<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 March 31, 1997
--------------
Commission file number 0-14633
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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) 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-II, LIMITED PARTNERSHIP
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1997
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Net Assets in Liquidation -
March 31, 1997 (Unaudited) . . . . . . . . . . . . . . . 3
Balance Sheet -
December 31, 1996 . . . . . . . . . . . . . . . . . . . 4
Statements of Operations (Unaudited) -
Three Months Ended March 31, 1997 and 1996 . . . . . . . 5
Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 1997 and 1996 . . . . . . . 6
Notes to Financial Statements (Unaudited) . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . 11
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . 13
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAMSON/BIRTCHER REALTY INCOME FUND-II
STATEMENT OF NET ASSETS IN LIQUIDATION
MARCH 31, 1997
(UNAUDITED)
ASSETS (Liquidation Basis):
- ---------------------------
Properties held for sale $22,926,000
Investment in Cooper Village Partners 3,651,000
Cash and cash equivalents 1,604,000
Accounts receivable 43,000
Other assets 16,000
-----------
Total Assets 28,240,000
-----------
LIABILITIES (Liquidation Basis):
- --------------------------------
Accounts payable and accrued liabilities 704,000
Accrued expenses for liquidation 281,000
-----------
Total Liabilities 985,000
-----------
Net Assets in Liquidation $27,255,000
===========
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
- ------
Properties held for sale (net of valuation
allowance of $1,028,000) $22,318,000
Investment in Cooper Village Partners 3,630,000
Cash and cash equivalents 1,639,000
Accounts receivable 30,000
Accrued rent receivable 436,000
Prepaid expenses and other assets 159,000
-----------
$28,212,000
===========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Accounts payable and accrued liabilities $ 636,000
-----------
Partners' capital (deficit):
Limited Partners 27,746,000
General Partner (170,000)
-----------
27,576,000
Commitments and contingencies
-----------
$28,212,000
===========
Note: The balance sheet at December 31, 1996 has been prepared from the
audited financial statements as of that date.
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
--------------------------------
1997 1996
---------- ----------
REVENUES
- --------
Rental income $1,157,000 $1,175,000
Interest income 20,000 13,000
---------- ----------
Total revenues 1,177,000 1,188,000
---------- ----------
EXPENSES
- --------
Operating expenses 255,000 264,000
Real estate taxes 187,000 198,000
Depreciation and amortization 17,000 16,000
General and administrative 244,000 152,000
---------- ----------
Total expenses 703,000 630,000
---------- ----------
Income before equity in earnings 474,000 558,000
Equity in earnings of Cooper
Village Partners 91,000 155,000
---------- ----------
NET INCOME $ 565,000 $ 713,000
========== ==========
NET INCOME ALLOCABLE TO:
General Partner $ 6,000 $ 7,000
=========== ==========
Limited Partners $ 559,000 $ 706,000
=========== ==========
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 565,000 $ 713,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 17,000 16,000
Equity in earnings of Cooper Village Partners (91,000) (155,000)
Changes in:
Accounts receivable (14,000) (25,000)
Accrued rent receivable 42,000 20,000
Prepaid expenses and other assets (26,000) 32,000
Accounts payable and accrued liabilities 68,000 (14,000)
---------- ----------
Net cash provided by operating activities 561,000 587,000
Cash flows from investing activities:
Investments in real estate (61,000) (22,000)
Distributions received from
Cooper Village Partners 70,000 81,000
---------- ----------
Net cash provided by investing activities 9,000 59,000
Cash flows from financing activities:
Distributions (605,000) (467,000)
---------- ----------
Net cash used in financing activities (605,000) (467,000)
Net (decrease) increase in cash and cash
equivalents (35,000) 179,000
Cash and cash equivalents, beginning of period 1,639,000 1,055,000
---------- ----------
Cash and cash equivalents, end of period $1,604,000 $1,234,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
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,
Limited Partnership (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, 1996.
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 13, 1997. As a
result, the Partnership has adopted the liquidation basis of
accounting as of March 31, 1997. The difference between the adoption
of the liquidation basis of accounting as of March 13, 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 neccesarily 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.
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 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.
7
<PAGE> 8
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(1) Accounting Policies (Cont'd.)
-------------------
Carrying Value of Real Estate (Prior to Adoption of the Liquidation
Basis of Accounting)
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," ("FAS 121"). This Statement requires that if the
General Partner believes factors are present that may indicate
long-lived assets are impaired, the undiscounted cash flows, before
debt service, related to the assets should be estimated. If these
estimated cash flows are less than the carrying value of the asset,
then impairment is deemed to exist. If impairment exists, the asset
should be written down to the estimated fair value.
Further, assets held for sale, including any unrecoverable accrued
rent receivable or capitalized leasing commissions, were carried at
the lower of carrying value or fair value less estimated selling
costs. Any adjustment to carrying value were recorded as a valuation
allowance against property held for sale. Each reporting period, the
General Partner reviewed its estimates of fair value, which were
decreased or increased up to the original carrying value. Finally,
assets held for sale are no longer depreciated. The General Partner
adopted FAS 121 at December 31, 1995 and the adoption did not have a
material impact on the Partnership's operations or financial position,
as prior to December 31, 1995, the Partnership had not had any
properties held for sale.
As noted above, as of December 31, 1995 the General Partner decided to
account for the Partnership's properties as assets held for sale,
assuming an average 12 month holding period, instead of for
investment. Accordingly, the General Partner compared the carrying
value of each property to its appraised value as of January 1, 1996.
If the carrying value of a property and certain related assets was
greater than its appraised value, less selling costs, the General
Partner reduced the carrying value of the property by the difference.
Using this methodology, the General Partner determined that Atrium
Place, Kennedy Corporate Center, Lakeland Industrial Park and Cooper
Village (58% interest) had carrying values greater than they had
appraised values, and therefore reduced their carrying values by
$167,000, $500,000, $40,000 and $789,000 to $829,000, $2,625,000,
$4,929,000 and $3,704,000, respectively.
Utilizing the same methodology, assuming a twelve month holding
period, for the year ended December 31, 1996, the General Partner
determined that Ladera-II Shopping Center and Kennedy Corporate Center
had carrying values greater than their respective appraised values,
less selling costs. As a result, the carrying values were adjusted by
$185,000 and $343,000 to $2,200,000 and $2,460,000, respectively. In
addition, the carrying value of Atrium Place was reduced in September
1996 by $75,000 in order to reflect its approximate selling price and
the carrying value of Lakeland Industrial Park was increased by
$40,000 to $5,300,000, its estimated fair value less selling costs.
(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
8
<PAGE> 9
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - 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, 1997 and 1996
the Partnership incurred approximately $23,000 and $32,000,
respectively, of such expenses.
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 6% of the gross receipts from the
properties under management provided that leasing services are
performed, otherwise not to exceed 3%. Such fees amounted to
approximately $40,000 and $41,000, respectively, for the three months
ended March 31, 1997 and 1996. In addition, an affiliate of the
General Partner received $30,000 and $26,000 for the three months
ended March 31, 1997 and 1996, respectively, as reimbursement of costs
of on-site property management personnel and other reimbursable
expenses.
Leasing fees for the three months ended March 31, 1997 and 1996,
included charges of $0 and $5,000, 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 leases.
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 .65% for 1997 and .75% for 1996 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 March 31, 1997 and 1996, amounted to $42,000 and $50,000,
respectively.
In addition to the aforementioned, the General Partner was also paid
$18,000 and $22,000, related to the Partnership's portion (58%) of
asset management fees, property management fees, leasing fees,
reimbursement of on-site property management personnel and other
reimbursable expenses for Cooper Village Partners for the three months
ended March 31, 1997 and 1996, respectively.
(3) Commitments and Contingencies
-----------------------------
Litigation
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.
9
<PAGE> 10
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(4) Accrued Expenses for Liquidation
--------------------------------
Accrued expenses for liquidation as of March 31, 1997, 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 and the general partner's liability insurance.
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.
10
<PAGE> 11
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
-------------------------------
The Partnership completed its acquisition program in December 1988 and
is principally 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, at
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 solictied and recieved the consent of the Limited Partners
as of March 13, 1997, to dissolve the Partnership and gradually settle
and close the Partnership's business and dispose of and convey the
Partnership's property as soon as practicable, consistent with
obtaining reasonable value for the properties. The Partnership's
properties were held for sale throughout 1996 and continue to be held
for sale.
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.
Regular distributions through March 31, 1997 represent cash flow
generated from operations of the Partnership's properties and interest
earned on the temporary investment of working capital net of capital
improvement reserve requirements. In December 1996, the Partnership
made a special distribution of $720,000 representing 100% of the net
proceeds from the sale of Atrium Place. 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 reserve, after providing for
capital reserve and payment for capital improvements to the
Partnership's properties.
Results of Operations Prior to Adoption of the Liquidation Basis of
Accounting for the Three Months Ended March 31, 1997 Compared With the
Three Months Ended March 31, 1996
----------------------------------------------------------------------
The decrease in rental income for the three months ended March 31,
1997 as compared to the corresponding period in 1996, was primarily
attributable to the sale of Atrium Place in November 1996.
Interest income resulted from the temporary investment of Partnership
working capital. The increase in interest income for the three months
ended March 31, 1997, as compared to the corresponding period in 1996,
was attributable to the increase in the average level of working
capital available for short-term investment.
11
<PAGE> 12
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 Prior to Adoption of the Liquidation Basis of
Accounting for the Three Months Ended March 31, 1997 Compared With the
Three Months Ended March 31, 1996 (Cont'd.)
----------------------------------------------------------------------
The decrease in operating expenses for the three months ended March
31, 1997, as compared to the corresponding period in 1996, was
primarily attributable to the sale of Atrium Place in November 1996.
The decrease in real estate taxes for the three months ended March 31,
1997, as compared to the corresponding period in 1996, was primarily
attributable to the sale of Atrium Place in November 1996.
The decrease in equity in earnings of Cooper Village Partners for the
three months ended March 31, 1997, as compared to the corresponding
period in 1996, was primarily attributable to the Partnership's
portion (58%) of a $127,000 lease termination settlement fee that was
collected and recognized in March 1996. The termination fee was
associated with the Boston Store bankruptcy.
General and administrative expenses for the three months ended March
31, 1997 and 1996 include charges of $65,000 and $87,000,
respectively, 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
March 31, 1997 and 1996 are direct charges of $179,000 and $65,000,
respectively, relating to audit fees, tax preparation fees, legal and
professional fees, insurance expenses, costs incurred in providing
information to the Limited Partners and other miscellaneous costs.
The increase in general and administrative expenses for the three
months ended March 31, 1997, as compared to the corresponding period
in 1996, was primarily attributable to the increase in legal and
professional services associated with the February 1997, Consent
Solicitation.
Accrued expenses for liquidation, as reflected in the Statement of Net
Assets in Liquidation as of 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.
12
<PAGE> 13
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
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.
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.
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, 1997.
13
<PAGE> 14
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.
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: May 12, 1997 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: May 12, 1997 By: /s/ Brent R. Donaldson
------------------------------
Brent R. Donaldson
President, Liquidity Fund
Asset Management, Inc.
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
STATEMENT OF NET ASSETS IN LIQUIDATION FOR DAMSON BIRTCHER REALTY INCOME FUND II
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,604,000
<SECURITIES> 0
<RECEIVABLES> 43,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,663,000
<PP&E> 22,926,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,240,000
<CURRENT-LIABILITIES> 704,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 27,255,000
<TOTAL-LIABILITY-AND-EQUITY> 28,240,000
<SALES> 0
<TOTAL-REVENUES> 1,268,000
<CGS> 0
<TOTAL-COSTS> 703,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 565,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 565,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
