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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 September 30, 1999
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Commission file number 0-14633
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 13-3294820
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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-II, LIMITED PARTNERSHIP
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 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 - September 30, 1999
(Unaudited) and December 31, 1998 (Audited)........................... 3
Statements of Changes of Net Assets in Liquidation -
Three and Nine months ended September 30, 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......................... 12
Item 3. Quantitative and Qualitative Market Risk Disclosures.................. 17
PART II. OTHER INFORMATION..................................................... 17
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2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
STATEMENTS OF NET ASSETS IN LIQUIDATION
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September 30, December 31,
1999 1998
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ASSETS (Liquidation Basis): (unaudited)
Properties $ 7,600,000 $23,587,000
Investment in Cooper Village Partners 3,728,000 3,375,000
Cash and cash equivalents 16,310,000 1,564,000
Cash held in escrow 576,000 --
Accounts receivable, net 102,000 20,000
Other assets 27,000 20,000
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Total Assets 28,343,000 28,566,000
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LIABILITIES (Liquidation Basis):
Accounts payable and accrued liabilities 187,000 685,000
Accrued expenses for liquidation 129,000 129,000
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Total Liabilities 316,000 814,000
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Net Assets in Liquidation $28,027,000 $27,752,000
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The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
STATEMENTS OF CHANGES OF NET ASSETS IN LIQUIDATION
(UNAUDITED)
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<CAPTION>
Three Months Ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
1999 1998 1999 1998
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Net assets in liquidation
at beginning of period $ 28,129,000 $ 27,494,000 $ 27,752,000 $ 27,394,000
Increase (decrease) during period:
Operating activities:
Property operating income, net 753,000 849,000 2,225,000 2,563,000
Equity in earnings of Cooper
Village Partners excluding
$263,000 gain from sale of
Partnership's interest in
Cooper Village Shopping Center 65,000 70,000 263,000 252,000
Interest income 33,000 18,000 65,000 58,000
Leasing commissions (95,000) (12,000) (197,000) (45,000)
General and administrative
expenses (176,000) (170,000) (496,000) (540,000)
------------ ------------ ------------ ------------
580,000 755,000 1,860,000 2,288,000
------------ ------------ ------------ ------------
Liquidating activities:
Loss from sale of real estate (339,000) -- (339,000) --
Gain from sale of Partnership's
interest in Cooper Village
Shopping Center 263,000 -- 263,000 --
Distributions to partners (606,000) (659,000) (1,509,000) (2,092,000)
------------ ------------ ------------ ------------
(682,000) (659,000) (1,585,000) (2,092,000)
------------ ------------ ------------ ------------
Net (decrease) increase in assets
in liquidation (102,000) 96,000 275,000 196,000
------------ ------------ ------------ ------------
Net assets in liquidation at
end of period $ 28,027,000 $ 27,590,000 $ 28,027,000 $ 27,590,000
============ ============ ============ ============
</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
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, 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 13, 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
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
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.
5
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(1) Accounting Policies (Cont'd.)
Segment Reporting (Cont'd.)
Rental income from Iomega Corporation totaled $327,000 and $318,000 for
the three months ended September 30, 1999 and 1998, respectively, or
approximately 39% and 24%, respectively, of the Partnership's total
rental income and $977,000 and $943,000 or 30% and 24%, respectively,
for the nine months there ended. Rental income from Delta Dental
Corporation totaled $0 and $221,000 for the three months ended
September 30, 1999 and 1998, respectively, or approximately 0% and 17%,
respectively, of the Partnership's total rental income and $147,000 and
$662,000 or 5% and 17%, respectively, for the nine months there ended.
Adjustment to the Carrying Value of Real Estate
During the three months ended June 30, 1999, the General Partner
determined that the carrying values of Ladera-II Shopping Center and
Iomega were in excess of their respective estimated net realizable
values, less estimated selling costs. As a result, their carrying
values were adjusted by $525,000 and $294,000, to $1,118,000, and
$7,600,000, respectively. In addition, the carrying value of Creekridge
was increased by $819,000 to its estimated net realizable value, less
estimated selling costs, of $7,721,000 which had the effect of
offsetting the aforementioned decreases.
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.
(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, 1999 and 1998 the Partnership incurred approximately
$21,000 and $21,000, respectively, of such expenses. For the nine
months there ended, these expenses amounted to $90,000 and $89,000,
respectively.
An affiliate of the General Partner provides property management
services with
6
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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.)
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 $43,000
and $47,000, respectively, for the three months ended September 30,
1999 and 1998 and $122,000 and $136,000 for the nine months there
ended. In addition, an affiliate of the General Partner received
$26,000 and $26,000 for the three months ended September 30, 1999 and
1998, respectively, as reimbursement of costs of on-site property
management personnel and other reimbursable expenses. These payments
amounted to $88,000 and $84,000 for the nine months there ended.
Leasing fees for the three months ended September 30, 1999 and 1998,
included charges of $7,000 and $4,000, 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. For the nine months there ended, such fees were
$65,000 and $31,000, respectively.
As previously reported, on June 24, 1993, the Partnership completed its
solicitation of written consents from its Limited Partners. A majority
in interest of the Partnership's Limited Partners approved each of the
proposals contained in the Information Statement dated May 5, 1993.
Those proposals were implemented by the Partnership as contemplated by
the Information Statement as amendments to the Partnership Agreement,
and are reflected in these financial statements as such.
The amended Partnership Agreement provides for the Partnership's
payment to the General Partner of an annual asset management fee equal
to .45% for 1999 and .55% for 1998 of the aggregate appraised value of
the Partnership's properties as determined by independent appraisal in
January of 1998 and by the General Partner's estimate of fair value for
1999. Such fees for the three months ended September 30, 1999 and 1998,
amounted to $28,000 and $40,000, and for the nine months there ended,
they amounted to $87,000 and $120,000, respectively.
In addition to the aforementioned, the General Partner was also paid
$20,000 and $17,000, 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 September 30, 1999 and 1998, respectively. For the nine months
there ended, these payments amounted to $59,000 and $57,000,
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:
7
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
3) Commitments and Contingencies (Cont'd.)
Litigation (Cont'd.)
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Bigelow Diversified Secondary Partnership Fund 1990 litigation
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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, its affiliated partnership, 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 the Partnership and Real
Estate Income Partners III took pursuant to the respective consent
solicitations dated February 18, 1997 were 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.
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,
8
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
3) Commitments and Contingencies (Cont'd.)
Litigation (Cont'd.)
----------
Madison Partnership and ISA Partnership Litigation (Cont'd.)
------------------------------------------------------------
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 moved to dismiss the case on
the grounds that the pending Bigelow class action, discussed above,
raises essentially the same claims. If the case is not stayed or
dismissed, the Partnership intends to present a vigorous defense.
(4) Accrued Expenses for Liquidation
Accrued expenses for liquidation as of September 30, 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 (exclusive of litigation costs), accounting fees, tax preparation
and filing fees and other professional services. 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.
(5) Loss on Sale of Real Estate
Loss from sale of real estate represents the net gains and losses from
the sales of Kennedy Corporate Center, Ladera-II shopping center,
Lakeland Industrial Center and Creekridge Office Park. Gains were
generated from the sales of Kennedy Corporate Center ($379,000) and
Ladera-II shopping center ($4,000). Losses were generated by the sales
of Lakeland Industrial Park ($34,000) and Creekridge Office Park
($688,000). The Partnership also recognized a gain from the sale of the
Partnership's interest in Cooper Village Shopping Center ($263,000).
During the three month period ended September 30, 1999, the Partnership
sold five of its six properties (including its 58% interest in Cooper
Village Shopping Center) in three separate transactions, as set forth
below:
Cooper Village
--------------
On September 21, 1999, the Partnership sold its 58% interest in Cooper
Village Shopping Center (co-owned with an affiliated partnership), in
Mesa, Arizona to Old Vine Corporation ("Old Vine"), a local shopping
center operator that is not affiliated in any way with the Partnership,
its General Partner or any of its principals or affiliates. The sale
price for the Partnership's 58% interest was $3,581,500.
9
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(5) Loss on the Sale of Real Estate (Cont'd.)
Cooper Village (Cont'd.)
--------------
The buyer was represented by a third-party broker in the transaction.
The Partnership's allocation of the broker commission paid was $46,000
from the sale proceeds. The General Partner was not paid any property
disposition fee in connection with the sale. Old Vine has hired an
affiliate of Birtcher to perform certain onsite property management
services (not accounting or asset management), pursuant to a contract
that is cancelable at any time upon 30 days notice.
The proceeds from the sale of Cooper Village Shopping Center will be
distributed to the Partnership and its affiliated partnership during
the fourth quarter of 1999.
Ladera-II
---------
On September 22, 1999, the Partnership sold Ladera-II Shopping Center,
in Albuquerque, New Mexico to CA New Mexico, LLC, a wholly-owned
subsidiary of CenterAmerica Trust ("CenterAmerica"), a Houston-based
real estate investment trust that is not affiliated in any way with the
Partnership, its General Partner or any of its principals or
affiliates. The sale price was $1,176,000.
CenterAmerica and the Partnership were each represented by third-party
brokers in the transaction. The brokers were paid an aggregate $49,657
from the sale proceeds. The General Partner was not paid a disposition
fee in connection with the transaction. CenterAmerica did not hire the
General Partner or any affiliate to perform asset management or
property management services for this property.
The Rubin Pachulsky Dew Transaction
-----------------------------------
On September 23, 1999, the Partnership sold Creekridge Business Center,
in Bloomington, Minnesota, Kennedy Corporate Center, in Palatine,
Illinois and Lakeland Business Center, in Milwaukee, Wisconsin to Rubin
Pachulsky Dew Properties, LLC ("Rubin Pachulsky Dew") for $8,300,000,
$2,600,000, and $5,200,000, respectively, or an aggregate purchase
price of $16,100,000. Rubin Pachulsky Dew is a third-party real estate
investment entity that is not affiliated in any way with the
Partnership, its General Partner or any of its principals or
affiliates.
The purchase price for the Creekridge Business Center was effectively
reduced by approximately $905,000 in a tenant improvement allowance.
As previously reported, the Partnership had entered into a lease for
the 42,203 square foot space at Creekridge Center that was vacated by
Delta Dental. Pursuant to that lease, the Partnership granted the
tenant an allowance of up to approximately $905,000 for tenant
improvements, pending agreement regarding the design for building out
the space.
Rubin Pachulsky Dew was represented by a third-party broker in the
transaction. The broker was paid $161,000 from the sale proceeds. Since
the sale price of Creekridge Business Center exceeded the January 1,
1993 appraised value ($6,400,000), pursuant to the 1993 Amendment of
the Partnership Agreement, the General Partner earned and was paid a
property disposition fee of $207,500 in connection with the sale.
Rubin Pachulsky Dew has hired an affiliate of Birtcher as property
manager for the properties for a fee that is approximately the same as
the fee the Partnership previously paid to the General Partner for
property management. In
10
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(5) Loss on the Sale of Real Estate (Cont'd.)
The Rubin Pachulsky Dew Transaction (Cont'd.)
-----------------------------------
addition, Rubin Pachulsky Dew has hired an affiliate of Birtcher to
provide certain asset management services for the properties, and will
pay an incentive fee approximately equal to 10% of the profits, if any,
after Rubin Pachulsky Dew has received a 15% return on its investment.
The incentive fee, if earned, is not payable until the last property is
sold or four years from date of purchase, whichever comes first. The
property management agreement is cancelable at any time upon 60 days
notice, but the incentive fee will survive termination of the contract.
A portion of the proceeds from the sale of the properties to Rubin
Pachulsky Dew continues to be held in escrow. A sum equal to two and
one-half percent of the purchase price has been held back as a
potential source of payment for any claims that may arise related to a
Partnership breach of certain representations and warranties related to
the sale and for any litigation costs that may arise for a one-year
period. The remaining cash held in escrow relates to holdbacks for tax
prorations. The cash held in escrow is included in the calculation of
loss from sale of real estate.
11
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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 primarily 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 solicited and received the consent of the Limited Partners,
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 1998 and continue to be held for sale.
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 purchase price ranging between
$32,250,000 and $33,000,000, 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
(approximately 11%), which the Partnership did not agree to.
On April 30, 1999, the Partnership and Praedium Performance Fund IV
("Praedium") executed a Purchase and Sale Agreement to sell all of the
Partnership's properties except its interest in Cooper Village shopping
center to Praedium for $29,000,000. Praedium deposited $222,400 into
escrow, pending completion of its due diligence inspection and review.
Praedium's contingency period expired on June 14, 1999. During and
after the contingency period, Praedium, in a series of negotiations
with the Partnership, sought reductions in the purchase price of each
of the properties and declined to include Iomega and Ladera-II in its
offers. During this time, the General Partner negotiated with Praedium,
and also sought other purchasers for the properties, both individually
and as a group. Finally, in late July 1999, the Partnership declined
Praedium's offer to purchase only Creekridge Center, Kennedy Corporate
Center-I and Lakeland Industrial Park for a materially reduced purchase
price and terminated its dealings with Praedium.
Sale of the Properties
During the three month period ended September 30, 1999, the Partnership
sold five of its six properties (including its 58% interest in Cooper
Village Shopping Center) in three separate transactions, as set forth
below:
Cooper Village
--------------
On September 21, 1999, the Partnership sold its 58% interest in Cooper
Village
12
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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.)
Liquidity and Capital Resources (Cont'd.)
-------------------------------
Sale of the Properties (Cont'd.)
Cooper Village (Cont'd.)
--------------
Shopping Center (co-owned with an affiliated partnership), in Mesa,
Arizona to Old Vine Corporation ("Old Vine"), a local shopping center
operator that is not affiliated in any way with the Partnership, its
General Partner or any of its principals or affiliates. The sale price
for the Partnership's 58% interest was $3,581,500.
The buyer was represented by a third-party broker in the transaction.
The Partnership's allocation of the broker commission paid was $46,000
from the sale proceeds. The General Partner was not paid any property
disposition fee in connection with the sale. Old Vine has hired an
affiliate of Birtcher to perform certain onsite property management
services (not accounting or asset management), pursuant to a contract
that is cancelable at any time upon 30 days notice.
The proceeds from the sale of Cooper Village Shopping Center will be
distributed to the Partnership and its affiliated partnership during
the fourth quarter of 1999.
Ladera-II
---------
On September 22, 1999, the Partnership sold Ladera-II Shopping Center,
in Albuquerque, New Mexico to CA New Mexico, LLC, a wholly-owned
subsidiary of CenterAmerica Trust ("CenterAmerica"), a Houston-based
real estate investment trust that is not affiliated in any way with the
Partnership, its General Partner or any of its principals or
affiliates. The sale price was $1,176,000.
CenterAmerica and the Partnership were each represented by third-party
brokers in the transaction. The brokers were paid an aggregate $49,657
from the sale proceeds. The General Partner was not paid a disposition
fee in connection with the transaction. CenterAmerica did not hire the
General Partner or any affiliate to perform asset management or
property management services for this property.
The Rubin Pachulsky Dew Transaction
-----------------------------------
On September 23, 1999, the Partnership sold Creekridge Business Center,
in Bloomington, Minnesota, Kennedy Corporate Center, in Palatine,
Illinois and Lakeland Business Center, in Milwaukee, Wisconsin to Rubin
Pachulsky Dew Properties, LLC ("Rubin Pachulsky Dew") for $8,300,000,
$2,600,000, and $5,200,000, respectively, or an aggregate purchase
price of $16,100,000. Rubin Pachulsky Dew is a third-party real estate
investment entity that is not affiliated in any way with the
Partnership, its General Partner or any of its principals or
affiliates.
The purchase price for the Creekridge Business Center was effectively
reduced by approximately $905,000 in a tenant improvement allowance.
As previously reported, the Partnership had entered into a lease for
the 42,203 square foot space at Creekridge Center that was vacated by
Delta Dental. Pursuant to that lease, the Partnership granted the
tenant an allowance of up to approximately $905,000 for tenant
improvements, pending agreement regarding the design for building out
the space.
Rubin Pachulsky Dew was represented by a third-party broker in the
transaction. The broker was paid $161,000 from the sale proceeds. Since
the sale price of
13
<PAGE> 14
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd.)
Liquidity and Capital Resources (Cont'd.)
-------------------------------
Sale of the Properties (Cont'd.)
The Rubin Pachulsky Dew Transaction (Cont'd.)
-----------------------------------
Creekridge Business Center exceeded the January 1, 1993 appraised value
($6,400,000), pursuant to the 1993 Amendment of the Partnership
Agreement, the General Partner earned and was paid a property
disposition fee of $207,500 in connection with the sale.
Rubin Pachulsky Dew has hired an affiliate of Birtcher as property
manager for the properties for a fee that is approximately the same as
the fee the Partnership previously paid to the General Partner for
property management. In addition, Rubin Pachulsky Dew has hired an
affiliate of Birtcher to provide certain asset management services for
the properties, and will pay an incentive fee approximately equal to
10% of the profits, if any, after Rubin Pachulsky Dew has received a
15% return on its investment. The incentive fee, if earned, is not
payable until the last property is sold or four years from date of
purchase, whichever comes first. The property management agreement is
cancelable at any time upon 60 days notice, but the incentive fee will
survive termination of the contract.
A portion of the proceeds from the sale of the properties to Rubin
Pachulsky Dew continues to be held in escrow. A sum equal to two and
one-half percent of the purchase price has been held back as a
potential source of payment for any claims that may arise related to a
Partnership breach of certain representations and warranties related to
the sale and for any litigation costs that may arise for a one-year
period. The remaining cash held in escrow relates to holdbacks for tax
prorations. The cash held in escrow is included in the calculation of
loss from sale of real estate.
Summary of Sale Proceeds
------------------------
The Partnership realized approximately $18,220,000, or approximately
$346 per $1,000 originally invested in the Partnership, in
distributable cash proceeds from the sale of the five properties, after
deducting for holdbacks (approximately $1,428,000, which includes a
$905,000 tenant improvement allowance at Creekridge), and closing costs
and prorations totaling approximately $1,210,000.
The General Partner's estimate of distributable cash 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 property is sold or, the ongoing
litigation, which could affect the amount of sales proceeds ultimately
available for distribution. Therefore, the actual proceeds to be
received by the limited partners may vary materially, up or down, from
the estimate.
Currently, two lawsuits are pending against the Partnership and its
General Partner and certain of its affiliates that seek, among things,
unspecified monetary damages. Since these cases are in the preliminary
discovery phase, there is unavoidable uncertainty regarding their
ultimate resolution. The Partnership Agreement mandates that the
General Partner provide for all of the Partnership's liabilities and
obligations, including contingent liabilities, before distributing
liquidation proceeds to its partners. Therefore, the Partnership will
not distribute liquidation proceeds until the uncertainty surrounding
these lawsuits is sufficiently resolved. The amount and timing of any
distribution of liquidation proceeds will be determined by the General
Partner in light of these and other relevant considerations.
14
<PAGE> 15
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd.)
Liquidity and Capital Resources (Cont'd.)
-------------------------------
Status of Iomega
----------------
On October 15, 1999, the Partnership signed a Purchase and Sale
Agreement to sell Iomega Business Center to ANA Development, LLC
("ANA"), for a purchase price of $8,085,000. ANA is a local real estate
developer that is not affiliated in any way with the Partnership or the
General Partner, or any of the General Partner's principals or
affiliates. It is not anticipated that ANA will hire the General
Partner or any affiliate to perform asset management or property
management services for this property after close of the sale. The
Partnership was represented by a third-party broker in this
transaction, who will be paid a commission not to exceed $242,550.
During ANA's due diligence inspection period, the sole tenant of Iomega
Business Center told ANA and the Partnership that it intended to vacate
Building 7 at the end of November 1999, when its lease expired. The
Partnership has agreed to lease Building 7 back from the Seller for an
eighteen-month period commencing on December 1, 1999, paying ANA rent
at the rate of $34,720 per month, plus CAM charges and a pro rata
portion of property taxes (this is the amount that Iomega had
been paying under its lease). To secure this leaseback obligation, the
Partnership has agreed that $607,600, plus the estimated amount of CAM
charges and property taxes, shall be held back by escrow and disbursed
to the Buyer in monthly installments after closing. The General Partner
anticipates that the current occupant of Building 7 will hold over
after its lease expires for at least a few months, so that the
Partnership's leaseback obligations will be reduced by rent paid during
that time.
ANA may request, no later than December 10, 1999, that the Partnership
finance, on a short-term basis, up to 80% of the purchase price. The
Partnership may decline the request and terminate the transaction,
retaining ANA's $100,000 deposit. If the Partnership accepts, it will
take back a 6-month promissory note from ANA that will bear interest at
9% per annum with a maturity date of June 15, 2000. The promissory note
would be secured with a first mortgage deed of trust.
Other Matters
-------------
Regular distributions through September 30, 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
improvement 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 reserve, after providing for capital reserve and
payment for capital improvements to the Partnership's properties.
The Partnership is in the process of liquidating its remaining assets.
Only one of the Partnership's properties (Iomega) remains unsold at
September 30, 1999. The balance of the Partnership's assets consists
primarily of cash and receivables. Further, it is anticipated that the
Iomega property will be sold on or before January 1, 2000. It is
therefore the opinion of the General Partner that the value of the
remaining 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 financial position, results of operations or cash
flows in future periods.
As of September 30, 1999, the Partnership's accounting systems and the
investor services system used to track the limited partners' interests,
distributions and tax information have been tested and appear to be
free of year 2000 bugs. The
15
<PAGE> 16
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd.)
Liquidity and Capital Resources (Cont'd.)
-------------------------------
Other Matters (Cont'd.)
-------------
Partnership's remaining property is under review utilizing the Building
Owners and Managers Association ("BOMA") industry standards as a
guideline for necessary corrections. The cost of the upgrades to the
Partnership's accounting systems were 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 run it could convert its systems to standard spreadsheet or data
base programs at nominal cost.
Results of Operations for the Three Months Ended September 30, 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 completed the sale of five of
its six remaining properties (including a 58% interest in Cooper
Village shopping center) in three separate transactions during
September 1999. The Partnership's operating results have been reflected
on the Statements of Changes of Net Assets in Liquidation.
For the three months ended September 30, 1999, the Partnership
generated $753,000 of net operating income from its operations. The
decrease in net operating income for the three months ended September
30, 1999 when compared to the same period in 1998 was primarily
attributable to the sale of five of its six remaining properties during
September 1999 and the decrease in revenue at Creekridge that resulted
from Delta Dental's lease expiration on February 28, 1999.
Interest income resulted from the temporary investment of Partnership
working capital. For the three months ended September 30, 1999,
interest income was approximately $33,000. The increase in interest
income was reflective of the increased cash and cash equivalent
balances that were generated from the sale of the properties.
Loss from sale of real estate represents the net gains and losses from
the sales of Kennedy Corporate Center, Ladera-II shopping center,
Lakeland Industrial Center and Creekridge Office Park. Gains were
generated from the sales of Kennedy Corporate Center ($379,000) and
Ladera-II shopping center ($4,000). Losses were generated by the sales
of Lakeland Industrial Park ($34,000) and Creekridge Office Park
($688,000). The Partnership also recognized a gain from the sale of the
Partnership's interest in Cooper Village Shopping Center ($263,000).
General and administrative expenses for the three months ended
September 30, 1999 include charges of $56,000 from the General Partner
and its affiliates for services rendered in connection with
administering the affairs of the Partnership and operating the
Partnership's properties. Also included in general and administrative
expenses for the three months ended September 30, 1999 are direct
charges of $120,000 relating to audit fees, tax preparation fees, legal
and professional fees, 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 September 30, 1999, as compared to the corresponding
period in 1998, was
16
<PAGE> 17
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, 1999
-------------------------------------------------------------------
(Cont'd.)
primarily attributable to an increase in legal fees incurred.
During the three months ended June 30, 1999, the General Partner
determined that the carrying values of Ladera-II Shopping Center and
Iomega were in excess of their respective estimated net realizable
values, less estimated selling costs. As a result, their carrying
values were adjusted by $525,000 and $294,000, to $1,118,000, and
$7,600,000, respectively. In addition, the carrying value of Creekridge
was increased by $819,000 to its estimated net realizable value, less
estimated selling costs, of $7,721,000 which had the effect of
offsetting the aforementioned decreases.
Accrued expenses for liquidation as of September 30, 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 (exclusive of litigation), accounting fees, tax preparation and
filing fees and other professional services. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
Not applicable because the Partnership does not have any financial
instruments subject to market risk.
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, its affiliated partnership, Real
Estate Income Partners III, and their general partner,
Birtcher/Liquidity Properties, filed a
17
<PAGE> 18
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
ITEM 1. LEGAL PROCEEDINGS (Cont'd.)
Bigelow Diversified Secondary Partnership Fund 1990 litigation
--------------------------------------------------------------
(Cont'd.)
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 the Partnership and Real Estate Income Partners III took pursuant to
the respective consent solicitations dated February 18, 1997 were
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.
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 moved to dismiss the case on
the grounds that the pending Bigelow class action, discussed above,
raises essentially the same claims. If the case is not stayed or
dismissed, the Partnership intends to present a vigorous defense.
18
<PAGE> 19
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
27 - Financial Data Schedule
b) Reports on Form 8-K:
Form 8-K filed on October 15, 1999 reporting the sales of
Ladera-II shopping center, Lakeland Industrial Center,
Creekridge Business Center, Kennedy Corporate Center and
Cooper Village shopping center incorporated by reference.
19
<PAGE> 20
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.
<TABLE>
<S> <C>
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 15, 1999 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 15, 1999 By: /s/ Brent R. Donaldson
-----------------------------
Brent R. Donaldson
President
Liquidity Fund Asset Management, Inc.
</TABLE>
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
<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 II AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 16,886,000
<SECURITIES> 0
<RECEIVABLES> 102,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,015,000
<PP&E> 7,600,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,343,000
<CURRENT-LIABILITIES> 316,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 28,027,000
<TOTAL-LIABILITY-AND-EQUITY> 28,343,000
<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-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>STATEMENT OF OPERATIONS IS NOT PRESENTED IN LIQUIDATION BASIS OF ACCOUNTING.
</FN>
</TABLE>
