform services on behalf of the Partnership in connection with
administering the affairs of the Partnership. The General Partner and affiliates
are reimbursed for their general and administrative costs actually incurred and
associated with services performed on behalf of the Partnership. For the years
ended December 31, 1995, 1994 and 1993, the Partnership was charged with
approximately $226,000, $191,000 and $182,000, respectively, of such expenses.
On November 1, 1993, the General Partner elected to terminate the
Partnership's property management agreement with an unaffiliated third party. On
that date, the General Partner entered into a new property management agreement
with Birtcher Properties, an affiliate of the General Partner. The contract
encompasses terms at least as favorable to the Partnership as the terminated
contract with the unaffiliated third party, and is terminable by the Partnership
upon 60 days' notice to Birtcher Properties. Fees paid to the General Partner's
affiliate for services are not to exceed 3% of the gross receipts from the
properties under management. Such fees amounted to approximately $161,000 in
1995, $167,000 in 1994 and $32,000 in 1993. In addition, the affiliate of the
General Partner received $321,000 in 1995, $303,000 in 1994 and $49,000 in 1993,
as reimbursement of costs for on-site property management personnel and other
reimbursable costs.
The amended Partnership Agreement provides for the Partnership's payment to
the General Partner of an annual asset management fee equal to .75% of the
aggregate appraised value of the Partnership's properties as determined by
independent appraisal undertaken in January of each year. Such fees for the year
ended December 31, 1995, 1994 and 1993, amounted to $304,000, $353,000 and
$351,000, respectively. In addition, the amended Partnership Agreement provides
for payment to the General Partner of a leasing fee for services rendered in
connection with leasing space in a Partnership property after the expiration or
termination of any lease of such space including renewal options. Fees for
leasing services for the year ended December 31, 1995, 1994 and 1993, amounted
to $58,000, $24,000 and $47,000, respectively.
(4) COMMITMENTS AND CONTINGENCIES
Litigation
The Partnership is not a party to any material pending legal proceedings
other than ordinary routine litigation incidental to its business. It is the
General Partner's belief, that the outcome of these proceedings will not be
material to the business, financial condition, or results of operations of the
Partnership.
22
<PAGE> 41
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future Minimum Annual Rentals
The Partnership has determined that all leases which had been executed as
of December 31, 1995, are properly classified as operating leases for financial
reporting purposes. Future minimum annual rental income to be received under
such leases as of December 31, 1995, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
--------------------------------------
<S> <C>
1996.......................... $ 4,905,000
1997.......................... 4,427,000
1998.......................... 3,189,000
1999.......................... 2,776,000
2000.......................... 1,829,000
Thereafter...................... 7,568,000
-----------
$24,694,000
===========
</TABLE>
Certain of these leases also provide for, among other things: tenant
reimbursements to the Partnership of certain operating expenses; payments of
additional rents in amounts equal to a set percentage of the tenant's annual
revenue in excess of specified levels; and escalations in annual rents based
upon the Consumer Price Index.
(5) SECURED LOAN AGREEMENTS
In September 1987, the Partnership borrowed $4,000,000 pursuant to a loan
agreement secured by a First Deed of Trust on the Certified Distribution Center
in Salt Lake City, Utah. That loan matured on October 1, 1990, however, the
General Partner obtained a loan extension that was to mature December 1, 1993.
On July 30, 1993, the Partnership obtained a new loan secured by a First Deed of
Trust on the Certified Distribution Center in Salt Lake City, Utah. The new
loan, in the amount of $3,500,000, carries a fixed interest rate of 9% per annum
over a 13-year fully amortizing term. The Partnership's first payment of $38,000
was paid on September 1, 1993, with monthly installments due thereafter. Future
principal payments to the lender under the loan as of December 31, 1995, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-----------------------------------------
<S> <C>
1996............................. $ 185,000
1997............................. 202,000
1998............................. 221,000
1999............................. 242,000
2000............................. 264,000
Thereafter......................... 2,002,000
----------
$3,116,000
==========
</TABLE>
The General Partner believes the fair value of this secured loan
approximates the carrying value, based on the interest rate charged for the
loan.
In March 1996, the Partnership entered into a loan agreement pursuant to
which it may borrow up to $1,500,000, evidenced by a note secured by a first
deed of trust and financing statement on the Ladera I Shopping Center in
Albuquerque, New Mexico. Pursuant to the note and loan agreement, until March 3,
1997 the Partnership is to pay interest only at the rate of 1% over prime
(currently, the loan rate is 9.25%) on the amounts it borrows. Thereafter, the
outstanding balance of all advances made under the note is to be converted to a
fully amortizing loan payable in 24 equal monthly payments of principal plus
accrued interest, commencing April 3, 1997. The Partnership has agreed to repay
the loan from the first sale of the Partnership's property. The net proceeds of
the foregoing loan are to be used to fund a portion of the
23
<PAGE> 42
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
renovation and tenant improvements at The Cornerstone and tenant improvements at
Oakpointe, with any remainder added to the Partnership's working capital
reserves.
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Real estate taxes................... $ 799,000 $ 759,000
Accounts payable and other.......... 354,000 285,000
---------- ----------
$1,153,000 $1,044,000
========== ==========
</TABLE>
(7) ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year.................. $ -- $19,000 $26,000
Additions charged to expense.................. 63,000 4,000 17,000
Write-offs.................................... -- (23,000) (24,000)
------- ------- -------
Balance at end of year........................ $63,000 $ -- $19,000
======= ======= =======
</TABLE>
24
<PAGE> 43
DAMSON/BIRTCHER REALTY INCOME FUND-I
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COL. D
COL. C ----------------------- COL. E
----------------------- COSTS CAPITALIZED ---------------------------------
INITIAL COST SUBSEQUENT TO GROSS AMOUNT AT WHICH
TO PARTNERSHIP THE ACQUISITION CARRIED AT CLOSE OF PERIOD
COL. A (C) ----------------------- (B)
- ------------------------- COL. B ----------------------- CARRYING ---------------------------------
DESCRIPTION ------------ BUILDINGS AND COSTS BUILDINGS AND TOTAL
(A) ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS (D), (B) LAND IMPROVEMENTS (E)
- ------------------------- ------------ ------- ------------- ------------ -------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Washington
Technical Center,
Phase I
Renton, WA............... $ -- $ 865 $ 3,252 $1,084 $ (855) $ 859 $ 3,488 $ 4,347
Arlington
Executive Plaza
Arlington Heights, IL.... -- 1,004 6,748 1,960 (3,650) 693 5,369 6,062
Certified
Distribution Center
Salt Lake City, UT....... 3,116 1,160 8,751 -- -- 1,160 8,751 9,911
Ladera
Shopping Center,
Phase I
Albuquerque, NM.......... -- 2,107 6,971 312 (570) 2,097 6,723 8,820
The Cornerstone
Tempe, AZ................ -- 4,620 14,115 1,931 (5,800) 3,597 11,268 14,865
Terracentre
Denver, CO............... -- 1,458 19,939 2,079 (14,790) 491 8,195 8,686
Oakpointe
Arlington Heights, IL.... -- 1,249 8,852 2,605 (1,112) 1,119 10,475 11,594
------ ------- ------- ------ -------- ------- ------- -------
TOTAL.................... $3,116 $12,463 $68,628 $9,971 $(26,777) $10,016 $54,269 $64,285
====== ======= ======= ====== ======== ======= ======= =======
<CAPTION>
COL. F COL. I
COL. A ------------ COL. H -----------
- ------------------------- ACCUMULATED -------- DEPRECIABLE
DESCRIPTION DEPRECIATION DATE LIFE
(A) (E) ACQUIRED (F)
- ------------------------- ------------ -------- -----------
<S> <C> <C> <C>
Washington
Technical Center,
Phase I
Renton, WA............... $ 1,735 12/19/84 30 years
Arlington
Executive Plaza
Arlington Heights, IL.... 3,322 02/15/85 30 years
Certified
Distribution Center
Salt Lake City, UT....... 3,135 04/02/85 30 years
Ladera
Shopping Center,
Phase I
Albuquerque, NM.......... 2,586 05/10/85 30 years
The Cornerstone
Tempe, AZ................ 5,833 07/19/85 30 years
Terracentre
Denver, CO............... 6,289 09/06/85 30 years
Oakpointe
Arlington Heights, IL.... 4,389 09/18/85 30 years
-------
TOTAL.................... $ 27,289
=======
</TABLE>
- ---------------
NOTE: Column G is not applicable.
See notes to schedule on following page.
25
<PAGE> 44
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO SCHEDULE III
(a) For a description of the properties, see "Item 2. Properties."
(b) At December 31, 1995, the General Partner determined that The Cornerstone,
Ladera I Shopping Center, Terracentre, Arlington Executive Plaza and
Washington Technical Center had carrying values greater than they had
appraised values less selling costs, and therefore provided a valuation
allowance of $4,770,000 against property held for sale.
At December 31, 1994, after evaluation of The Cornerstone, Terracentre, and
Oakpointe, the General Partner estimated a $5,500,000 impairment of value as
compared to their respective carrying values.
The aggregate cost of land, buildings and improvements for Federal income
tax purposes (unaudited) was $91,943,000 as of December 31, 1995. The
difference between the aggregate cost of land, buildings and improvements
for tax reporting purposes as compared to financial reporting purposes is
primarily attributable to: (1) amounts received under rental agreements for
non-occupied space, which were recorded as income for tax reporting purposes
but were recorded as a reduction of the corresponding property basis for
financial reporting purposes, and (2) the adjustments to the carrying value
of the real estate for financial statement purposes have no effect for tax
reporting purposes.
(c) The initial cost to the Partnership includes acquisition fees paid to the
General Partner. The Partnership's cost has also been reduced by amounts
received from sellers after acquisition under rental agreements for
non-occupied space.
(d) Amounts represent funds received from sellers subsequent to acquisition
under rental agreements for non-occupied space and include adjustments to
carrying value of real estate.
(e) RECONCILIATION OF REAL ESTATE
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year.............. $67,867,000 $72,657,000 $71,968,000
Additions during the year:
Improvements......................... 1,188,000 710,000 689,000
Reductions during the year:
Adjustment to the carrying value of
real estate........................ (4,770,000) (5,500,000) --
----------- ----------- -----------
Balance at end of year.................... $64,285,000 $67,867,000 $72,657,000
=========== =========== ===========
</TABLE>
RECONCILIATION OF ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year.............. $25,396,000 $23,258,000 $21,045,000
Depreciation expense.................... 1,893,000 2,138,000 2,213,000
----------- -----------
Balance at end of year.................... $27,289,000 $25,396,000 $23,258,000
=========== ===========
</TABLE>
(f) Through December 31, 1995, depreciation expense was computed based upon the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Buildings.................................. 30
Building improvements...................... 3 to 30
</TABLE>
26
<PAGE> 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership and the General Partner have no directors or executive
officers. The General Partner of the Partnership is Damson/Birtcher Partners, a
California general partnership of which Birtcher Partners, a California general
partnership, and LF Special Fund II, L.P., a California limited partnership, are
the general partners. Under the terms of the Partnership Agreement, Birtcher
Partners is responsible for the day-to-day management of the Partnership's
assets.
The general partner of LF Special Fund II, L.P., is Liquidity Fund Asset
Management, Inc., a California corporation affiliated with Liquidity Financial
Group, L.P. The principals and officers of Liquidity Fund Asset Management, Inc.
are as follows:
- Richard G. Wollack, Chairman of the Board
- Brent R. Donaldson, President
- Deborah M. Richard, Chief Financial Officer
The general partner of Birtcher Partners is Birtcher Investments, a
California general partnership. Birtcher Investments' general partner is
Birtcher Limited, a California limited partnership and its general partner is
BREICORP, a California corporation. The principals and relevant officers of
BREICORP are as follows:
- Ronald E. Birtcher, Co-Chairman of the Board
- Arthur B. Birtcher, Co-Chairman of the Board
- Robert M. Anderson, Executive Director
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the fees, compensation and other expense
reimbursements paid to the General Partner and its affiliates in all capacities
for each year in the three-year period ended December 31, 1995.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
General Partner's 1% share of distributable cash........ $ 8,000 $ 15,000 $ 19,000
Asset management fees................................... 304,000 353,000 351,000
Property management fees(1)............................. 161,000 167,000 32,000
Leasing fees............................................ 58,000 24,000 47,000
Property management expense reimbursements(1)........... 321,000 303,000 49,000
Other expense reimbursements............................ 226,000 191,000 182,000
---------- ---------- --------
TOTAL......................................... $1,078,000.. $1,053,000 $680,000
========== ========== ========
</TABLE>
- ---------------
(1) The General Partner did not provide property management services to the
Partnership's properties through October 31, 1993, and consequently, the
General Partner did not receive any similar compensation during the first
ten months of 1993.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of January 31, 1996, there was no entity or individual holding more than
5% of the limited partnership interests of the Registrant.
27
<PAGE> 46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning transactions to which the Registrant was or is
to be a party in which the General Partner or its affiliates had or are to have
a direct or indirect interest, see Notes 1 and 3 to the Financial Statements in
Item 8, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) 1. and 2. Financial Statements and Financial Statements Schedules:
See accompanying Index to Financial Statements and Schedules to Item 8,
which information is incorporated herein by reference.
3. EXHIBITS:
Articles of Incorporation and Bylaws
(a) The Amended and Restated Agreement of Limited Partnership
incorporated by reference to Exhibit A to the Partnership's prospectus
contained in the Partnership's registration statement on Form S-11
(Commission File No. 2-91065), dated June 22, 1985, as supplemented filed
under the Securities Act of 1933.
10. Material Contracts
(a) Revised Property Management Agreement dated April 2, 1985 between
Birtcher Properties and the Registrant for Certified Distribution
Center. Incorporated by reference to Exhibit 19(a)(4) of the
Partnership's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1985. (SUPERSEDED)
(b) Property Management Agreement dated May 10, 1985, between Birtcher
Properties and the Registrant for Ladera Shopping Center.
Incorporated by reference to Exhibit 19(a)(6) of the Partnership's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1985.
(SUPERSEDED)
(c) Property Management Agreement dated July 17, 1985, between
Birtcher Properties and the Registrant for The Cornerstone.
Incorporated by reference to Exhibit 19(a)(8) of the Partnership's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1985. (SUPERSEDED)
(d) Property Management Agreement dated September 6, 1985, between
Birtcher Properties and the Registrant for Terracentre.
Incorporated by reference to Exhibit 19(a)(10) of the
Partnership's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1985. (SUPERSEDED)
(e) Property Management Agreement dated September 16, 1985, between
Birtcher Properties and the Registrant for Oakpointe (formerly
Lincoln Atrium Center). Incorporated by reference to Exhibit
19(a)(12) of the Partnership's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1985. (SUPERSEDED)
(f) Property Management Agreement dated October 24, 1991, between
Glenborough Management Corporation and the Registrant for
Arlington Executive Plaza, Certified Distribution Center, The
Cornerstone, Ladera-I Shopping Center, Oakpointe, Terracentre and
Washington Technical Center. Incorporated by reference to Exhibit
1 of the Partnership's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1991. (SUPERSEDED)
(g) Agreement for Partnership administrative services dated October
24, 1991, between Glenborough Management Corporation and the
Registrant for the services described therein.
28
<PAGE> 47
Incorporated by reference to Exhibit 2 of the Partnership's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1991. (SUPERSEDED)
(h) Property Management Agreement, dated October 29, 1993, between
Birtcher Properties and the Registrant for Arlington Executive
Plaza, Certified Distribution Center, The Cornerstone, Ladera-I
Shopping Center, Oakpointe, Terracentre, and Washington Technical
Center. Incorporated by reference to Exhibit 1 of the Partnership
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
(27) Financial Data Schedule
b) Reports on Form 8-K:
None.
29
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the Undersigned, thereunto duly authorized.
DAMSON/BIRTCHER REALTY INCOME FUND-I
By: DAMSON/BIRTCHER PARTNERS By: BIRTCHER PARTNERS,
(General Partner) a California general partnership
By: BIRTCHER INVESTMENTS,
a California general partnership,
General Partner of Birtcher
Partners
By: BIRTCHER LIMITED,
a California limited
partnership,
General Partner of Birtcher
Investments
By: BREICORP,
a California corporation,
formerly known as Birtcher
Real Estate Inc., General
Partner of Birtcher Limited
Date: March 30, 1996 By: /s/ ROBERT M. ANDERSON
----------------------------
Robert M. Anderson
Executive Director
BREICORP
By: LF Special Fund II, L.P.,
a California limited partnership
By: Liquidity Fund Asset Management,
Inc.,
a California corporation, General
Partner of LF Special
Fund II, L.P.
Date: March 30, 1996 By: /s/ BRENT R. DONALDSON
---------------------------------
Brent R. Donaldson
President
Liquidity Fund Asset
Management, Inc.
30
<PAGE> 49
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
Damson/Birtcher Partners (General Partner of the Registrant) and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ----------------------------------------------- ---------------------------- ---------------
<C> <S> <C>
/s/ ARTHUR B. BIRTCHER Co-Chairman of the Board -- March 30, 1996
- ----------------------------------------------- BREICORP
Arthur B. Birtcher
/s/ RONALD E. BIRTCHER Co-Chairman of the Board -- March 30, 1996
- ----------------------------------------------- BREICORP
Ronald E. Birtcher
/s/ RICHARD G. WOLLACK Chairman of Liquidity Fund March 30, 1996
- ----------------------------------------------- Asset Management, Inc.
Richard G. Wollack
</TABLE>
31
<PAGE> 50
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1996
COMMISSION FILE NUMBER 0-13563
DAMSON/BIRTCHER REALTY INCOME FUND -- I
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
PENNSYLVANIA 13-3264491
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
27611 LA PAZ ROAD, P.O. BOX A-1,
LAGUNA NIGUEL, CALIFORNIA 92677-0100
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(714) 643-7700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 12(g), 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve 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 ___
================================================================================
<PAGE> 51
DAMSON/BIRTCHER REALTY INCOME FUND-I
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets --
September 30, 1996 (Unaudited) and December 31, 1995........................ 3
Statements of Operations (Unaudited) --
Three and Nine Months Ended September 30, 1996 and 1995..................... 4
Statements of Cash Flows (Unaudited) --
Nine Months Ended September 30, 1996 and 1995............................... 5
Notes to Financial Statements (Unaudited)................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................... 8
PART II. OTHER INFORMATION........................................................... 12
</TABLE>
2
<PAGE> 52
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAMSON/BIRTCHER REALTY INCOME FUND-I
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------------ ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Properties held for sale (net of valuation allowance of
$6,640,000 in 1996 and $4,770,000 in 1995).................. $ 37,033,000 $ 36,996,000
Cash and cash equivalents..................................... 215,000 301,000
Accounts receivable (net of allowance for doubtful accounts of
$46,000 in 1996 and $63,000 in 1995)........................ 39,000 43,000
Accrued rent receivable....................................... 487,000 443,000
Prepaid expenses and other assets............................. 706,000 710,000
----------- -----------
$ 38,480,000 $ 38,493,000
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities...................... $ 932,000 $ 1,153,000
Secured loan(s) payable....................................... 3,679,000 3,116,000
----------- -----------
Total liabilities................................... 4,611,000 4,269,000
----------- -----------
Partners' capital (deficit):
Limited Partners............................................ 34,363,000 34,714,000
General Partner............................................. (494,000) (490,000)
----------- -----------
33,869,000 34,224,000
Commitments and contingencies................................. -- --
----------- -----------
$ 38,480,000 $ 38,493,000
=========== ===========
</TABLE>
- ---------------
Note: The balance sheet at December 31, 1995 has been prepared from the audited
financial statements as of that date.
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 53
DAMSON/BIRTCHER REALTY INCOME FUND-I
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Rental income................................... $1,590,000 $1,442,000 $4,737,000 $4,411,000
Interest income................................. 4,000 12,000 6,000 33,000
----------- ----------- ----------- -----------
Total revenues................................ 1,594,000 1,454,000 4,743,000 4,444,000
----------- ----------- ----------- -----------
EXPENSES
Operating expenses.............................. 429,000 475,000 1,318,000 1,338,000
Real estate taxes............................... 230,000 257,000 568,000 709,000
Depreciation and amortization................... 56,000 505,000 140,000 1,510,000
General and administrative...................... 230,000 243,000 708,000 728,000
Interest........................................ 84,000 72,000 240,000 218,000
Adjustment to carrying value of real estate..... 335,000 -- 1,870,000 --
----------- ----------- ----------- -----------
Total expenses................................ 1,364,000 1,552,000 4,844,000 4,503,000
----------- ----------- ----------- -----------
NET INCOME (LOSS)............................... $ 230,000 $ (98,000) $ (101,000) $ (59,000)
=========== =========== =========== ===========
NET INCOME (LOSS) ALLOCABLE TO:
General Partner............................... $ 2,000 $ (1,000) $ (1,000) $ (1,000)
=========== =========== =========== ===========
Limited Partners.............................. $ 228,000 $ (97,000) $ (100,000) $ (58,000)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 54
DAMSON/BIRTCHER REALTY INCOME FUND-I
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................................... $ (101,000) $ (59,000)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization.................................... 140,000 1,510,000
Adjustment to carrying value of real estate........................ 1,870,000 --
Changes in:
Additions to properties held for sale............................ (1,907,000) --
Accounts receivable.............................................. 4,000 51,000
Accrued rent receivable.......................................... (44,000) (26,000)
Prepaid expenses and other assets................................ (135,000) (106,000)
Accounts payable and accrued liabilities......................... (221,000) 95,000
--------- ----------
Net cash (used in) provided by operating activities................ (394,000) 1,465,000
Cash flows from investing activities:
Investments in real estate....................................... -- (514,000)
--------- ----------
Net cash used in investing activities.............................. -- (514,000)
Cash flows from financing activities:
Proceeds from secured loan....................................... 700,000 --
Secured loan payments............................................ (137,000) (125,000)
Distributions.................................................... (255,000) (766,000)
--------- ----------
Net cash provided by (used in) financing activities................ 308,000 (891,000)
Net (decrease) increase in cash and cash equivalents............... (86,000) 60,000
Cash and cash equivalents, beginning of period..................... 301,000 648,000
--------- ----------
Cash and cash equivalents, end of period........................... $ 215,000 $ 708,000
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 55
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS -- UNAUDITED
(1) ACCOUNTING POLICIES
The financial statements of Damson/Birtcher Realty Income Fund-I (the
"Partnership") included herein have been prepared by the General Partner,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. These financial statements include all adjustments which
are of a normal recurring nature and, in the opinion of the General Partner, are
necessary for a fair presentation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Partnership's annual report on Form 10-K for the year
ended December 31, 1995.
Earnings Per Unit
The Partnership Agreement does not designate investment interests in units.
All investment interests are calculated on a "percent of Partnership" basis, in
part to accommodate original reduced rates on sales commissions for
subscriptions in excess of certain specified amounts.
A Limited Partner who was charged a reduced sales commission or no sales
commission was credited with proportionately larger Invested Capital and
therefore had a disproportionately greater interest in the capital and revenues
of the Partnership than a Limited Partner who paid commissions at a higher rate.
As a result, the Partnership has no set unit value as all accounting, investor
reporting and tax information is based upon each investor's relative percentage
of Invested Capital. Accordingly, earnings or loss per unit is not presented in
the accompanying financial statements.
Carrying Value of Real Estate
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("FAS 121").
This Statement requires that if the General Partner believes factors are present
that may indicate long-lived assets are impaired, the undiscounted cash flows,
before debt service, related to the assets should be estimated. If these
estimated cash flows are less than the carrying value of the asset, then
impairment is deemed to exist. If impairment exists, the asset should be written
down to the estimated fair value.
Further, assets held for sale, including any unrecoverable accrued rent
receivable or capitalized leasing commissions, should be carried at the lower of
carrying value or fair value less estimated selling costs. Any adjustment to
carrying value is recorded as a valuation allowance against property held for
sale. Each reporting period, the General Partner will review its estimates of
fair value, which may be decreased or increased up to the original carrying
value. Finally, assets held for sale are no longer depreciated. The General
Partner adopted FAS 121 at December 31, 1995 and the adoption did not have a
material impact on the Partnership's operations or financial position, as prior
to December 31, 1995, the Partnership had not had any properties held for sale.
As noted above, as of December 31, 1995 the General Partner decided to
account for the Partnership's properties as assets held for sale, instead of for
investment. Assuming an average 12 month holding period, the General Partner
compared the carrying value of each property to its appraised value as of
January 1, 1996. If the carrying value of a property and certain related assets
was greater than its appraised value, less selling costs, the General Partner
reduced the carrying value of the property by the difference. Using this
methodology, as of December 31, 1995, the General Partner determined that The
Cornerstone, Ladera I Shopping Center, Terracentre, Arlington Executive Plaza
and Washington Technical Center had carrying values greater than their appraised
values, and accordingly reduced those carrying values by $1,600,000,
6
<PAGE> 56
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS -- UNAUDITED (CONTINUED)
$560,000, $590,000, $1,250,000 and $770,000 to $9,032,000, $6,234,000,
$2,397,000, $2,740,000 and $2,612,000, respectively.
For the three and nine months ended September 30, 1996, the Partnership
spent an aggregate of approximately $335,000 and $1,870,000, respectively,
related to tenant/building improvements and leasing commissions with respect to
the aforementioned properties. Because these expenditures exceeded the estimate
of fair value of each of those properties as of December 31, 1995, the General
Partner adjusted the carrying value of the Partnership's portfolio by an
aggregate of $1,870,000 for the nine months ending September 30, 1996.
(2) TRANSACTIONS WITH AFFILIATES
The Partnership has no employees and, accordingly, the General Partner and
its affiliates perform services on behalf of the Partnership in connection with
administering the affairs of the Partnership. The General Partner and affiliates
are reimbursed for their general and administrative costs actually incurred and
associated with services performed on behalf of the Partnership. For the three
months ended September 30, 1996 and 1995, the Partnership incurred approximately
$49,000 and $49,000, respectively, of such expenses. For the nine months ended
September 30, 1996 and 1995, such payments were $147,000 and $157,000
respectively.
An affiliate of the General Partner provides property management services
with respect to the Partnership's properties and receives a fee for such
services not to exceed 3% of the gross receipts from the properties under
management. Such fees amounted to approximately $46,000 and $39,000 for the
three months ended September 30, 1996 and 1995, respectively, and $135,000 and
$116,000 for the nine months ended September 30, 1996 and 1995. In addition, an
affiliate of the General Partner received $89,000 and $79,000 for the three
months ended September 30, 1996 and 1995, respectively, as reimbursement of
costs of on-site property management personnel and other reimbursable costs. For
the nine months ended September 30, 1996 and 1995, such payments were $284,000
and $243,000, respectively.
As previously reported, on June 24, 1993, the Partnership completed its
solicitation of written consent from its Limited Partners. A majority in
interest of the Partnership's Limited Partners approved each of the proposals
contained in the Information Statement dated May 5, 1993. Those proposals have
been implemented by the Partnership as contemplated by the Information Statement
as amendments to the Partnership Agreement, and are reflected in these financial
statements as such.
The Amended Partnership Agreement provides for the Partnership's payment to
the General Partner of an annual asset management fee equal to .75% of the
aggregate appraised value of the Partnership's properties as determined by
independent appraisal undertaken in January of each year. Such fees for the
three months ended September 30, 1996 and 1995, amounted to $76,000 and $76,000,
respectively. For the nine months there ended, such fees amounted to $227,000
and $228,000, respectively.
In addition, the Amended Partnership Agreement provides for payment to the
General Partner of a leasing fee for services rendered in connection with
leasing space in a Partnership property after the expiration or termination of
leases. Fees for leasing services for the three months ended September 30, 1996
and 1995, amounted to $5,000 and $21,000, respectively, and for the nine months
there ended they amounted to $13,000 and $28,000, respectively.
7
<PAGE> 57
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS -- UNAUDITED (CONTINUED)
(3) COMMITMENTS AND CONTINGENCIES
Litigation
The Partnership is not a party to any material pending legal proceedings
other than ordinary routine litigation incidental to its business. It is the
General Partner's belief that the outcome of these proceedings will not be
material to the business or financial condition of the Partnership.
(4) SUBSEQUENT EVENTS
In August 1996, the General Partner entered into a contract to sell
Arlington Executive Plaza for $3,041,250. The property is currently in escrow
and is scheduled to close on or before November 30, 1996. Proceeds from the sale
will be used to retire the existing debt on Ladera-I Shopping Center
(approximately $700,000) with any remainder being distributed to the Limited
Partners.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Since completion of its acquisition program in September 1985, the
Partnership has been engaged primarily in the operation of its properties. The
Partnership's objective has been to hold its properties as long-term
investments, although properties may be sold at any time depending upon the
General Partner's judgment of the anticipated remaining economic benefits of
continued ownership. Working capital is and will be provided principally from
the operation of the Partnership's properties and the working capital reserve
established for the properties. The Partnership may incur mortgage indebtedness
relating to such properties by borrowing funds primarily to fund capital
improvements or to obtain financing proceeds for distribution to the partners.
On July 30, 1993, the Partnership obtained a loan secured by a First Deed
of Trust on the Certified Distribution Center in Salt Lake City, Utah. The loan,
in the amount of $3,500,000, carries a fixed interest rate of 9% per annum over
a 13-year fully amortizing term. The Partnership's first payment of $38,138.82
was paid on September 1, 1993, with monthly installments due thereafter.
Proceeds from that loan, along with $500,000 of Partnership cash reserves, were
used to retire the Partnership's then existing debt of $4,000,000.
In March 1996, the Partnership entered into a loan agreement pursuant to
which it may borrow up to $1,500,000, evidenced by a note secured by a first
deed of trust and financing statement on the Ladera-I Shopping Center in
Albuquerque, New Mexico. Pursuant to the note and loan agreement, until March 3,
1997 the Partnership is to pay interest only at the rate of 1% over prime
(currently, the loan rate is 9.25%) on the amounts it borrows. Thereafter, the
outstanding balance of all advances made under the note is to be converted to a
fully amortizing loan payable in 24 equal monthly payments of principal plus
accrued interest, commencing April 3, 1997. The Partnership has agreed to repay
the loan from the first sale of the Partnership's property. The net proceeds of
the foregoing loan are to be used to fund a portion of the renovation and tenant
improvements at The Cornerstone and tenant improvements at Oakpointe, with any
remainder added to the Partnership's working capital reserves. As of September
30, 1996, the Partnership had borrowed $700,000 pursuant to the aforementioned
loan agreement to fund a portion of the renovation at The Cornerstone Shopping
Center, which was completed during the second quarter of 1996. There will be
additional costs for tenant improvements as the vacant space in the center is
leased.
Certain of the Partnership's properties are not fully leased. The
Partnership is actively marketing the vacant space in these properties, subject
to the competitive environment in each of their respective market areas. To the
extent the Partnership is not successful in maintaining or increasing occupancy
levels at these properties, the Partnership's future cash flow may be reduced.
8
<PAGE> 58
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS -- UNAUDITED (CONTINUED)
Distributions through September 30, 1996 represent cash flow generated from
operations of the Partnership's properties and interest earned on the temporary
investment of working capital net of capital reserve requirements. Future cash
distributions will be made principally to the extent of cash flow attributable
to operations and sales of the Partnership's properties and interest earned on
the investment of capital reserves, after loan repayments, capital improvements
and providing for future capital reserves.
In accordance with the terms of the Partnership Agreement, each year the
Partnership secures an independent appraisal of each of the Partnership's
properties as of January 1. Prior to the January 1, 1995 appraisals, the
independent appraiser had estimated each property's "Investment Value,"
utilizing a seven to ten-year cash flow model to estimate value based upon an
income approach.
The Amendment to the Partnership Agreement consented to by the Limited
Partners in June 1993 mandated, among other things, that the General Partner
seek a vote of (and provide an analysis and recommendation to) the Limited
Partners no later than December 31, 1996 regarding the prompt liquidation of the
Partnership in the event that properties with (then) current appraised values
(constituting at least one-half of the total (then) current appraised values) of
all of the Partnership's properties are not sold or under contract for sale by
the end of 1996.
Given that mandate, the General Partner requested that the appraiser
provide an assessment of value that reflects a shorter investment holding term.
Although the General Partner does not currently have a specific liquidation plan
for the Partnership's properties, it requested that the appraiser assume that
the entire portfolio would be sold over four years, in connection with the
January 1995 appraisals and over three years in connection with the January 1996
appraisals.
Using the shorter-term investment methodology that is consistent with the
mandate of the 1993 Amendment to the Partnership Agreement, the appraiser
estimated the value of the Partnership's properties at January 1, 1996 to be
$40,390,000, or $4,155 per $10,000 original investor subscription.
Over the past year, the General Partner has examined several alternative
methods to achieve the Partnership's goal of selling properties and liquidating
the Partnership at the earliest practicable time consistent with achieving
reasonable value for the Limited Partners' investment. As explained in the
Partnership's May 5, 1993 Information Statement, "achieving reasonable value"
has meant for the Partnership to balance receiving higher sales prices per
property than their 1993 values while at the same time not waiting forever to
sell at a theoretical "top of the market." Alternatives under consideration by
the General Partner may include a property-by-property liquidation or selling
all of the properties as a single portfolio. The General Partner has had
preliminary discussions regarding disposition, in whole or in part, of the
Partnership's properties with various potential purchasers of some or all of the
Partnership's portfolio.
In connection with its consideration of these alternatives, the General
Partner has decided to treat its properties as held for sale, instead of for
investment, for financial statement purposes. In accordance with Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the carrying
value of these properties was evaluated to ensure that each property was carried
on the Partnership's Balance Sheet at the lower of cost or fair value less
estimated selling costs. The General Partner estimated fair value for this
purpose based on appraisals performed as of January 1, 1996. However, fair value
can only be determined based upon sales to third parties and sales proceeds
could differ substantially.
Based upon the General Partner's survey of the current marketplace, the
General Partner believes, in fact, that in the relatively short term the
Partnership's properties could generate sales prices that, in the aggregate,
could be materially less than their aggregate appraised values based upon an
"Investment Value" appraisal model. The amount of the possible variance between
the aggregate appraised values and potential sales prices cannot be reliably
estimated at this time, because of the numerous variables that could affect the
9
<PAGE> 59
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS -- UNAUDITED (CONTINUED)
sales prices, including but not limited to the time frame in which the
properties must be sold, method of sale (property-by-property or single
transaction), prevailing capitalization rates at which comparable properties are
being sold at the time of the Partnership's sales, constantly changing local
market conditions and the state of leasing negotiations and capital expenditures
for the properties at the time of sale.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED
WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1995
The increases in rental income for the three and nine months ended
September 30, 1996, as compared to the corresponding periods in 1995, were
primarily attributable to the increase's in revenue at Oakpointe, Terracentre
and Arlington Executive Plaza. At Oakpointe, a new lease was successfully
negotiated with Symbol Technologies, Inc, encompassing 22,801 square feet, for a
five year term effective in February 1996. In addition, a new lease was
negotiated at Terracentre with Ragland Design Group, Inc., in July 1996,
encompassing 1,194 square feet for a three year term. At Arlington Executive
Plaza, new leases were successfully negotiated with Dawes Laboratories
encompassing 4,832 square feet in October 1995, Drs. Jessen, Wesley & Assoc.,
encompassing 1,620 square feet in November 1995, Tony Stallone Produce Co.,
encompassing 741 square feet in February 1996 and Associates in Psychotherapy
encompassing 1,724 square feet in July 1996.
The decrease in interest income from 1995 to 1996 was attributable to a
decrease in the average level of working capital available for short term
investments.
The decrease in real estate taxes for the three months ended September 30,
1996, as compared to the corresponding period in 1995 was primarily a result of
a decrease in real estate taxes at The Cornerstone.
The decrease in real estate taxes for the nine months ended September 30,
1996, as compared to the corresponding period in 1995, was primarily a result of
successful tax appeals at Arlington Executive Plaza and Oakpointe.
The decrease in operating expenses for the three months ended September 30,
1996, as compared to the corresponding period in 1995, resulted from several
factors. At The Cornerstone, legal and professional fees were reduced by
$25,000. At Arlington Executive Plaza, general building repair and maintenance,
electricity and painting costs decreased ($9,000). In addition, general building
repair and maintenance, electricity and space planning costs decreased at
Terracentre ($12,000) during the period.
The decrease in operating expenses for the nine months ended September 30,
1996, as compared to the corresponding period in 1995, was primarily
attributable to a decrease in utility costs, advertising and space planning at
The Cornerstone ($29,000).
The decreases in depreciation and amortization expenses for the three and
nine months ended September 30, 1996 as compared to the corresponding periods in
1995 were attributable to the adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," pursuant to which assets held for sale are
no longer depreciated.
For the nine months ended September 30, 1996, the carrying value of the
Partnership's portfolio was reduced by $1,870,000, which is representative of
the amount spent on building improvements, tenant improvements, leasing
commissions and other related assets at The Cornerstone, Ladera-I Shopping
Center, Terracentre, Arlington Executive Plaza and Washington Technical Center
during the period.
General and administrative expenses for the nine months ended September 30,
1996 and 1995, include charges of $387,000 and $414,000, respectively, from the
General Partner and its affiliates for services
10
<PAGE> 60
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS -- UNAUDITED (CONTINUED)
rendered in connection with administering the affairs of the Partnership and
operating the Partnership's properties. Also included in general and
administrative expenses for the nine months ended September, 1996 and 1995, are
direct charges of $321,000 and $314,000, respectively, relating to audit fees,
tax preparation fees, legal fees and professional services, liability insurance
expenses, costs incurred in providing information to the Limited Partners and
other miscellaneous costs.
The decreases in general and administrative expenses for the three and nine
months ended September 30, 1996, as compared to the corresponding periods in
1995, were primarily attributable to a decrease in leasing fees and appraisal
fees. The aforementioned decreases were partially offset by an increase in
professional services.
The increases in interest expenses for the three and nine months ended
September 30, 1996, as compared to the corresponding periods in 1995, were
attributable to a new loan arrangement that commenced in March 1996. Pursuant to
that arrangement, the Partnership borrowed $700,000 for which it is paying
interest only at 1% over the prime rate (currently 9.25%) on the outstanding
principal. Such interest amounted to $16,000 and $34,000 for the three and nine
months ended September 30, 1996, respectively.
11
<PAGE> 61
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
So far as is known to the General Partner, neither the Partnership nor its
properties are subject to any material pending legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
27 -- Financial Data Schedule
b) REPORTS ON FORM 8-K:
None filed in quarter ended September 30, 1996.
12
<PAGE> 62
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAMSON/BIRTCHER REALTY INCOME FUND-I
By: DAMSON/BIRTCHER PARTNERS By: BIRTCHER PARTNERS,
(General Partner) a California general partnership
By: BIRTCHER INVESTMENTS,
a California general partnership,
General Partner of Birtcher
Partners
By: BIRTCHER LIMITED,
a California limited partnership,
General Partner of Birtcher
Investments
By: BREICORP,
a California corporation,
formerly known as Birtcher
Real Estate Inc., General
Partner of Birtcher Limited
Date: November 12, 1996 By: /s/ ROBERT M. ANDERSON
----------------------------
Robert M. Anderson
Executive Director
BREICORP
By: LF Special Fund II, L.P.,
a California limited partnership
By: Liquidity Fund Asset Management,
Inc.,
a California corporation, General
Partner of LF Special Fund II, L.P.
Date: November 12, 1996 By: /s/ BRENT R. DONALDSON
---------------------------------
Brent R. Donaldson
President
Liquidity Fund Asset
Management, Inc.
13
<PAGE> 63
CONSENT CONSENT
DAMSON/BIRTCHER REALTY INCOME FUND-I
THIS CONSENT is solicited by and on behalf of the Partnership. The General
Partner recommends a vote "FOR" the Proposal.
THIS CONSENT WILL BE RECORDED IN ACCORDANCE WITH THE INSTRUCTIONS BELOW. IF NO
INSTRUCTIONS ARE INDICATED, BY YOUR SIGNATURE BELOW YOU WILL BE DEEMED TO HAVE
CONSENTED TO THE PROPOSAL AS RECOMMENDED BY THE GENERAL PARTNER.
A consent to a Proposal also will constitute your consent to all actions
necessary to consummate all transactions with respect to the Proposal
contemplated by the Consent Solicitation.
PLEASE MARK THE APPROPRIATE BOX:
With the General Partner's recommendation to dissolve the Partnership
and seek to sell and liquidate the remaining Partnership properties and wind up
the Partnership as soon as is practicable, consistent with selling the
Partnership's properties to the best advantage under the circumstances, I vote:
/ / FOR / / AGAINST / / ABSTAIN
The undersigned acknowledges receipt of the Consent Solicitation dated February
18, 1997 pertaining to the Proposal.
Dated:__________________, 1997
______________________________
Signature
______________________________
Signature (if held jointly)
------------------------------
Title
Please sign exactly as name
appears hereon. When interests
are held by joint accounts, both
should sign. When signing as an
attorney, an executor,
administrator, trustee or
guardian, please give full title
as such. If a corporation,
please sign in name by President
or other authorized officer. If
a Partnership, please sign in
partnership name by authorized
person.
PLEASE MARK, SIGN, DATE AND RETURN THIS CONSENT PROMPTLY USING THE ENCLOSED
PRE-PAID ENVELOPE TO: The Herman Group, Inc., 2128 San Jacinto Street, 26th
Floor, Dallas, Texas 75201. If you have any questions, please call the Investor
Relations Department at (800) 657-8844 or (214) 999-9593.
