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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 June 30, 2000
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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 JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Net Assets in Liquidation - June 30, 2000
(Unaudited) and December 31, 1999 (Audited)........................ 3
Statements of Changes of Net Assets in Liquidation -
Three and Six Months ended June 30, 2000 and 1999 (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............... 18
PART II. OTHER INFORMATION.................................................. 19
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
STATEMENTS OF NET ASSETS IN LIQUIDATION
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
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ASSETS (Liquidation Basis): (unaudited)
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<S> <C> <C>
Properties $ -- $ 7,689,000
Cash and cash equivalents 1,778,000 6,418,000
Cash held in escrow 239,000 553,000
Accounts receivable, net 59,000 14,000
Notes receivable 7,523,000 --
Other assets 28,000 29,000
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Total Assets 9,627,000 14,703,000
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LIABILITIES (Liquidation Basis):
--------------------------------
Accounts payable and accrued liabilities 147,000 210,000
Deferred lease liability 87,000 --
Accrued expenses for liquidation 188,000 310,000
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Total Liabilities 422,000 520,000
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Net Assets in Liquidation $9,205,000 $14,183,000
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
STATEMENTS OF CHANGES OF NET ASSETS IN LIQUIDATION
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2000 1999 2000 1999
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net assets in liquidation
at beginning of period $ 8,644,000 $ 27,900,000 $ 14,183,000 $ 27,752,000
Increase (decrease) during period:
Operating activities:
Property operating income, net -- 749,000 133,000 1,472,000
Equity in earnings of Cooper
Village Partners -- 90,000 -- 199,000
Interest income 218,000 16,000 429,000 31,000
Miscellaneous income 87,000 -- 87,000 --
Leasing commissions -- -- -- (102,000)
General and administrative
expenses -- (153,000) -- (319,000)
----------- ------------ ------------ ------------
305,000 702,000 649,000 1,281,000
----------- ------------ ------------ ------------
Liquidating activities:
Gain on sale of real
estate 251,000 -- 167,000 --
Liquidation expenses 5,000 -- (43,000) --
Distributions to partners -- (473,000) (5,751,000) (904,000)
----------- ------------ ------------ ------------
256,000 (473,000) (5,627,000) (904,000)
----------- ------------ ------------ ------------
Net increase (decrease) in assets
in liquidation 561,000 229,000 (4,978,000) 377,000
----------- ------------ ------------ ------------
Net assets in liquidation at
end of period $ 9,205,000 $ 28,129,000 $ 9,205,000 $ 28,129,000
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
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, 1999.
Sale of the Properties
The Partnership sold five of its six remaining properties during the
year ended December 31, 1999 and on February 9, 2000, sold its last
remaining property, Iomega Business Park (see Note 5).
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
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.)
that the enterprise report descriptive information about the way that
the operating segments were determined and the products and services
provided by the operating segments. Given that the Partnership is in
the process of liquidation, the Partnership has identified only one
operating business segment which is the business of asset liquidation.
The adoption of SFAS 131 did not have an impact on the Partnership's
financial reporting.
Rental income from Iomega Corporation totaled $0 and $325,000 for the
three months ended June 30, 2000 and 1999, respectively, or
approximately 0% and 27%, respectively, of the Partnership's total
rental income. For the six months there ended, rental income from
Iomega Corporation totaled $102,000 and $649,000 or 100% and 28% of the
Partnership's total rental income.
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 June
30, 2000 and 1999 the Partnership incurred approximately $8,000 and
$42,000, respectively, of such expenses. For the six months there
ended, such expenses amounted to $10,000 and $68,000, respectively.
An affiliate of the General Partner provides property management
services with respect to the Partnership's properties and receives a
fee for such services not to exceed 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 $0 and $43,000, respectively, for the three months ended
June 30, 2000 and 1999 and $7,000 and $79,000 for the six months there
ended. In addition, an affiliate of the General Partner received $0 and
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.)
$29,000 for the three months ended June 30, 2000 and 1999,
respectively, as reimbursement of costs of on-site property management
personnel and other reimbursable expenses. These payments amounted to
$1,000 and $61,000 for the six months there ended.
Leasing fees for the three months ended June 30, 2000 and 1999,
included charges of $0 and $7,000, 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 six months there ended, such fees were
$2,000 and $58,000, 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 .35% for 2000 and .45% for 1999 of the aggregate appraised value of
the Partnership's properties. Appraised value was determined by the
General Partner's estimate of fair value. Such fees for the three
months ended June 30, 2000 and 1999, amounted to $0 and $29,000, and
for the six months there ended, they amounted to $4,000 and $59,000,
respectively. Since the Partnership has sold all of its properties, the
Partnership no longer pays an asset management fee.
In addition to the aforementioned, the General Partner was also paid
$19,000 and $39,000, 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 and six
months ended June 30, 1999, respectively. Cooper Village Shopping
Center was sold in September 1999.
(3) Commitments and Contingencies
Litigation
So far as is known to the General Partner, neither the Partnership nor
its properties are subject to any material pending legal proceedings,
except for the following:
Bigelow Diversified Secondary Partnership Fund 1990 litigation
On March 25, 1997, a limited partner named Bigelow/Diversified
Secondary Partnership Fund 1990 L.P. 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
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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.)
Bigelow Diversified Secondary Partnership Fund 1990 litigation
(Cont'd.)
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.
In March 2000, defendants informed the Court and plaintiff that they
would bring a Motion for Summary Judgment against the named plaintiff
based upon the allegations set forth in plaintiff's complaint. On April
14, 2000, Bigelow/Diversified Secondary Partnership Fund 1990 filed a
First Amended Class Action and Derivative Complaint against
Damson/Birtcher Partners, Birtcher Investors, Birtcher/Liquidity
Properties, Birtcher Partners, Birtcher Properties, Birtcher Ltd.,
Birtcher Investments, BREICORP, L.F. Special Fund II, L.P., L.F.
Special Fund I, L.P., Liquidity Fund Asset Management, Inc., Arthur
Birtcher, Ronald Birtcher, Robert Anderson, Richard G. Wollack and
Brent R. Donaldson, the Partnership, Damson/Birtcher Realty Income
Fund-I and Real Estate Income Partners III, alleging breach of
fiduciary duty, breach of contract, and a derivative claim for breach
of fiduciary duty. Defendants have answered the First Amended
Complaint.
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
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 moved to stay or dismiss the case
on the grounds that the pending Bigelow class action, discussed above,
raises essentially the same claims. The court granted the Partnership's
motion and ordered a stay of the litigation pending re-evaluation at a
May 23, 2000 status conference. The court lifted the stay on May 23,
2000. Plaintiffs have initiated document discovery. A status conference
is currently scheduled for September 8, 2000.
(4) Accrued Expenses for Liquidation
Accrued expenses for liquidation as of June 30, 2000, include estimates
of costs to be incurred in carrying out the dissolution and liquidation
of the Partnership. These costs include estimates of legal fees,
accounting fees, tax preparation and filing fees, other professional
services and the general partner's liability insurance. During the
three months ended June 30, 2000, the Partnership incurred $65,000 of
such expenses. At June 30, 2000, the General Partner re-evaluated the
estimated costs to wind up and dissolve the Partnership given the
uncertainty involved with the ongoing litigation. The provision for
liquidation expenses was accordingly reduced by $5,000 to reflect the
revised estimates.
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. The accrued
expenses for liquidation do not take into consideration the possible
outcome of the ongoing litigation. Such costs are unknown and are not
estimable at this time.
(5) Gain on Sale of Real Estate
On February 9, 2000, the Partnership sold Iomega Business Center to ANA
9
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(5) Gain on Sale of Real Estate (Cont'd.)
Development, L.C. ("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. ANA did not 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, and ANA was represented by an
ANA-affiliated broker in this transaction. Collectively, these brokers
were to be paid a commission not to exceed $242,550.
ANA delivered approximately $400,000 cash to escrow (portions of which
were used in connection with closing costs and rent prorations), plus
two promissory notes in the face amount of $6,468,000 (the "First
Note") and $1,217,000 (the "Second Note"), respectively. The First Note
bears 9% interest, with monthly payments based upon a 20-year
amortization schedule. It was due on June 15, 2000 and is secured by a
first deed of trust and assignment of rents and leases on Iomega. The
Second Note bears 12% interest, with monthly payments of interest only.
In addition, any "net cash flow" generated by Iomega will be paid to
the Partnership and applied against principal and interest payable
under the Second Note. The Second Note was due on June 15, 2000 and is
secured by a second deed of trust and assignment of rents and leases on
Iomega, plus first deeds of trust encumbering two other parcels of real
estate located in Salt Lake City, Utah and Davis County, Utah, plus a
pledge of the ANA-affiliated broker's commission.
Shortly before closing, Iomega Corporation, which had leased the entire
property since the Partnership originally purchased it, disclosed that
it would not renew its lease on one of the buildings. To close the
sale, the Partnership agreed to lease back the building from ANA for a
term ending May 31, 2001. Iomega Corporation has not yet vacated the
premises and has, in fact, signed two sub-leases (at different rental
rates) covering the building it had announced it would vacate. The
leases terminate May 31, 2003. So long as the Second Note is
outstanding in full, the Partnership has no rental obligation under the
leaseback; if the Second Note is partly paid off, the Partnership's
rental obligation will commence proportionately. Upon repayment in full
of the Second Note, the Partnership will place in escrow the total
estimated rental payments for the balance of the leaseback period.
Thereafter, the Partnership will continue to receive all rental
payments paid by Iomega Corporation or any other subtenant. ANA failed
to pay off the First Note and Second Note on their original maturity
date, June 15, 2000. The Partnership has extended the payment date to
September 26, 2000 (or October 26, 2000 if ANA has obtained a binding
loan commitment from an institutional lender) in exchange for personal
guarantees of the indebtedness by the three principals of ANA.
At June 30, 2000, management's estimate of the Partnership's rental
obligation was $87,000 as reflected on the Statement of Net Assets in
Liquidation for the period. The actual rental obligation could vary
significantly from the management's estimate due to the uncertainty
related to the complexities which may arise in the collection of the
Second Note.
The Partnership realized a gain on the sale of $167,000, in excess of
its carrying value, after deducting for closing costs, prorations and
management's estimate of the Partnership's rental obligation. As of
June 30, 2000, management
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DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(5) Gain on Sale of Real Estate (Cont'd.)
lowered its estimate of the Partnership's rental obligation under the
leaseback arrangement from $218,000 (at March 31, 2000) to $87,000. The
revision resulted from the General Partner successfully sub-leasing
through May 31, 2003, the building the Partnership was responsible for
under the leaseback arrangement with the buyer of the property. In
addition, a commission of $121,000 that was previously payable to an
affiliate of the buyer upon payment in full of the Second Note, has
been eliminated due to ANA's failure to pay off the Second Note on its
original maturity date of June 15, 2000.
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 1999 and five of its six remaining properties were sold
by year-end. The Partnership's remaining property was sold on February
9, 2000. (See Note 5 to the financial statements for further
discussion).
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, and on
February 9, 2000, it sold its final property as set forth below:
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
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.
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 were
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,
13
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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.)
The Rubin Pachulsky Dew Transaction (Cont'd.)
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 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 was 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 (expiring on September 23, 2000) and for any litigation costs
that may arise (released to the Partnership on March 23, 2000). The
remaining cash held in escrow relates to holdbacks for tax prorations.
Iomega Business Center
On February 9, 2000, the Partnership sold Iomega Business Center to ANA
Development, L.C. ("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. ANA did not 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, and ANA was represented by an
ANA-affiliated broker in this transaction. Collectively, these brokers
were to be paid a commission not to exceed $242,550.
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.)
Sale of the Properties (Cont'd.)
Iomega Business Center (Cont'd.)
ANA delivered approximately $400,000 cash to escrow (portions of which
were used in connection with closing costs and rent prorations), plus
two promissory notes in the face amount of $6,468,000 (the "First
Note") and $1,217,000 (the "Second Note"), respectively. The First Note
bears 9% interest, with monthly payments based upon a 20-year
amortization schedule. It was due on June 15, 2000 and is secured by a
first deed of trust and assignment of rents and leases on Iomega. The
Second Note bears 12% interest, with monthly payments of interest only.
In addition, any "net cash flow" generated by Iomega will be paid to
the Partnership and applied against principal and interest payable
under the Second Note. The Second Note was due on June 15, 2000 and is
secured by a second deed of trust and assignment of rents and leases on
Iomega, plus first deeds of trust encumbering two other parcels of real
estate located in Salt Lake City, Utah and Davis County, Utah, plus a
pledge of the ANA-affiliated broker's commission.
Shortly before closing, Iomega Corporation, which had leased the entire
property since the Partnership originally purchased it, disclosed that
it would not renew its lease on one of the buildings. To close the
sale, the Partnership agreed to lease back the building from ANA for a
term ending May 31, 2001. Iomega Corporation has not yet vacated the
premises and has, in fact, signed two sub-leases (at different rental
rates) covering the building it had announced it would vacate. The
leases terminate May 31, 2003. So long as the Second Note is
outstanding in full, the Partnership has no rental obligation under the
leaseback; if the Second Note is partly paid off, the Partnership's
rental obligation will commence proportionately. Upon repayment in full
of the Second Note, the Partnership will place in escrow the total
estimated rental payments for the balance of the leaseback period.
Thereafter, the Partnership will continue to receive all rental
payments paid by Iomega Corporation or any other subtenant. ANA failed
to pay off the First Note and Second Note on their original maturity
date, June 15, 2000. The Partnership has extended the payment date to
September 26, 2000 (or October 26, 2000 if ANA has obtained a binding
loan commitment from an institutional lender) in exchange for personal
guarantees of the indebtedness by the three principals of ANA.
At June 30, 2000, management's estimate of the Partnership's rental
obligation was $87,000 as reflected on the Statement of Net Assets in
Liquidation for the period. The actual rental obligation could vary
significantly from the management's estimate due to the uncertainty
related to the complexities which may arise in the collection of the
Second Note.
The Partnership realized a gain on the sale of $167,000, in excess of
its carrying value, after deducting for closing costs, prorations and
management's estimate of the Partnership's rental obligation. As of
June 30, 2000, management lowered its estimate of the Partnership's
rental obligation under the leaseback arrangement from $218,000 (at
March 31, 2000) to $87,000. The revision resulted from the General
Partner successfully sub-leasing through May 31, 2003, the building the
Partnership was responsible for under the leaseback arrangement with
the buyer of the property. In addition, a commission of $121,000 that
was previously payable to an affiliate of the buyer upon payment in
full of the Second Note, has been eliminated due to ANA's failure to
pay off the Second Note on its original maturity date of June 15, 2000.
Other Matters
Regular distributions through the year ended December 31, 1999
represented net
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.)
cash flow from the operation of the Partnership's properties and
interest earned on the temporary investment of working capital, net of
capital reserve requirements. On December 8, 1999, the Partnership made
a special distribution of $14,001,000 representing a portion of the
proceeds from the sale of five of its six remaining properties. Another
special distribution of $5,751,000 was made on March 1, 2000. This last
special distribution arose out of discussions with the named plaintiffs
and their lawyers in the purported class action lawsuits. It represents
the culmination of further, private discussions with representatives of
Grape Investors, the holder of the largest investor position in the
Partnership. Grape Investors has agreed that for a period of 24 months,
it will not involve itself in any way or support any effort to seek, or
cause anyone else to seek, the addition of new general partners, the
appointment of a receiver, or the removal of the General Partner. Grape
Investors also has agreed to either abstain or vote against any such
action or proposal.
Two lawsuits remain pending against the Partnership and its General
Partner and certain of its affiliates that seek, among other 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 amount and timing
of any distribution of liquidation proceeds will be determined by the
General Partner in light of these and other relevant considerations.
Year 2000
As of December 31, 1999, the Partnership's accounting systems and the
investor services system used to track the limited partners' interests,
distributions and tax information were tested and appeared to be free
of year 2000 bugs. The Partnership's remaining property was also
reviewed utilizing the Building Owners and Managers Association
("BOMA") industry standards as a guideline for necessary corrections
and those corrections were successful. As of June 30, 2000, the
Partnership did not experience any significant issues or problems
relating to year 2000. The cost of the Partnership's accounting systems
upgrade was borne by the General Partner and was not reimbursed by the
Partnership.
Results of Operations for the Three Months Ended June 30, 2000
Because the Partnership has been liquidating its assets, a
quarter-to-quarter comparison of the results of operations is not
practical. As the Partnership's assets (properties) were sold, the
results of operations have been generated from a smaller asset base,
and are therefore not comparable. The Partnership completed the sale of
five of its six remaining properties in three separate transactions
16
<PAGE> 17
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 June 30, 2000
(Cont'd.)
during 1999 and sold its last property in February 2000. The
Partnership's operating results have been reflected on the Statements
of Changes of Net Assets in Liquidation.
For the three months ended June 30, 2000, the Partnership generated no
net operating income/loss from the operation of property as all of its
properties have been sold. The decrease in net operating income for the
three months ended June 30, 2000 when compared to the same period in
1999 was primarily attributable to the sale of five of its six
remaining properties during September 1999 and the sale of Iomega
Business Center on February 9, 2000.
Interest income resulted from the temporary investment of Partnership
working capital and from the interest income earned on Notes
Receivable. For the three months ended June 30, 2000, interest income
was approximately $218,000. The increase in interest income was
reflective of the temporary investment of cash and cash equivalent
balances that were generated from the sale of the properties and from
the interest income and late payment fees earned on Notes Receivable.
Miscellaneous income for the three and six months ended June 30, 2000,
resulted from a real estate tax refund that was generated by successful
tax appeals for the 1992, 1993 and 1994 tax years at Kennedy Corporate
Center. Kennedy Corporate Center was sold by the Partnership in
September 1999.
The gain on sale of real estate for the three and six months ended June
30, 2000, relates to the sale of Iomega Business Center on February 9,
2000. As of June 30, 2000, management has lowered its estimate of the
Partnership's rental obligation under the leaseback arrangement from
$218,000 to $87,000. The revision resulted from the General Partner
successfully sub-leasing through May 31, 2003, the building the
Partnership was responsible for under the leaseback arrangement with
the buyer of the property. In addition, a commission of $121,000 that
was previously payable to an affiliate of the buyer upon payment in
full of the Second Note, has been eliminated. ANA failed to pay off the
Second Note on its original maturity date of June 15, 2000. The
Partnership has extended the payment date to September 26, 2000 (or
October 26, 2000 if ANA has obtained a binding loan commitment from an
institutional lender) in exchange for personal guarantees of the
indebtedness by the three principals of ANA. See Note 5 to the
Financial Statements for further discussion.
Accrued expenses for liquidation as of June 30, 2000, include estimates
of costs to be incurred in carrying out the dissolution and liquidation
of the Partnership. These costs include estimates of legal fees,
accounting fees, tax preparation and filing fees, and other
professional services. During the three months ended June 30, 2000, the
Partnership incurred $75,000 of such expenses. At June 30, 2000, the
General Partner re-evaluated the estimated costs to wind up and
dissolve the Partnership given the uncertainty involved with the
ongoing litigation. The provision for liquidation expenses was
accordingly reduced by $5,000 to reflect the revised estimates. The
allowance for accrued expenses for liquidation does not, however,
reflect any costs of the ongoing litigation due to the uncertainty
associated with those matters.
17
<PAGE> 18
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 June 30, 2000
(Cont'd.)
Liquidation expenses incurred for the three months ended June 30, 2000
include charges of $8,000 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 liquidation expenses incurred for the three months ended
June 30, 2000 are direct charges of $65,000 relating to audit fees, tax
preparation fees, legal and professional fees, costs incurred in
providing information to the Limited Partners and other miscellaneous
costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
As of June 30, 2000, the Partnership had cash equivalents of $1,406,000
invested in interest-bearing certificates of deposit. These investments
are subject to interest rate risk due to changes in interest rates upon
maturity. Declines in interest rates over time would reduce Partnership
interest income.
18
<PAGE> 19
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,
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 L.P. 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.
In March 2000, defendants informed the Court and plaintiff that they
would bring a Motion for Summary Judgment against the named plaintiff
based upon the allegations set forth in plaintiff's complaint. On April
14, 2000, Bigelow/Diversified Secondary Partnership Fund 1990 filed a
First Amended Class Action and Derivative Complaint against
Damson/Birtcher Partners, Birtcher
19
<PAGE> 20
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
ITEM 1. LEGAL PROCEEDINGS (Cont'd.)
Bigelow Diversified Secondary Partnership Fund 1990 litigation
(Cont'd.)
Investors, Birtcher/Liquidity Properties, Birtcher Partners, Birtcher
Properties, Birtcher Ltd., Birtcher Investments, BREICORP, L.F. Special
Fund II, L.P., L.F. Special Fund I, L.P., Liquidity Fund Asset
Management, Inc., Arthur Birtcher, Ronald Birtcher, Robert Anderson,
Richard G. Wollack and Brent R. Donaldson, the Partnership,
Damson/Birtcher Realty Income Fund-I and Real Estate Income Partners
III, alleging breach of fiduciary duty, breach of contract, and a
derivative claim for breach of fiduciary duty. Defendants have answered
the First Amended Complaint.
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 moved to stay or dismiss the case
on the grounds that the pending Bigelow class action, discussed above,
raises essentially the same claims. The court granted the Partnership's
motion and ordered a stay of the litigation pending re-evaluation at a
May 23, 2000 status conference. The court lifted the stay on May 23,
2000. Plaintiffs have initiated document discovery. A status conference
is currently scheduled for September 8, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
27 - Financial Data Schedule
b) Reports on Form 8-K:
None filed in the quarter ended June 30, 2000.
20
<PAGE> 21
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> <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: August 14, 2000 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: August 14, 2000 By: /s/ Brent R. Donaldson
----------------------
Brent R. Donaldson
President
Liquidity Fund Asset Management, Inc.
</TABLE>
21
<PAGE> 22
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
