<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 12(g), 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1994
Commission file number 0-14633
DAMSON/BIRTCHER REALTY INCOME FUND - II, LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 13-3294820
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27611 La Paz Road, P.O. Box A-1, Laguna Niguel, California 92677-0100
(Address of principal executive offices) (Zip Code)
(714) 831-8031
(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 / /
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1994
INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets -
September 30, 1994 (Unaudited) and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations (Unaudited) -
Three and Nine Months Ended September 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
BALANCE SHEETS
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September 30, December 31,
1994 1993
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(Unaudited) (Note)
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ASSETS
Investment in real estate, net:
Land $ 3,593,000 $ 3,593,000
Buildings and improvements 32,633,000 32,407,000
------------ -----------
36,226,000 36,000,000
Less accumulated depreciation (10,652,000) (9,742,000)
------------ -----------
25,574,000 26,258,000
Investment in Cooper Village Partners 4,855,000 4,922,000
Cash and cash equivalents 1,229,000 1,000,000
Accounts receivable (net of allowance for
doubtful accounts of $40,000 in 1994 and
$23,000 in 1993) 105,000 50,000
Deferred rent receivable 403,000 200,000
Prepaid expenses and other assets 206,000 307,000
------------ -----------
$ 32,372,000 $32,737,000
============ ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities $ 712,000 $ 690,000
------------ -----------
Total liabilities 712,000 690,000
Commitments and contingencies - -
Partners' capital:
Limited Partners 31,796,000 32,179,000
General Partners (136,000) (132,000)
------------ -----------
31,660,000 32,047,000
------------ -----------
$ 32,372,000 $32,737,000
============ ===========
</TABLE>
Note: The balance sheet at December 31, 1993 has been prepared from the
audited financial statements as of that date.
The accompanying notes are an integral part of these financial statements.
3
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------------
1994 1993 1994 1993
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REVENUES
Rental income $1,134,000 $1,034,000 $ 3,456,000 $ 3,068,000
Interest income 11,000 8,000 30,000 24,000
---------- ---------- ----------- -----------
Total revenues 1,145,000 1,042,000 3,486,000 3,092,000
---------- ---------- ----------- -----------
EXPENSES
Operating expenses 286,000 225,000 835,000 752,000
Real estate taxes 172,000 138,000 556,000 589,000
Depreciation and amortization 321,000 314,000 969,000 909,000
General and administrative 138,000 180,000 473,000 663,000
---------- ---------- ----------- -----------
Total expenses 917,000 857,000 2,833,000 2,913,000
---------- ---------- ----------- -----------
Income before equity
in earnings 228,000 185,000 653,000 179,000
Equity in earnings of
Cooper Village Partners 50,000 21,000 154,000 132,000
---------- ---------- ----------- -----------
NET INCOME $ 278,000 $ 206,000 $ 807,000 $ 311,000
========== ========== =========== ===========
NET INCOME
ALLOCABLE TO:
General Partner $ 3,000 $ 2,000 $ 8,000 $ 3,000
========== ========== =========== ===========
Limited Partners $ 275,000 $ 204,000 $ 799,000 $ 308,000
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Nine Months Ended September 30,
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1994 1993
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Cash flows from operating activities:
Net income $ 807,000 $ 311,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 969,000 909,000
Equity in earnings of Cooper Village Partners (154,000) (132,000)
Changes in:
Accounts receivable (55,000) (2,000)
Deferred rent receivable (203,000) (28,000)
Prepaid expenses and other assets 43,000 (19,000)
Accounts payable and accrued liabilities 22,000 15,000
Due to affiliates - (13,000)
----------- ----------
Net cash provided by operating activities 1,429,000 1,041,000
Cash flows from investing activities:
Investment in real estate (226,000) (440,000)
Distributions received from
Cooper Village Partners 220,000 250,000
----------- ----------
Net cash (used) by investing activities (6,000) (190,000)
Cash flows from financing activities:
Distributions (1,194,000) (891,000)
----------- ----------
Net cash used in financing activities (1,194,000) (891,000)
Net increase/(decrease) in cash and cash equivalents 229,000 (40,000)
Cash and cash equivalents, beginning of period 1,000,000 1,047,000
----------- ----------
Cash and cash equivalents, end of period $ 1,229,000 $1,007,000
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
(1) Accounting Policies
The financial statements of Damson/Birtcher Realty Income Fund-II,
(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. The financial statements include
all adjustments which are of a normal recurring nature and, in the
opinion of the General Partner, 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, 1993.
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.
Reclassifications
Certain reclassifications have been made to conform prior year amounts
to the 1994 presentation.
6
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd)
(1) Accounting Policies (Cont'd)
Investments in Real Estate
Investment in real estate reflect an adjustment to the carrying value
of real estate assets of $3,850,000. In May 1992, the General Partner
obtained appraisals of the Partnership's properties from a qualified
independent appraiser. Based upon these appraisals, management's
intention to hold these real estate assets and current and anticipated
market conditions, management estimated that three of the
Partnership's properties, Atrium Place Office Building ($275,000),
Creekridge Center ($3,150,000) and Kennedy Corporate Center-I
($425,000) had each experienced a permanent impairment of value as
compared to their respective carrying values.
In May 1994, the General Partner obtained updated appraisals from a
qualified independent appraiser as required by the Partnership
Agreement. The portfolio was appraised at an aggregate value of
$34,968,000, which includes the Partnership's interest in Cooper
Village Partners, which was appraised at $4,118,000 as of January 1,
1994.
(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, 1994 and 1993, the Partnership incurred approximately
$27,000 and $34,000, respectively, of such expenses. For the nine
months ended September 30, 1994 and 1993, such amounts were $86,000
and $105,000, respectively.
Leasing fees for the three months ended September 30, 1994 and 1993,
included charges of $22,000 and $5,000, respectively. For the nine
months ended September 30, 1994 and 1993, such fees were $28,000 and
$26,000, respectively, from the General Partner and its affiliates for
leasing services rendered in connection with leasing space in a
Partnership property after expiration or termination of any lease of
such space including renewal options.
The General Partner elected to terminate the Partnership's Property
Management Agreement with Glenborough Management Corporation effective
November 1, 1993. On that date, the General Partner caused the
Partnership to enter into a new property management agreement with
Birtcher Properties, an affiliate of the General Partner. The new
contract encompasses terms at least as favorable to the Partnership as
the terminated contract with Glenborough Management Corporation, and
is
7
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd)
(2) Transactions with Affiliates (Cont'd)
terminable by the Partnership upon 60 days' written notice to Birtcher
Properties.
Pursuant to the property management agreement, Birtcher Properties
provides property management services with respect to the
Partnership's properties and receives a fee for such services not to
exceed 6% of the gross receipts from the properties under management,
provided that leasing services are performed otherwise not to exceed
3%. Such fee for the three and nine months ended September 30, 1994,
amounted to approximately $39,000 and $117,000, respectively. In
addition, an affiliate of the General Partner received $30,000 and
$93,000 for the three and nine months ended September 30, 1994,
respectively, as reimbursement of costs of on-site property management
personnel and other reimbursable costs.
In addition to the aforementioned, the General Partner was also paid
$13,000 and $39,000, related to the Partnership's portion (58%) of
property management fees, leasing fees, reimbursement of on-site
property management personnel and other reimbursable expenses for
Cooper Village Partners for the three and nine months ended September
30, 1994, 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 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, 1994 and 1993, were $58,000 and $58,000, respectively. For the
nine months ended September 30, 1994 and 1993, such fees were $174,000
and $174,000, respectively. In addition to the aforementioned, the
General Partner was also paid $23,000 and $23,000, respectively,
related to the Partnership's portion (58%) of asset management fees
for Cooper Village Partners for the nine months ended September 30,
1994 and 1993.
(3) Commitments and Contingencies
The Partnership is not a party to any 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.
8
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
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 December 1988, the
Partnership has been engaged primarily in the operation of its
properties. The Partnership intends 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 provided principally from the operation of the Partnership's
properties and the Partnership may incur mortgage indebtedness
relating to such properties by borrowing funds primarily to fund
capital improvements or to obtain sale or financing proceeds for
distribution to the Partners.
In May 1994, the General Partner obtained appraisals of the
Partnership's properties from a qualified independent appraiser. The
aggregate appraised value of the properties was reported at
$34,968,000, which includes the Partnership's interest in Cooper
Village Partners, which was appraised at $4,118,000, as of January 1,
1994.
Distributions through September 30, 1994 represent cash flow generated
from operation of the Partnership's properties and interest earned on
the temporary investment of working capital net of capital
requirements and fees paid to the General Partner. Future cash
distributions will be made principally to the extent of cash flow
attributable to the operation of the Partnership's properties net of
fees and capital reserve requirements.
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.
Results of Operations for the Three Months Ended September 30, 1994
Compared With the Three Months Ended September 30, 1993
and for the Nine Months Ended September 30, 1994 Compared With the
Nine Months Ended September 30, 1993
The increases in rental income for the three and nine months ended
September 30, 1994, as compared to the corresponding periods in 1993
were attributable to several factors. At Lakeland, three new leases
commenced, in August 1993 with Copper and Brass Sales and Lamina
Products and in August 1994 with Midwest Products & Engineering.
These leases encompassed an aggregate of 39,360 square feet and
increased 1994 rental income by an aggregate of $99,000 when compared
to 1993. At Creekridge, Delta Dental's lease was successfully
renegotiated in November 1993, which resulted in an additional 7,000-
square foot occupancy for a 64-month term. Also, new leases commenced
with
9
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
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, 1994
Compared With the Three Months Ended September 30, 1993
and for the Nine Months Ended September 30, 1994 Compared With the
Nine Months Ended September 30, 1993 (Cont'd)
Title One in December 1993, Global Access and Independent Pension
Consultant in January 1994. The expansion of Delta Dental lease and
these three new leases increased 1994 rental revenues by an aggregate
of $97,000. At Kennedy Corporate Center, expansion of four existing
tenants and commencement of a new lease with M.Z.M., Inc. dba Account
Source in May 1994, resulted increase in rental income by $53,000 in
1994. In addition to the aforementioned, operating expense recoveries
were higher at Lakeland Industrial park ($48,000) and Kennedy
Corporate Center ($68,000).
Interest income resulted from the temporary investment of Partnership
working capital. The increase for the three and nine months ended
September 30, 1994, as compared to the corresponding period in 1993,
was attributable to an increased level of average working capital and
a higher rate-of-return on short-term investments.
The increase in operating expenses for the three and nine months ended
September 30, 1994, as compared to the corresponding period in 1993,
was primarily attributable to increase in building repairs and
maintenance ($45,000), HVAC repairs and maintenance ($19,000) and
utility costs ($14,000) at Creekridge during 1994.
The increase in real estate taxes for the three months ended September
30, 1994, as compared to the corresponding period in 1993, was
primarily attributable to higher tax assessment at Kennedy Corporate
Center.
The decrease in real estate taxes for the nine months ended September
30, 1994, as compared to the corresponding period in 1993, was as a
result of lower tax assessments resulting from successful tax appeals
at Creekridge.
General and administrative expenses for the nine months ended
September 30, 1994 and 1993, include $287,000 and $305,000,
respectively, of charges 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 nine months
ended September 30, 1994 and 1993, are direct charges of $186,000 and
$358,000, respectively, relating to audit and tax return preparation
fees, annual appraisal fees, legal fees, insurance expense, costs
incurred in providing information to the Limited Partners and other
miscellaneous costs.
10
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
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, 1994
Compared With the Three Months Ended September 30, 1993
and for the Nine Months Ended September 30, 1994 Compared With the
Nine Months Ended September 30, 1993 (Cont'd)
The decrease in general and administrative expenses for the nine
months ended September 30, 1994, as compared to the corresponding
period in 1993, was primarily attributable to a decrease in legal and
professional services, postage and mailing expenses and printing costs
associated with the amendment of the Partnership Agreement, which
occurred in 1993.
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:
None.
b) Reports on Form 8-K:
None filed in quarter ended September 30, 1994.
11
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
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.
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DAMSON/BIRTCHER REALTY INCOME FUND-II
By: BIRTCHER/LIQUIDITY By: BIRTCHER INVESTORS,
PROPERTIES a California limited partnership
(General Partner)
By: BIRTCHER INVESTMENTS,
a California general partnership,
General Partner of Birtcher Investors
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, 1994 By: /s/ Robert M. Anderson
----------------------
Robert M. Anderson
Executive Director
BREICORP
By: LF Special Fund I, L.P.,
a California limited partnership
By: Liquidity Fund Asset Management, Inc.,
a California corporation, General
Partner of LF Special Fund I, L.P.
Date: November 10, 1994 By: /s/ Brent R. Donaldson
-------------------------------------
Brent R. Donaldson
President
Liquidity Fund Asset Management, Inc.
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet and Statement of Operation of Damson Birtcher Realty Income Fund II,
Limited Partnership Form 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 1,229,000
<SECURITIES> 0
<RECEIVABLES> 548,000
<ALLOWANCES> 40,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,943,000
<PP&E> 36,226,000
<DEPRECIATION> 10,652,000
<TOTAL-ASSETS> 32,372,000
<CURRENT-LIABILITIES> 712,000
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 31,660,000
<TOTAL-LIABILITY-AND-EQUITY> 32,372,000
<SALES> 0
<TOTAL-REVENUES> 3,640,000
<CGS> 0
<TOTAL-COSTS> 2,833,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 17,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 807,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 807,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
