<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------------
For Quarter Ended September 30, 1998
-------------------------------------------------------
Commission file number 0-13563
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DAMSON/BIRTCHER REALTY INCOME FUND - I
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 13-3264491
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27611 La Paz Road, P.O. Box 30009, Laguna Niguel, California 92607-0009
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(949) 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> 2
DAMSON/BIRTCHER REALTY INCOME FUND-I
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Net Assets in Liquidation - September 30, 1998
(Unaudited)and December 31, 1997 (Audited)............................... 3
Statements of Changes of Net Assets in Liquidation -
Three Months Ended September 30, 1998 and 1997 and Nine Months
Ended September 30, 1998(Unaudited)...................................... 4
Statement of Operations (Unaudited) -
Three Months Ended March 31, 1997........................................ 5
Statement of Cash Flows (Unaudited) -
Three Months Ended March 31, 1997........................................ 6
Notes to Financial Statements (Unaudited)................................ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................ 12
PART II. OTHER INFORMATION........................................................ 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
DAMSON/BIRTCHER REALTY INCOME FUND-I
STATEMENTS OF NET ASSETS IN LIQUIDATION
---------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
ASSETS (Liquidation Basis): (unaudited)
- ---------------------------
<S> <C> <C>
Properties $34,327,000 $36,090,000
Cash and cash equivalents 456,000 461,000
Accounts receivable, net 43,000 100,000
Other assets 224,000 99,000
----------- -----------
Total Assets 35,050,000 36,750,000
----------- -----------
LIABILITIES (Liquidation Basis):
- --------------------------------
Accounts payable and accrued liabilities 935,000 945,000
Secured loan payable 2,566,000 2,730,000
Accrued expenses for liquidation 1,049,000 1,049,000
----------- -----------
Total Liabilities 4,550,000 4,724,000
----------- -----------
Net Assets in Liquidation $30,500,000 $32,026,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
DAMSON/BIRTCHER REALTY INCOME FUND-I
STATEMENTS OF CHANGES OF NET ASSETS IN LIQUIDATION
(UNAUDITED)
--------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Three Months Ended Ended
September 30, September 30,
1998 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Net assets in liquidation at beginning
of period $29,922,000 $32,081,000 $32,026,000
Increase (decrease) during period:
Operating activities:
Property operating income, net 922,000 859,000 2,514,000
Interest income 3,000 8,000 9,000
General and administrative expenses (240,000) (304,000) (748,000)
Interest expense on mortgage payable (59,000) (63,000) (179,000)
Leasing commissions (48,000) (61,000) (266,000)
----------- ----------- -----------
578,000 439,000 1,330,000
----------- ----------- -----------
Liquidating activities:
Adjustment to the carrying value
of properties in liquidation -- -- (2,600,000)
Distributions to partners -- (256,000) (256,000)
----------- ----------- -----------
-- (256,000) (2,856,000)
----------- ----------- -----------
Net increase (decrease) in assets
in liquidation 578,000 183,000 (1,526,000)
----------- ----------- -----------
Net assets in liquidation at end
of period $30,500,000 $32,264,000 $30,500,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
DAMSON/BIRTCHER REALTY INCOME FUND-I
STATEMENT OF OPERATIONS
(UNAUDITED)
------------------------------------
<TABLE>
<CAPTION>
For the
Three Months
Ended
3/31/97
------------
<S> <C>
REVENUES
--------
Rental income $1,479,000
Interest income 10,000
----------
Total revenues 1,489,000
----------
EXPENSES
--------
Operating expenses 377,000
Real estate taxes 201,000
Amortization 70,000
General and administrative 369,000
Interest 66,000
----------
Total expenses 1,083,000
----------
NET INCOME $ 406,000
==========
NET INCOME ALLOCABLE TO:
General Partner $ 4,000
==========
Limited Partners $ 402,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
DAMSON/BIRTCHER REALTY INCOME FUND-I
STATEMENT OF CASH FLOWS
(UNAUDITED)
------------------------------------
<TABLE>
<CAPTION>
For the
Three Months
Ended
March 31, 1997
--------------
<S> <C>
Cash flows from operating activities:
Net income $ 406,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Amortization 70,000
Changes in:
Accounts receivable (48,000)
Prepaid expenses and other assets 112,000
Accrued rent receivable 6,000
Accounts payable and accrued liabilities (146,000)
---------
Net cash provided by operating activities 400,000
Cash flows from investing activities:
Investments in real estate (34,000)
---------
Net cash used in investing activities (34,000)
Cash flows from financing activities:
Principal payments on secured loan payable (49,000)
Distributions (255,000)
---------
Net cash used in financing activities (304,000)
Net increase in cash and cash equivalents 62,000
Cash and cash equivalents, beginning of
period 711,000
---------
Cash and cash equivalents, end of period $ 773,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
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, 1997.
Liquidation Basis of Accounting
On February 18, 1997, the Partnership mailed a Consent Solicitation to
the Limited Partners which sought their consent to dissolve the
Partnership and sell and liquidate all of its remaining properties as
soon as practicable, consistent with selling the Partnership's
properties to the best advantage under the circumstances. A majority in
interest of the Limited Partners consented by March 14, 1997. As a
result, the Partnership adopted the liquidation basis of accounting as
of March 31, 1997. The liquidation basis of accounting is appropriate
when liquidation appears imminent, the Partnership can no longer be
classified as a going concern and the net realizable values of the
Partnership's assets are reasonably determinable. The difference between
the adoption of the liquidation basis of accounting as of March 14, 1997
and March 31, 1997 was not material.
Under the liquidation basis of accounting, assets are stated at their
estimated net realizable values and liabilities are stated at their
anticipated settlement amounts. The valuation of assets and liabilities
necessarily requires many estimates and assumptions, and there are
substantial uncertainties in carrying out the dissolution of the
Partnership. The actual values upon dissolution and costs associated
therewith could be higher or lower than the amounts recorded.
The Partnership adopted the liquidation basis of accounting on March 31,
1997. Comparison of results of operations to prior years through March
31, 1997, therefore, is not practical. The Statements of Net Assets in
Liquidation and Statements of Changes of Net Assets in Liquidation
reflect the Partnership in the process of liquidation. Prior financial
statements reflect the Partnership as a going concern.
Sale of the Properties
On April 30, 1998, the General Partner accepted an offer to purchase all
of the Partnership's properties for $39,140,000, subject to customary
contingencies, including due diligence review by the purchaser and
negotiation of a definitive Purchase and Sale Agreement (the "Purchase
Offer"). At that time, the buyer, Abbey Investments, Inc. ("Abbey"),
anticipated closing the transaction in approximately 60-90 days.
7
<PAGE> 8
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
- ---------------------------------------------------
(1) Accounting Policies (Cont'd.)
-------------------
Sale of the Properties (Cont'd.)
Since that time, the General Partner and the buyer have been working to
finalize a definitive Purchase and Sale Agreement, and that negotiation
culminated in an executed agreement dated as of November 9, 1998.
As previously reported, several of the Partnership's properties,
including The Cornerstone (76% leased), Certified Distribution Center
(39% leased), Ladera-I Shopping Center (80% leased) and Oakpointe (91%
leased) have not performed to expectations. As a consequence, the buyer
has reduced its offer, based upon lower than expected revenue and the
anticipated cost to reconfigure, build out and lease-up these
properties. As a result, the parties have agreed to a final purchase
price range between $34,500,000 and $36,000,000, depending upon final
occupancy rates at the time of closing, as described below. Based upon
an aggregate price of $34,500,000, the purchase price would be allocated
as follows:
<TABLE>
<CAPTION>
---------------------------------------------- --------------------- -----------------
PROPERTIES PURCHASE PRICE DISPOSITION
FEES EARNED
----------------------------------------------- --------------------- -----------------
<S> <C> <C>
Certified Distribution Center $ 6,500,000 -0-
----------------------------------------------- --------------------- -----------------
The Cornerstone 7,700,000 -0-
----------------------------------------------- --------------------- -----------------
Terracentre 3,300,000 $82,500
----------------------------------------------- --------------------- -----------------
Ladera-I Shopping Center 5,400,000 -0-
----------------------------------------------- --------------------- -----------------
Oakpointe 7,100,000 -0-
----------------------------------------------- --------------------- -----------------
Washington Technical Center 4,500,000 $112,500
----------------------------------------------- --------------------- -----------------
Total $34,500,000 $195,000
----------------------------------------------- --------------------- -----------------
</TABLE>
Deposit. Abbey will deposit into an interest-bearing escrow an initial
deposit of $200,000. This deposit plus all interest earned is refundable
to Abbey (less one-half of any escrow charges) until the Partnership has
satisfied all of its presale obligations or those obligations are waived
by Abbey, or until January 23, 1999. Thereafter, the deposit is
nonrefundable and it and all interest earned shall be applied to the
payment of the purchase price.
Conditions. The close of the sale is subject to, among other things,
Abbey's approval of title conditions, review of operating documents and
reports, physical inspection of the properties, and receipt of tenant
estoppel certificates. Escrow fees and costs will be shared equally; in
general, other costs will be borne in accordance with how those cost are
shared in each county in which the real property is located.
Default. If the Partnership defaults in its obligations under the
Purchase and Sale Agreements, Abbey may either (i) terminate the
agreements, take back its deposit plus any interest earned, and receive
from the Partnership Abbey's actual out-of-pocket expenses, including
reasonable attorneys fees and costs or (ii) seek specific performance of
the agreements. If Abbey defaults after the contingency period, the
Partnership is entitled to keep the deposit plus any interest earned.
Abbey and the Partnership have also agreed to refer any disputes to a
retired judge or other private arbitrator should a dispute arise.
8
<PAGE> 9
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
- ---------------------------------------------------
(1) Accounting Policies (Cont'd.)
-------------------
Sale of the Properties (Cont'd.)
Price adjustments; vacant space; earnout. The purchase price will be
between $34,500,000 and $36,000,000, depending upon whether or not
certain space in the Partnership's properties that is currently vacant
or soon-to-be-vacant is leased before closing. The General Partner and
Abbey have agreed on a formula that, in general, credits the Partnership
for new leases on certain vacant space, or expanding certain current
leases, prior to closing. According to this formula, the purchase price
will never drop below $34,500,000 nor rise above $36,000,000. A sale in
this price range will provide Limited Partners with a final distribution
of approximately $306 to $322 per $1,000 original investment.
Disposition fees. Pursuant to the Partnership Agreement, the General
Partner will earn a Disposition Fee of 2.5% of the sale price of certain
properties, as set forth in the table above. The amount of the fee will
vary depending upon the final sale price of each property. The General
Partner will not receive any other fees or distribution of proceeds from
the sale of the properties to Abbey.
Management agreement. At closing, Abbey will enter into a property
management agreement with Birtcher Property Services ("BPS") to manage
all of the Partnership's properties, plus the properties currently owned
by Damson/Birtcher Realty Income Fund-II and Real Estate Income Partners
III. BPS is an affiliate of Birtcher Partners. BPS has no relationship
or affiliation with Liquidity Fund or any of its affiliates.
The property management agreement has a three year term, during which
time BPS will be Abbey's exclusive agent to lease, operate and maintain
the properties. For these services, Abbey will pay BPS an annual asset
management fee based on performance of the properties measured by the
net operating income they generate. The asset management fee will never
be greater than an amount equal to 1% of the final sales price of each
property as set forth in the Purchase and Sale Agreements. In addition,
Abbey will pay BPS a property management fee equal to 3% of gross rents
collected, and leasing fees of 6.5% of total lease consideration (less
third-party brokerage commissions, which are expected to be 5-6%) for
new leases and 2% (0% if third-party brokers are involved) for renewals.
BPS will be responsible for all of its costs and expenses associated
with performing pursuant to the management agreement. The agreement
(covering all of the Partnership's properties plus those of
Damson/Birtcher Realty Income Fund-II and Real Estate Income Partners
III) may be terminated without cause by Abbey at any time six months
after closing. Termination requires 60 days notice and payment of a
termination fee that approximates a 1% asset management fee, plus a 3%
property management fee, for the remainder of the term that is equal to
$2.7 million, less $100,000 for each month of the contract term that has
expired.
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
9
<PAGE> 10
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
- ---------------------------------------------------
(1) Accounting Policies (Cont'd.)
-------------------
Earnings Per Unit (Cont'd.)
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.
(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, 1998 and 1997, the Partnership incurred approximately
$25,000 and $43,000, respectively. For the nine months there ended, such
expenses were $115,000 and $122,000, 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 $47,000
and $42,000 for the three months ended September 30, 1998 and 1997,
respectively. For the nine months there ended, these fees amounted to
$133,000 and $123,000, respectively. In addition, an affiliate of the
General Partner received $76,000 and $79,000 for the three months ended
September 30, 1998 and 1997, respectively, as reimbursement of costs of
on-site property management personnel and other reimbursable costs. For
the nine months there ended, such reimbursements were $236,000 and
$236,000, respectively.
As previously reported, on June 24, 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 were 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 .55%
for 1998 and .65% for 1997 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, 1998 and 1997, amounted to $52,000 and $61,000,
respectively. For the nine months there ended, these fees amounted to
$157,000 and $184,000, respectively.
10
<PAGE> 11
DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENT - UNAUDITED (Cont'd.)
- --------------------------------------------------
2) Transactions with Affiliates (Cont'd.)
----------------------------
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, 1998 and 1997, amounted to $8,000 and $16,000,
respectively. For the nine months there ended, such fees were $43,000
and $25,000, respectively.
(3) Commitments and Contingencies
-----------------------------
Litigation
On March 25, 1997, a limited partner named Bigelow/Diversified Secondary
Partnership Fund 1990 filed a purported class action lawsuit in the
Court of Common Pleas of Philadelphia County against Damson/Birtcher
Partners, Birtcher Investors, Birtcher/Liquidity Properties, Birtcher
Investments, L.F. Special Fund II, L.P., L.F. Special Fund I, L.P.,
Arthur Birtcher, Ronald Birtcher, Robert Anderson, Richard G. Wollack
and Brent R. Donaldson alleging breach of fiduciary duty and breach of
contract and seeking to enjoin the Consent Solicitation dated February
18, 1997. On April 18, 1997, the court denied the plaintiff's motion for
a preliminary injunction. On June 10, 1997, the court dismissed the
plaintiff's complaint on the basis of lack of personal jurisdiction and
forum non conveniens.
In September 1998, Bigelow/Diversified Secondary Partnership 1990
informed the Partnership that it was filing suit in the Delaware
Chancery Court against Damson/Birtcher Partners, Birtcher Investors,
Birtcher Liquidity Properties, Birtcher Investments, BREICORP, LF
Special Fund I, LP, LF Special Fund II. LP, Arthur Birtcher, Ronald
Birtcher, Robert Anderson, Richard G. Wollack and Brent R. Donaldson
alleging a purported class action on behalf of the limited partners of
Damson/Birtcher Realty Income Fund-I, Damson/Birtcher Realty Income
Fund-II and Real Estate Income Partners III alleging breach of fiduciary
duty and incorporating the allegations set forth in the previously
dismissed March 25, 1998 complaint filed in the Court of Chancery of
Philadelphia County. One of the stated purposes of the Delaware
complaint is to enjoin the pending transaction with Abbey. Plaintiff has
engaged in preliminary discovery and the parties have held settlement
discussions. No motions are pending at this time.
(4) Accrued Expenses for Liquidation
--------------------------------
Accrued expenses for liquidation as of September 30, 1998, include
estimates of costs to be incurred in carrying out the dissolution and
liquidation of the Partnership. These costs include estimates of legal
fees, accounting fees, tax preparation and filing fees, other
professional services, the general partner's liability insurance and the
pre-payment penalty associated with the anticipated early retirement of
the mortgage loan secured by the Certified Distribution Center property.
The actual costs could vary significantly from the related provisions
due to the uncertainty related to the length of time required to
complete the liquidation and dissolution and the complexities which may
arise in disposing of the Partnership's remaining assets.
11
<PAGE> 12
DAMSON/BIRTCHER REALTY INCOME FUND-I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
Liquidity and Capital Resources
-------------------------------
Since the completion of its acquisition program in September 1985, the
Partnership has been engaged in the operation of its properties. The
Partnership's original objective had been to hold its properties as
long-term investments. However, an Information Statement, dated May 5,
1993, mandated that the General Partner 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 were not
sold or under contract for sale by the end of 1996. Given the mandate of
the May 5, 1993 Information Statement, 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. In a Consent
Solicitation dated February 18, 1997, the Partnership solicited and
received the consent of the Limited Partners on March 14, 1997 to
dissolve the Partnership and sell and liquidate all of its remaining
properties as soon as practicable, consistent with selling the
Partnership's properties to the best advantage under the circumstances.
The Partnership's properties were held for sale throughout 1997 and
continue to be held for sale.
On April 30, 1998, the General Partner accepted an offer to purchase all
of the Partnership's properties for $39,140,000, subject to customary
contingencies, including due diligence review by the purchaser and
negotiation of a definitive Purchase and Sale Agreement (the "Purchase
Offer"). At that time, the buyer anticipated closing the transaction in
approximately 60-90 days.
Since that time, the General Partner and the buyer have been working to
finalize a definitive Purchase and Sale Agreement, and that negotiation
culminated in an executed agreement dated as of November 9, 1998.
The prospective buyer (the "Purchaser") is Abbey Investments, Inc., an
affiliate of The Abbey Company. The Abbey Company is a Southern
California-based real estate operating company founded in 1990. The
Purchaser is not affiliated in any way with the Partnership or the
General Partner, or any of the General Partner's principals or
affiliates.
As previously reported, several of the Partnership's properties,
including The Cornerstone (76% leased), Certified Distribution Center
(39% leased), Ladera-I Shopping Center (80% leased) and Oakpointe (91%
leased) have not performed to expectations. As a consequence, the buyer
has reduced its offer, based upon lower than expected revenue and the
anticipated cost to reconfigure, build out and lease-up these
properties. As a result, the parties have agreed to a final purchase
price range between $34,500,000 and $36,000,000, depending upon final
occupancy rates at the time of closing, as described below. Based upon
an aggregate price of $34,500,000, the purchase price would be allocated
as follows:
12
<PAGE> 13
DAMSON/BIRTCHER REALTY INCOME FUND-I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (Cont'd.)
-----------------------
Liquidity and Capital Resources (Cont'd.)
-------------------------------
<TABLE>
<CAPTION>
---------------------------------------------- --------------------- -----------------
PROPERTIES PURCHASE PRICE DISPOSITION
FEES EARNED
----------------------------------------------- --------------------- -----------------
<S> <C> <C>
Certified Distribution Center $ 6,500,000 -0-
----------------------------------------------- --------------------- -----------------
The Cornerstone 7,700,000 -0-
----------------------------------------------- --------------------- -----------------
Terracentre 3,300,000 $82,500
----------------------------------------------- --------------------- -----------------
Ladera-I Shopping Center 5,400,000 -0-
----------------------------------------------- --------------------- -----------------
Oakpointe 7,100,000 -0-
----------------------------------------------- --------------------- -----------------
Washington Technical Center 4,500,000 $112,500
----------------------------------------------- --------------------- -----------------
Total $34,500,000 $195,000
----------------------------------------------- --------------------- -----------------
</TABLE>
Deposit. Abbey will deposit into an interest-bearing escrow an initial
deposit of $200,000. This deposit plus all interest earned is refundable
to Abbey (less one-half of any escrow charges) until the Partnership has
satisfied all of its presale obligations or those obligations are waived
by Abbey, or until January 23, 1999. Thereafter, the deposit is
nonrefundable and it and all interest earned shall be applied to the
payment of the purchase price.
Conditions. The close of the sale is subject to, among other things,
Abbey's approval of title conditions, review of operating documents and
reports, physical inspection of the properties, and receipt of tenant
estoppel certificates. Escrow fees and costs will be shared equally; in
general, other costs will be borne in accordance with how those cost are
shared in each county in which the real property is located.
Default. If the Partnership defaults in its obligations under the
Purchase and Sale Agreements, Abbey may either (i) terminate the
agreements, take back its deposit plus any interest earned, and receive
from the Partnership Abbey's actual out-of-pocket expenses, including
reasonable attorneys fees and costs or (ii) seek specific performance of
the agreements. If Abbey defaults after the contingency period, the
Partnership is entitled to keep the deposit plus any interest earned.
Abbey and the Partnership have also agreed to refer any disputes to a
retired judge or other private arbitrator should a dispute arise.
Price adjustments; vacant space; earnout. The purchase price will be
between $34,500,000 and $36,000,000, depending upon whether or not
certain space in the Partnership's properties that is currently vacant
or soon-to-be-vacant is leased before closing. The General Partner and
Abbey have agreed on a formula that in general, credits the Partnership
for new leases on certain vacant space, or expanding certain current
leases, prior to closing. According to this formula, the purchase price
will never drop below $34,500,000 nor rise above $36,000,000. A sale in
this price range will provide Limited Partners with a final distribution
of approximately $306 to $322 per $1,000 original investment.
Disposition fees. Pursuant to the Partnership Agreement, the General
Partner will earn a Disposition Fee of 2.5% of the sale price of certain
properties, as set forth in the table above. The amount of the fee will
13
<PAGE> 14
DAMSON/BIRTCHER REALTY INCOME FUND-I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (Cont'd.)
-------------
Liquidity and Capital Resources (Cont'd.)
-------------------------------
vary depending upon the final sale price of each property. The General
Partner will not receive any other fees or distribution of proceeds from
the sale of the properties to Abbey.
Management agreement. At closing, Abbey will enter into a property
management agreement with Birtcher Property Services ("BPS") to manage
all of the Partnership's properties, plus the properties currently owned
by Damson/Birtcher Realty Income Fund-II and Real Estate Income Partners
III. BPS is an affiliate of Birtcher Partners. BPS has no relationship
or affiliation with Liquidity Fund or any of its affiliates.
The property management agreement has a three year term, during which
time BPS will be Abbey's exclusive agent to lease, operate and maintain
the properties. For these services, Abbey will pay BPS an annual asset
management fee based on performance of the properties measured by the
net operating income they generate. The asset management fee will never
be greater than an amount equal to 1% of the final sales price of each
property as set forth in the Purchase and Sale Agreements. In addition,
Abbey will pay BPS a property management fee equal to 3% of gross rents
collected, and leasing fees of 6.5% of total lease consideration (less
third-party brokerage commissions, which are expected to be 5-6%) for
new leases and 2% (0% if third-party brokers are involved) for renewals.
BPS will be responsible for all of its costs and expenses associated
with performing pursuant to the management agreement. The agreement
(covering all of the Partnership's properties plus those of
Damson/Birtcher Realty Income Fund-II and Real Estate Income Partners
III) may be terminated without cause by Abbey at any time six months
after closing. Termination requires 60 days notice and payment of a
termination fee that approximates a 1% asset management fee, plus a 3%
property management fee, for the remainder of the term that is equal to
$2.7 million, less $100,000 for each month of the contract term that has
expired.
In contemplation of the proposed transaction, the General Partner
reduced the carrying value of properties in liquidation by $2,600,000 at
June 30, 1998. However, there can be no assurance that the proposed sale
of the properties will be completed.
Regular distributions through September 30, 1998 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, payment for capital improvements to the
Partnership's
14
<PAGE> 15
DAMSON/BIRTCHER REALTY INCOME FUND-I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (Cont'd.)
-------------
Liquidity and Capital Resources (Cont'd.)
-------------------------------
properties and providing for capital reserves.
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 and a
prepayment penalty of approximately $600,000 at current interest rates,
if fully paid off after July 1, 1998.
In March 1996, the Partnership entered into a loan agreement pursuant to
which it could borrow up to $1,500,000 (similar to a credit line
arrangement), 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, the Partnership
borrowed $700,000 in March 1996. The net proceeds of the foregoing loan
were used to fund a portion of the renovation and tenant improvements at
The Cornerstone and tenant improvements at Oakpointe. The Partnership
made interest only payments at the rate of 1% over prime (the loan rate
was 9.25%) through November 1996, when the entire balance was paid off
utilizing a portion of the proceeds from the sale of Arlington Executive
Plaza. The Partnership has the ability to borrow against this credit
facility (up to $1,500,000) through March 31, 1999.
Results of Operations for the Three Months Ended September 30, 1998
-------------------------------------------------------------------
Because the Partnership adopted the liquidation basis of accounting on
March 31, 1997, a comparison of the results of operations is not
practical. As the Partnership's assets (properties) are sold, the
results of operations will be generated from a smaller asset base, and
are therefore not comparable. The Partnership's operating results have
been reflected on the Statement of Changes of Net Assets in Liquidation
since March 31, 1997 (the date of adoption of the liquidation basis of
accounting).
For the three months ended September 30, 1998, the Partnership generated
$922,000 of net operating income from operations of its properties. The
increase in net operating income for the three months ended September
30, 1998 when compared to the same period in 1997 was primarily
attributable to an increase in rental income at The Cornerstone
($103,000) and the collection of an early lease termination fee at
Ladera-I Shopping Center($100,000). The aforementioned increases were
partially offset by a decrease in rental income at Certified
Distribution Center ($162,000) that resulted from lower occupancy in
1998.
In September and November 1997, Certified Warehouse and Transfer
Company, Inc. vacated Certified Distribution Center. Although the
General Partner successfully completed negotiation of a 123,074 square
foot lease with Quality Distribution effective March 1, 1998 at a rate
greater than before, the remaining 189,115 square foot vacancy will have
a negative impact on future distributions of cash from operations to the
Limited Partners.
Interest income resulted from the temporary investment of Partnership
working capital. For the three months ended September 30, 1998, interest
15
<PAGE> 16
DAMSON/BIRTCHER REALTY INCOME FUND-I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (Cont'd.)
-------------
Results of Operations for the Three Months Ended September 30, 1998
- -------------------------------------------------------------------
(Cont'd.)
income was approximately $3,000.
General and administrative expenses for the three months ended
September30, 1998, include charges of $85,000 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 for the three months ended September 30, 1998, are direct
charges of $155,000, 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 decrease in general and administrative expenses for the three months
ended September 30, 1998, as compared to the corresponding period in
1997, was primarily attributable to the decrease in legal, professional
services, asset management fees and administrative costs.
Accrued expenses for liquidation, as reflected in the Statements of Net
Assets in Liquidation since March 31, 1997, are not included in results
of operations for the three month period ended March 31, 1997. The
liquidation basis of accounting was adopted on March 31, 1997 therefore,
it was not appropriate to include such adjustments in the results of
operations for prior periods. Accrued expenses for liquidation as of
September 30, 1998, includes estimates of costs to be incurred in
carrying out the dissolution and liquidation of the Partnership. These
costs include estimates of legal fees, accounting fees, tax preparation
and filing fees, professional services, the general partner's liability
insurance and the pre-payment penalty associated with the anticipated
early retirement of the mortgage loan secured by the Certified
Distribution Center property. The actual costs could vary significantly
from the related provisions due to the uncertainty related to the length
of time required to complete the liquidation and dissolution and the
complexities which may arise in disposing of the Partnership's remaining
assets.
Interest expense resulted from interest on the first deed of trust on
Certified Distribution Center.
16
<PAGE> 17
DAMSON/BIRTCHER REALTY INCOME FUND-I
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 25, 1997, a limited partner named Bigelow/Diversified Secondary
Partnership Fund 1990 filed a purported class action lawsuit in the
Court of Common Pleas of Philadelphia County against Damson/Birtcher
Partners, Birtcher Investors, Birtcher/Liquidity Properties, Birtcher
Investments, L.F. Special Fund II, L.P., L.F. Special Fund I, L.P.,
Arthur Birtcher, Ronald Birtcher, Robert Anderson, Richard G. Wollack
and Brent R. Donaldson alleging breach of fiduciary duty and breach of
contract and seeking to enjoin the Consent Solicitation dated February
18, 1997. On April 18, 1997, the court denied the plaintiff's motion for
a preliminary injunction. On June 10, 1997, the court dismissed the
plaintiff's complaint on the basis of lack of personal jurisdiction and
forum non conveniens.
In September 1998, Bigelow/Diversified Secondary Partnership 1990
informed the Partnership that it was filing suit in the Delaware
Chancery Court against Damson/Birtcher Partners, Birtcher Investors,
Birtcher Liquidity Properties, Birtcher Investments, BREICORP, LF
Special Fund I, LP, LF Special Fund II. LP, Arthur Birtcher, Ronald
Birtcher, Robert Anderson, Richard G. Wollack and Brent R. Donaldson
alleging a purported class action on behalf of the limited partners of
Damson/Birtcher Realty Income Fund-I, Damson/Birtcher Realty Income
Fund-II and Real Estate Income Partners III alleging breach of fiduciary
duty and incorporating the allegations set forth in the previously
dismissed March 25, 1998 complaint filed in the Court of Chancery of
Philadelphia County. One of the stated purposes of the Delaware
complaint is to enjoin the pending transaction with Abbey. Plaintiff has
engaged in preliminary discovery and the parties have held settlement
discussions. No motions are pending at this time.
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, 1998.
17
<PAGE> 18
DAMSON/BIRTCHER REALTY INCOME FUND-I
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
<TABLE>
<CAPTION>
<S> <C>
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 10, 1998 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 10, 1998 By: /s/ Brent R. Donaldson
----------------------
Brent R. Donaldson
President
Liquidity Fund Asset Management, Inc.
</TABLE>
18
<PAGE> 19
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Statement of
Net Assets in Liquidation of Damson Birtcher Realty Income Fund-I and is
qualified in its entirety by reference to such 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 456,000
<SECURITIES> 0
<RECEIVABLES> 43,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 723,000
<PP&E> 34,327,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 35,050,000
<CURRENT-LIABILITIES> 1,984,000
<BONDS> 2,566,000
0
0
<COMMON> 0
<OTHER-SE> 30,500,000
<TOTAL-LIABILITY-AND-EQUITY> 35,050,000
<SALES> 0
<TOTAL-REVENUES> 0<F1>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0<F1>
<INCOME-TAX> 0<F1>
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0<F1>
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Statement of Operations is not presented in liquidation basis of accounting.
</FN>
</TABLE>
