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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 March 31, 1999
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Commission file number 0-13563
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DAMSON/BIRTCHER REALTY INCOME FUND - I
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(Exact name of registrant as specified in its charter)
Pennsylvania 13-3264491
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(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
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(Address of principal executive offices) (Zip Code)
(949) 643-7700
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(Registrant's telephone number, including area code)
N/A
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(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 [ ]
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DAMSON/BIRTCHER REALTY INCOME FUND-I
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1999
INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Net Assets in Liquidation - March 31, 1999
(Unaudited)and December 31, 1998 (Audited)..................... 3
Statements of Changes of Net Assets in Liquidation -
Three Months Ended March 31, 1999 and 1998 (Unaudited)......... 4
Notes to Financial Statements (Unaudited)...................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 10
Item 3. Quantitative and Qualitative Market Risk Disclosures........... 13
PART II. OTHER INFORMATION.............................................. 14
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAMSON/BIRTCHER REALTY INCOME FUND-I
STATEMENTS OF NET ASSETS IN LIQUIDATION
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
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(unaudited)
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ASSETS (Liquidation Basis):
Properties $34,444,000 $34,431,000
Cash and cash equivalents 502,000 351,000
Accounts receivable, net 37,000 171,000
Other assets 139,000 121,000
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Total Assets 35,122,000 35,074,000
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LIABILITIES (Liquidation Basis):
Accounts payable and accrued liabilities 873,000 896,000
Secured loan payable 2,450,000 2,509,000
Accrued expenses for liquidation (including
prepayment penalty) 873,000 873,000
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Total Liabilities 4,196,000 4,278,000
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Net Assets in Liquidation $30,926,000 $30,796,000
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</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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DAMSON/BIRTCHER REALTY INCOME FUND-I
STATEMENTS OF CHANGES OF NET ASSETS IN LIQUIDATION
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
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1999 1998
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<S> <C> <C>
Net assets in liquidation at beginning of period $ 30,796,000 $ 32,026,000
Increase (decrease) during period:
Operating activities:
Property operating income, net 667,000 681,000
Interest income 3,000 4,000
General and administrative expenses (208,000) (234,000)
Interest expense on mortgage payable (56,000) (61,000)
Leasing commissions (11,000) (108,000)
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395,000 282,000
Liquidating activities-
distributions to partners (265,000) (256,000)
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Net increase in assets in liquidation 130,000 26,000
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Net assets in liquidation at end of period $ 30,926,000 $ 32,052,000
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</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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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, 1998.
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.
Segment Reporting
The Partnership adopted Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 requires, among other items, that a
public business enterprise report a measure of segment profit or loss,
certain specific revenue and expense items, segment assets, information
about the revenues derived from the enterprise's products or services
and major customers. SFAS 131 also requires that the enterprise report
descriptive information about the way that the operating segments were
determined and the products and services provided by the operating
segments. Given that the Partnership is in the process of liquidation,
the Partnership has identified only one operating business segment
which is the business of asset liquidation. The adoption of SFAS 131 did
not have an impact on the Partnership's financial reporting.
Rental income from FISERV, Inc. (formerly d.b.a. Citicorp CIR, Inc.)
totaled $257,000 and $234,000 for the three months ended March 31, 1999
and 1998, or approximately 20% and 17% respectively of the Partnership's
total rental income.
Sale of the Properties
In November 1998, the Partnership entered into a definitive Purchase and
Sale Agreement with Abbey Investments, Inc. to sell all the
Partnership's properties for a range between $34,500,000 and
$36,000,000, depending on final occupancy rates at the time of closing.
However, in January 1999, the agreement was terminated because Abbey had
requested a material reduction in the purchase price, which the
Partnership did not agree to.
On March 24, 1999, the Partnership signed a Purchase and Sale Agreement
and Joint Escrow Instructions to sell Terracentre for a sale price of
$6,450,000. The purchaser is Halcyon Real Estate, Inc. ("Halcyon"), a
local Denver real estate development company that is not affiliated in
any way with the Partnership or the General Partner, or any of the
General Partner's principals or affiliates. Closing of the transaction
is subject to Halcyon's due diligence review and approval of title
conditions,
5
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DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(1) Accounting Policies (Cont'd.)
Sale of the Properties (Cont'd.)
environmental reports, physical and engineering inspections, and
operating documentation including leases, rental agreements and
contracts, personal property inventories, operating expenses, property
tax bills and physical plans and specifications for the property. The
purchaser deposited $250,000 into escrow on March 25, 1999, which sum is
fully refundable to the purchaser until completion of its due diligence
investigation. The due diligence period ends May 17, 1999, with closing
of the transaction currently scheduled to take place on June 2, 1999.
Halcyon will not hire the General Partner or any affiliate to perform
asset management or property management services for this property after
close of the sale.
On March 25, 1999, the Partnership signed a letter of intent with
Praedium Performance Fund IV ("Praedium") to sell all of its properties
except Terracentre to Praedium for $31,700,000. Praedium is a New
York-based investment firm affiliated with CS First Boston. Praedium is
not affiliated in any way with the Partnership or the General Partner,
or any of the General Partner's principals or affiliates. Praedium will
hire Birtcher or an affiliate as asset manager for the properties, and
pay an annual fee equal to .30% of the value of the assets for asset
management services. Also, Praedium will hire Birtcher or an affiliate
as property manager for these assets for a fee that is approximately the
same as the current fees paid to the General Partner for property
management.
On April 30, 1999, Praedium and the Partnership executed a definitive
Purchase and Sale Agreement for the price and on the terms contemplated
in the letter of intent, and Praedium deposited $243,100 into escrow.
The Agreement is subject to customary contingencies, including due
diligence inspection and review, approval of title conditions, receipt
of tenant estoppels and the like, and is subject to formal approval by
Praedium's "Investment Committee." Praedium's deposit is fully
refundable during the contingency period. The contingency period
currently expires on June 14, 1999, with closing of the transaction
currently scheduled for July 14, 1999.
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.
(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
6
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DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENT - UNAUDITED (Cont'd.)
(2) Transactions with Affiliates (Cont'd.)
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 March 31, 1999 and 1998, the
Partnership incurred approximately $33,000 and $40,000, 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 $42,000
and $42,000 for the three months ended March 31, 1999 and 1998,
respectively. In addition, an affiliate of the General Partner received
$86,000 and $73,000 for the three months ended March 31, 1999 and 1998,
respectively, as reimbursement of costs of on-site property management
personnel and other reimbursable costs.
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 .45%
for 1999 and .55% for 1998 of the aggregate appraised value of the
Partnership's properties as determined by independent appraisal
undertaken in January of 1998 and by the General Partner's estimate of
fair value in January 1999. Such fees for the three months ended March
31, 1999 and 1998, amounted to $39,000 and $52,000, 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 March 31, 1999 and 1998, amounted to $1,000 and $23,000,
respectively.
(3) Commitments and Contingencies
Litigation
So far as is known to the General Partner, neither the Partnership nor
its properties are subject to any material pending legal proceedings,
except for the following:
Bigelow/Diversified Secondary Partnership's Fund 1990 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,
7
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DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENT - UNAUDITED (Cont'd.)
(3) Commitments and Contingencies (Cont'd.)
Litigation (Cont'd.)
Bigelow Diversified Secondary Partnership Fund 1990 litigation (Cont'd.)
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.
On June 13, 1997, the Partnership's affiliated partnerships,
Damson/Birtcher Realty Income Fund-II and Real Estate Income Partners
III, and their general partner, Birtcher/Liquidity Properties, filed a
complaint for declaratory relief in the Court of Chancery in Delaware
against Bigelow/Diversified Secondary Partnership Fund 1990 L.P. The
complaint seeks a declaration that the vote that the limited partners of
Damson/Birtcher Realty Income Fund-II and Real Estate Income Partners
III took pursuant to the respective consent solicitations dated February
18, 1997 was effective to dissolve the respective partnerships and
complied with applicable law, that the actions of the General Partner in
utilizing the consent solicitations to solicit the vote of the limited
partners did not breach any fiduciary or contractual duty to such
limited partners, and an award of costs and fees to the plaintiffs. The
defendant has answered the complaint. The parties have initiated
discovery. No motions are pending at this time.
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, 1997 complaint filed in the Court of Chancery of
Philadelphia County. Plaintiff has engaged in preliminary discovery and
the parties have held settlement discussions. No motions are pending at
this time.
Rex Garton, et al. v. Damson/Birtcher Partners, et al.
------------------------------------------------------
This action was filed on September 25, 1998 in the District Court of
Oklahoma County for the State of Oklahoma against the Partnership's
general partner, Damson/Birtcher Partners, other related defendants and
numerous unrelated defendants. Damson/Birtcher Partners and other
related defendants were brought into the action in late December 1998,
when they were served with the Second Amended Petition. The other
related defendants are Birtcher Partners, Birtcher Properties, The
Birtcher Group, Birtcher American Properties, Arthur B. Birtcher, Ronald
E. Birtcher, LF Special Fund II, L.P., and Liquidity Fund Asset
Management Inc., but The Birtcher Group and Birtcher American Properties
have not been served with process and have not appeared in the action.
The Partnership itself is not named as a defendant. The case is a class
action brought on behalf of investors in the Partnership who purchased
limited partnership interests from May 7,
8
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DAMSON/BIRTCHER REALTY INCOME FUND-I
NOTES TO FINANCIAL STATEMENT - UNAUDITED (Cont'd.)
(3) Commitments and Contingencies (Cont'd.)
Litigation (Cont'd.)
Rex Garton, et al. v. Damson/Birtcher, et al. (Cont'd.)
1984 to September 17, 1985. The Second Amended Petition alleges breach
of contract, intentional and negligent misrepresentation, breach of
fiduciary duties, and violations of various Oklahoma and federal
statutes in connection with the sale of the limited partnership
interests. Plaintiff seeks unspecified compensatory damages and $10
million in punitive damages.
Damson/Birtcher Partners and the related defendants have removed the
case to the United States District Court for the Western District of
Oklahoma, and have filed a motion to dismiss the case for lack of
personal jurisdiction or, alternatively, to transfer the action to the
United States District Court for the Central District of California, for
the convenience of the parties and witnesses and in the interests of
justice. Plaintiff has moved to remand the case back to the Oklahoma
state court. Both motions are pending. Damson/Birtcher Partners and the
related defendants intend to present a vigorous defense on the merits of
plaintiff's claims, should this be necessary.
Madison Partnership and ISA Partnership Litigation
On April 2, 1999, Madison Partnership Liquidity Investors XVI, LLC and
ISA Partnership Liquidity Investors filed a purported class and
derivative action in the California Superior Court in Orange County,
California against Damson Birtcher Partners, Birtcher/Liquidity
Properties, Birtcher Partners, Birtcher Investors, Birtcher Investments,
Birtcher Limited, Breicorp LP Special Fund II, L.P., Liquidity Fund
Asset Management, Inc., Robert M. Anderson, Brent R. Donaldson, Arthur
B. Birtcher, Ronald E. Birtcher, and Richard G. Wollack, Defendants, and
Damson/Birtcher Realty Income Fund-I, Damson/Birtcher Realty Income
Fund-II, and Real Estate Income Partners III, Nominal Defendants. The
complaint asserts claims for breach of fiduciary duty and breach of
contract. The gravamen of the complaint is that the General Partners of
these limited partnerships have not undertaken all reasonable efforts to
expedite liquidation of the Partnerships' properties and to maximize the
returns to the Partnerships' limited partners. The complaint seeks
unspecified monetary damages, attorneys' fees and litigation expenses,
and an order for dissolution of the Partnerships and appointment of an
independent liquidating trustee. The Partnership has yet to respond to
the complaint, but intends to present a vigorous defense.
(4) Accrued Expenses for Liquidation
Accrued expenses for liquidation as of March 31, 1999, 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 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.
9
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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 1998 and
continue to be held for sale.
In November 1998, the Partnership entered into a Purchase and Sale
Agreement with Abbey Investments, Inc. to sell all the Partnership's
properties for a purchase price ranging between $34,500,000 and
$36,000,000, depending on final occupancy rates at the time of closing.
However, in January 1999, the agreement was terminated because Abbey had
requested a material reduction in the purchase price, which the
Partnership did not agree to.
On March 24, 1999, the Partnership signed a Purchase and Sale Agreement
and Joint Escrow Instructions to sell Terracentre for a sale price of
$6,450,000. The purchaser is Halcyon Real Estate, Inc. ("Halcyon"), a
local Denver real estate development company that is not affiliated in
any way with the Partnership or the General Partner, or any of the
General Partner's principals or affiliates. Closing of the transaction
is subject to Halcyon's due diligence review and approval of title
conditions, environmental reports, physical and engineering inspections,
and operating documentation including leases, rental agreements and
contracts, personal property inventories, operating expenses, property
tax bills and physical plans and specifications for the property. The
purchaser deposited $250,000 into escrow on March 25, 1999, which sum is
fully refundable to the purchaser until completion of its due diligence
investigation. The due diligence period ends May 17, 1999, with closing
of the transaction currently scheduled to take place on June 2, 1999.
Halcyon will not hire the General Partner or any affiliate to perform
asset management or property management services for this property after
close of the sale.
On March 25, 1999, the Partnership signed a letter of intent with
Praedium Performance Fund IV ("Praedium") to sell all of its properties
except Terracentre to Praedium for $31,700,000. Praedium is a New
York-based investment firm affiliated with CS First Boston. Praedium is
not affiliated in any way with the Partnership or the General Partner,
or any of the General Partner's principals or affiliates. Praedium will
hire Birtcher or an affiliate as asset manager for the properties, and
pay an annual fee
10
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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.)
equal to .30% of the value of the assets for asset management services.
Also, Praedium will hire Birtcher or an affiliate as property manager
for these assets for a fee that is approximately the same as the current
fees paid to the General Partner for property management.
On April 30, 1999, Praedium and the Partnership executed a definitive
Purchase and Sale Agreement for the price and on the terms contemplated
in the letter of intent, and Praedium deposited $243,100 into escrow.
The Agreement is subject to customary contingencies, including due
diligence inspection and review, approval of title conditions, receipt
of tenant estoppels and the like, and is subject to formal approval by
Praedium's "Investment Committee." Praedium's deposit is fully
refundable during the contingency period. The contingency period
currently expires on June 14, 1999, with closing of the transaction
currently scheduled for July 14, 1999.
Although there can be no assurance that the proposed sales of the
properties will be completed, if the sales are completed at the stated
prices, the limited partners will receive total aggregate sale proceeds
of approximately $345 per $1,000 originally invested in the Partnership.
The General Partner's estimate of sales proceeds does not take into
account the expenditure of Partnership cash reserves, operating expenses
or net income or loss of the Partnership for any period prior to the
time the remaining properties are sold, which could affect the amount of
sales proceeds available for distribution. Therefore, the actual
proceeds to be received by the limited partners may vary materially, up
or down, from the estimate.
Regular distributions through March 31, 1999 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 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 $700,000 at current interest rates.
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 April 2002 should its cash
requirements necessitate.
Other Matters
The Partnership is in the process of liquidating its remaining assets.
It is anticipated that a sale of those assets will occur on or before
January 1, 2000. It is the opinion of the General Partner that the value
of those assets is not subject to any valuation risk as a result of year
2000 issues, other than general economic climate issues that may arise.
Based on current information, the cost of addressing potential year 2000
problems is not expected to have a material adverse impact on the
Partnership's
11
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DAMSON/BIRTCHER REALTY INCOME FUND-I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd.)
Other Matters (Cont'd.)
financial position, results of operations or cash flows in future
periods. As of March 31, 1999, the investor services system used to
track the limited partners' interests, distributions and tax information
has been tested and appears to be free of year 2000 bugs. The
Partnership's properties are under review utilizing the Building Owners
and Managers Association ("BOMA") industry standards as a guideline for
necessary corrections and the Partnership's accounting systems are
scheduled for a software upgrade to correct any year 2000 issues in July
of 1999. The cost of the upgrades will be borne by the General Partner
and will not be reimbursed by the Partnership. In addition, the General
Partner has made inquiries of its banks, all of which indicate that any
problems have been addressed adequately by those institutions.
Even if attempts to correct any deficiencies in the Partnership's
software are unsuccessful, the General Partner anticipates that in the
short term it could convert its systems to standard spreadsheet or data
base programs at nominal costs.
Results of Operations for the Three Months Ended March 31, 1999
Because the Partnership is in the process of liquidating its remaining
assets, 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 Statements of Changes of Net Assets in Liquidation.
For the three months ended March 31, 1999, the Partnership generated
$667,000 of net operating income from operations of its properties. The
decrease in net operating income for the three months ended March 31,
1999 when compared to the same period in 1998 was primarily attributable
to the write off of $194,000 in uncollectable tenant rents at The
Cornerstone. This decrease was partially offset by an increase in
revenue at Certified Warehouse ($78,000), Washington Technical Center
($18,000) and Oakpointe ($57,000).
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 March 31, 1999, interest
income was approximately $3,000.
General and administrative expenses for the three months ended March 31,
1999, include charges of $73,000 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.
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.)
Results of Operations for the Three Months Ended March 31, 1999
(Cont'd.)
Also included in general and administrative expenses for the three
months ended March 31, 1999, are direct charges of $135,000, 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 March 31, 1999, as compared to the corresponding period in 1998,
was primarily attributable to decreases in the General Partner's
liability insurance, asset management fees and leasing fees during 1999.
The aforementioned decreases were partially offset by an increase in
legal fees incurred.
Accrued expenses for liquidation as of March 31, 1999, 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, other
professional services, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
The Partnership is not exposed to interest rate changes because its only
obligation outstanding at year end carries a fixed interest rate and the
Partnership expects to sell its properties within a short period of
time. The Partnership's interest rate risk management objective is to
limit the impact of interest rate changes on earnings and cash flows and
to lower its overall borrowing costs. To achieve its objectives, the
Partnership borrows primarily at fixed rates. The Partnership does not
enter into derivative or interest rate transactions for speculative
purposes.
13
<PAGE> 14
DAMSON/BIRTCHER REALTY INCOME FUND-I
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,
except for the following:
Bigelow Diversified Secondary Partnership Fund 1990 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.
On June 13, 1997, the Partnership's affiliated partnerships,
Damson/Birtcher Realty Income Fund-II and Real Estate Income Partners
III, and their general partner, Birtcher/Liquidity Properties, filed a
complaint for declaratory relief in the Court of Chancery in Delaware
against Bigelow/Diversified Secondary Partnership Fund 1990 L.P. The
complaint seeks a declaration that the vote that the limited partners of
Damson/Birtcher Realty Income Fund-II and Real Estate Income Partners
III took pursuant to the respective consent solicitations dated February
18, 1997 was effective to dissolve the respective partnerships and
complied with applicable law, that the actions of the General Partner in
utilizing the consent solicitations to solicit the vote of the limited
partners did not breach any fiduciary or contractual duty to such
limited partners, and an award of costs and fees to the plaintiffs. The
defendant has answered the complaint. The parties have initiated
discovery. No motions are pending at this time.
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, 1997 complaint filed in the Court of Chancery of
Philadelphia County. Plaintiff has engaged in preliminary discovery and
the parties have held settlement discussions. No motions are pending at
this time.
Rex Garton, et al. v. Damson/Birtcher Partners, et al.
This action was filed on September 25, 1998 in the District Court of
Oklahoma County for the State of Oklahoma against the Partnership's
general partner, Damson/Birtcher Partners, other related defendants and
numerous unrelated defendants. Damson/Birtcher Partners and other
related defendants were brought into the action in late December 1998,
when they were served with the Second Amended Petition. The other
related defendants
14
<PAGE> 15
DAMSON/BIRTCHER REALTY INCOME FUND-I
ITEM 1. LEGAL PROCEEDINGS (Cont'd.)
Rex Garton, et al. v. Damson/Birtcher Partners, et al. (Cont'd)
are Birtcher Partners, Birtcher Properties, The Birtcher Group, Birtcher
American Properties, Arthur B. Birtcher, Ronald E. Birtcher, LF Special
Fund II, L.P., and Liquidity Fund Asset Management Inc., but The
Birtcher Group and Birtcher American Properties have not been served
with process and have not appeared in the action. The Partnership itself
is not named as a defendant. The case is a class action brought on
behalf of investors in the Partnership who purchased limited partnership
interests from May 7, 1984 to September 17, 1985. The Second Amended
Petition alleges breach of contract, intentional and negligent
misrepresentation, breach of fiduciary duties, and violations of various
Oklahoma and federal statutes in connection with the sale of the limited
partnership interests. Plaintiff seeks unspecified compensatory damages
and $10 million in punitive damages.
Damson/Birtcher Partners and the related defendants have removed the
case to the United States District Court for the Western District of
Oklahoma, and have filed a motion to dismiss the case for lack of
personal jurisdiction or, alternatively, to transfer the action to the
United States District Court for the Central District of California, for
the convenience of the parties and witnesses and in the interests of
justice. Plaintiff has moved to remand the case back to the Oklahoma
state court. Both motions are pending. Damson/Birtcher Partners and the
related defendants intend to present a vigorous defense on the merits of
plaintiff's claims, should this be necessary.
Madison Partnership and ISA Partnership Litigation
On April 2, 1999, Madison Partnership Liquidity Investors XVI, LLC and
ISA Partnership Liquidity Investors filed a purported class and
derivative action in the California Superior Court in Orange County,
California against Damson Birtcher Partners, Birtcher/Liquidity
Properties, Birtcher Partners, Birtcher Investors, Birtcher Investments,
Birtcher Limited, Breicorp LP Special Fund II, L.P., Liquidity Fund
Asset Management, Inc., Robert M. Anderson, Brent R. Donaldson, Arthur
B. Birtcher, Ronald E. Birtcher, and Richard G. Wollack, Defendants, and
Damson/Birtcher Realty Income Fund-I, Damson/Birtcher Realty Income
Fund-II, and Real Estate Income Partners III, Nominal Defendants. The
complaint asserts claims for breach of fiduciary duty and breach of
contract. The gravamen of the complaint is that the General Partners of
these limited partnerships have not undertaken all reasonable efforts to
expedite liquidation of the Partnerships' properties and to maximize the
returns to the Partnerships' limited partners. The complaint seeks
unspecified monetary damages, attorneys' fees and litigation expenses,
and an order for dissolution of the Partnerships and appointment of an
independent liquidating trustee. The Partnership has yet to respond to
the complaint, but intends to present a vigorous defense.
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 March 31, 1999.
15
<PAGE> 16
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
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: May 14, 1999 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: May 14, 1999 By: /s/ Brent R. Donaldson
------------------------------------
Brent R. Donaldson
President
Liquidity Fund Asset Management, Inc.
16
<PAGE> 17
DAMSON/BIRTCHER REALTY INCOME FUND-I
EXHIBIT INDEX
a) Exhibits:
27 - Financial Data Schedule
b) Reports on Form 8-K:
None filed in quarter ended March 31, 1999.
17
<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-1 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 502,000
<SECURITIES> 0
<RECEIVABLES> 37,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 678,000
<PP&E> 34,444,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 35,122,000
<CURRENT-LIABILITIES> 1,746,000
<BONDS> 2,450,000
0
0
<COMMON> 0
<OTHER-SE> 30,926,000
<TOTAL-LIABILITY-AND-EQUITY> 35,122,000
<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
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0<F1>
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>STATEMENT OF OPERATION IS NOT PRESENTED IN LIQUIDATION BASIS OF ACCOUNTING
</FN>
</TABLE>
