Item 1. Business (Cont'd.)
considered several preliminary indications of interest from third parties to acquire some or all of the Partnership's properties. Apart from the recent sale of Atrium Place, however, these transactions never materialized, primarily because the General Partner rejected as too low the valuations of the Partnership's properties proposed by the potential purchasers.
During 1996, the Partnership made certain capital improvements to properties held for sale that resulted in a corresponding increase in the properties' valuation allowance. At December 31, 1996, the General Partner compared the carrying value of each property to its appraised value as of January 1, 1997 and determined that Ladera-II Shopping Center and Kennedy Corporate Center had carrying values greater than their respective appraised values. As a result, during the year ended December 31, 1996, the carrying values were adjusted by $185,000 and $343,000 to $2,200,000 and $2,460,000, respectively. In addition, the carrying value of Atrium Place was reduced in September 1996 by $75,000 in order to reflect its approximate selling price and the carrying value of Lakeland Industrial Park was increased by $40,000 to $5,300,000, its estimated fair value less selling costs.
The General Partner recently mailed a consent solicitation (the "Consent Solicitation") dated February 18, 1997 to the Limited Partners, pursuant to which the Limited Partners consented 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 derives most of its revenue from rental income. Both Iomega Corporation and Delta Dental Corporation represent significant portions of such income. Rental income from Iomega Corporation totaled $1,210,000 in 1996, $1,120,000 in 1995 and $1,207,000 in 1994, or approximately 25%, 24% and 26%, respectively, of the Partnership's total rental income. Rental income from Delta Dental Corporation totaled $755,000 in 1996, $701,000 in 1995 and $694,000 in 1994, or approximately 16%, 16% and 15%, respectively, of the Partnership's total rental income.
The Partnership's investments in real estate are subject to competition for tenants from similar types of properties in the vicinities in which they are located. The Partnership has no investments in real estate located outside the United States.
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 and operating the Partnership's properties. The General Partner and its affiliates receive compensation in connection with such activities. See Item 11 and Note 4 to the Financial Statements in Item 8 for a description of such charges.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
Item 2.
Item 2. PROPERTIES
SEE NOTES TO TABLE ON THE FOLLOWING PAGE.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
Item 2. PROPERTIES (Cont'd.)
NOTES TO TABLE ON THE PRECEDING PAGE
(1) The purchase price does not include an allocable share of acquisition fees of $2,484,000 paid to the General Partner. Also, for certain properties, the purchase price has been reduced by cash received after acquisition under rental agreements for non-occupied space.
(2) An interest in Cooper Village was acquired by the Partnership through a general partnership, Cooper Village Partners ("CV Partners") consisting of the Partnership and Real Estate Income Partners III, Limited Partnership, an affiliated limited partnership. At December 31, 1996, the Partnership had a 58% interest in CV Partners. (See Note 3 to Financial Statements in Item 8 for a further discussion of the Partnership's interest in CV Partners.) The amounts shown herein for approximate purchase price and net rentable square feet represent 58% of the respective amounts for CV Partners.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Partnership is not a party to any pending legal proceedings, other than ordinary routine litigation incidental to its business. It is the General Partner's belief that the outcome of these proceedings will not be material to the business, financial condition, or results of operations of the Partnership.
NASD Matter. In a matter not directly involving the Partnership or its General Partner, in 1991, the National Association of Securities Dealers, Inc. (the "Association") Business Conduct Committee for the Northern District of California initiated a complaint against a broker-dealer affiliate of LF Special Fund I, L.P. (a general partner of the General Partner of the Partnership), alleging violations of the Association's Rules of Fair Practice. Specifically, the complaint alleged that the affiliate (i) bought and sold limited partnership units (but not interests in the Partnership) in the secondary market, from or to unaffiliated parties, subject to mark-ups or mark-downs in excess of the Association's guidelines and (ii) failed to disclose the amount or existence of such mark-ups and mark-downs to buyers and sellers of limited partnership units. Brent Donaldson and Richard Wollack, executive officers of LF Special Fund I, L.P., were also named as respondents in the complaint in their capacities as principals of the affiliate. The complaint was settled as of January 3, 1992 on the following terms: the Association made findings, which were neither admitted nor denied, of violations by the affiliate and Mr. Donaldson of the Association's guidelines with respect to mark-ups or mark-downs, and of the failure by the affiliate (but not Mr. Donaldson) to disclose the amount of such mark-ups or mark-downs. Both allegations were dismissed as to Mr. Wollack. The settlement further provided that the affiliate would be censured and fined $125,000 and that Mr. Donaldson would be censured and fined $7,500.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S LIMITED PARTNERSHIP INTERESTS AND RELATED SECURITY HOLDER MATTERS
There is no public market for the limited partnership interests and a market is not expected to develop as such limited partnership interests are not publicly traded or freely transferable.
As of February 28, 1997, the number of holders of the Partnership's interests is as follows:
The Partnership makes quarterly cash distributions to its partners out of distributable cash pursuant to the Partnership's Agreement of Limited Partnership. Distributable cash is generally paid 99% to the Limited Partners and 1% to the General Partner.
The Partnership has paid the following quarterly cash distributions to its Limited Partners:
The Limited Partners and the General Partner are entitled to receive quarterly cash distributions, as available, in the future.
In December 1996, the Partnership made a $720,000 special distribution to its limited partners from a portion of the proceeds from the sale of Atrium Place. See Item 7, Liquidity and Capital Resources for further discussion.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
Item 6.
Item 6. SELECTED FINANCIAL DATA
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Liquidity
The Partnership completed its acquisition program in December 1988 and is principally engaged in the operation of its properties. The Partnership's original objective had been to hold its properties as long-term investments. However, an Information Statement, dated May 5, 1993, mandated that the General Partner seek a vote of the Limited Partners no later than December 31, 1996, regarding prompt liquidation of the Partnership in the event that properties with appraised values as of January 1993, which constituted at least one-half of the aggregate appraised values of all Partnership properties as of that date, are not sold or under contract for sale by the end of 1996. Given the mandate of the May 5, 1993 Information Statement, at December 31, 1995, the General Partner decided to account for the Partnership's properties as assets held for sale instead of for investment. In a Consent Solicitation dated February 18, 1997, the Partnership solictied and recieved the consent of the Limited Partners to dissolve the Partnership and gradually settle and close the Partnership's business and dispose of and convey the Partnership's property as soon as practicable, consistent with obtaining reasonable value for the properties. The Partnership's properties were held for sale throughout 1996 and continue to be held for sale.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.)
Capital Resources and Liquidity (Cont'd.)
Working capital is and will be principally provided from the operation of the Partnership's properties and the working capital reserve established for the properties. The Partnership may incur mortgage indebtedness relating to such properties by borrowing funds primarily to fund capital improvements or to obtain financing proceeds for distribution to the partners.
Regular distributions for the year ended December 31, 1996 represent net cash flow from operations of the Partnership's properties and interest earned on the temporary investment of working capital, net of capital reserve requirements. In December 1996, the Partnership made a special distribution of $720,000 representing 100% of the net proceeds from the sales of Atrium Place. Future cash distributions will be made principally to the extent of cash flow attributable to the operations and sales of the Partnership's properties, after capital reserve requirements. See Item 5 for a description of the Partnership's distribution history. The Partnership believes that the cash generated from its operations will provide the Partnership the funds necessary to meet all of its ordinary obligations.
Certain of the Partnership's properties are not fully leased. The Partnership is actively marketing the vacant space in these properties, subject to the competitive environment in each of the market areas. To the extent the Partnership is not successful in maintaining or increasing occupancy levels at these properties, the Partnership's future cash flow and distributions may be reduced.
In June 1993, the Partnership completed its solicitation of written consents from its Limited Partners. A majority in interest of the Partnership's Limited Partners approved each of the proposals contained in the Information Statement dated May 5, 1993. Those proposals have been implemented by amending the Partnership Agreement as contemplated by the Information Statement. The amendments include, among other things, the payment of asset management and leasing fees to the General Partner and the elimination of the General Partner's residual interest and deferred leasing fees that were previously subordinated to return of the Limited Partners' 9% Preferential Return. See Item 8, Note 4 to the Financial Statements for discussion of fees paid to the General Partner for the year ended December 31, 1996.
January 1, 1997 Property Appraisals and Net Asset Value
In accordance with the terms of the Partnership Agreement, each year the Partnership secures an independent appraisal of each of the Partnership's properties as of January 1. Prior to the January 1, 1995 appraisals, the independent appraiser had estimated each property's "Investment Value," utilizing a seven to ten-year cash flow model to estimate value based upon an income approach.
The amendment to the Partnership Agreement consented to by the Limited Partners in June 1993 mandates, among other things, that the General Partner seek a vote of (and provide an analysis and recommendation to) the Limited Partners no later than December 31, 1996 regarding the prompt liquidation of the Partnership in the
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.)
Capital Resources and Liquidity (Cont'd.)
January 1, 1997 Property Appraisals and Net Asset Value (Cont'd.)
event that properties with (then) current appraised values constituting at least one-half of the total (then) current appraised values of all of the Partnership's properties are not sold or under contract for sale by the end of 1996.
Given this mandate, the General Partner requested that the appraiser provide an assessment of value that reflects a shorter investment holding term. Although the General Partner does not know how long it will take to sell the Partnership's properties, it requested that the appraiser assume that the entire portfolio would be sold over four years, in connection with the January 1995 appraisals, over three years in connection with the January 1996 appraisals and over approximately two years for the January 1997 appraisals.
Using the shorter-term investment methodology that is consistent with the mandate of the 1993 amendment to the Partnership Agreement, the appraiser estimated the value of the Partnership's remaining properties at January 1, 1997 to be $29,535,000.
The foregoing appraised value of the Partnership's remaining properties indicates an estimated net asset value of the Partnership of $31,163,000 or $5,926 per $10,000 of original investor subscription. (Net asset value represents the appraised value of the Partnership's properties, cash, and other assets, less all liabilities.)
Results of Operations
Year Ended December 31, 1996
The increase in rental income for the year ended December 31, 1996, when compared to 1995, was primarily attributable to: 1) Iomega's absorption of the one remaining building thereby increasing the occupancy of that property to 100% in August of 1995 ($90,000); 2)the increased occupancy at Creekridge from 91% in 1995 to 98% in 1996 ($166,000); and 3) the increased occupancy at Lakeland Industrial Park from 96% in 1995 to 100% in 1996 ($74,000).
Interest income resulted from the temporary investment of Partnership working capital. It was generally comparable to 1995 overall.
On November 21, 1996, the Partnership sold Atrium Place, a single-story 23,970 square foot office building located on 1.74 acres of land in Arlington Heights, Illinois to an unaffiliated third party. The sales price was $825,000 ($784,000 net of closing costs and escrow fees) and the net proceeds of the sale amounted to approximately $720,000 after all prorations and credits to the buyer. In December 1995, the General Partner had adjusted the carrying value of the property in accordance with the guildlines of FAS 121, which resulted in a write-down of $167,000 and an adjusted carrying value of $829,000. In September 1996, the General Partner adjusted the carrying value by another $75,000 to $754,000 upon disposition. The resulting gain on sale, after taking into consideration all costs of disposition, amounted to $30,000 as reflected in the Statement of
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.)
Results of Operations (Cont'd.)
Year Ended December 31, 1996 (Cont'd.)
Operations. The General Partner was not paid a commission or disposition fee as part of this transaction.
The decrease in operating expenses for the year ended December 31, 1996, as compared to 1995, was attributable to several factors. At Lakeland Industrial Park, roof repairs, property management wages, legal fees and marketing and advertising costs were reduced in 1996. At Kennedy Corporate Center, landscaping and snow removal costs incurred were lower in 1996 due to mild winter conditions. Finally, as a result of the increased occupancy level at Iomega, the tenant absorbed additional operating costs at the site as a result of its lease arrangement.
The decrease in real estate taxes for the year ended December 31, 1996, as compared to 1995, was primarily attributable to reductions in the annual tax assessments for Kennedy Corporate Center and Lakeland Industrial Park and the overall decrease in tax expenses resulting from the sale of Atrium Place in November 1996. These decreases were partially offset by an increased tax assessment for Creekridge.
The decrease in depreciation and amortization expenses for the year ended December 31, 1996, as compared to 1995, was a result of the adoption and implementation at December 31, 1995 of Statement of Financial Accounting Standards, No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," pursuant to which "assets held for sale" are not depreciated.
General and administrative expenses for the year ended December 31, 1996 included charges of $348,000 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 are direct charges of $336,000 relating to audit and tax preparation fees, annual appraisal fees, legal fees, insurance, costs incurred in providing information to the Limited Partners and other miscellaneous costs.
The decrease in general and administrative expenses for the year ended December 31, 1996, when compared to 1995, was primarily attributable to the decrease in administrative expense reimbursements and leasing fees. The aforementioned decrease was partially offset by higher professional fees incurred by the Partnership.
During 1996, the Partnership made certain capital improvements to properties held for sale that resulted in a corresponding increase in the properties' valuation allowance. At December 31, 1996, the General Partner compared the carrying value of each property to its apprasised value as of January 1, 1997 and determined that Ladera-II Shopping Center and Kennedy Corporate Center had carrying values greater than their respective appraised values. As a result, during the year ended December 31, 1996 the carrying values were adjusted by $185,000 and $343,000 to $2,200,000 and $2,460,000, respectively. In addition, the carrying value of Atrium Place was reduced in September 1996 by $75,000 in order to
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.)
Results of Operations (Cont'd.)
Year Ended December 31, 1996 (Cont'd.)
reflect its approximate selling price and the carrying value of Lakeland Industrial Park was increased by $40,000 to $5,300,000, its estimated fair value less selling costs.
The increase in equity in earnings of Cooper Village Partners for the year ended December 31, 1996, as compared to 1995, was primarily attributable to the Partnership's portion (58%) of depreciation expenses incurred during 1995 that were not incurred in 1996. As previously discussed, the Partnership no longer depreciates its assets due to the adoption of Financial Accounting Standard No. 121. In addition, during 1996, a lease termination settlement in the amount of $127,000 was collected from The Boston Stores and accordingly, was taken into income in 1996. Finally, the adjustment to the carrying value of real estate in 1996 decreased to $412,000 from $1,360,000 in 1995.
Year Ended December 31, 1995
The decrease in rental income for the year ended December 31, 1995, as compared to 1994, was primarily attributable to the following factors: At Iomega, rental income decreased by $86,000, which was the result of the termination of a 19,400 square foot lease by Iomega Corporation at expiration in November 1994. At Creekridge, revenue decreased by $44,000, which was primarily the result of termination of two leases in March and April 1995. At Kennedy Corporate Center, revenue decreased by $68,000, which was primarily a result of reduced operating expense recoveries during 1995. The aforementioned decreases were partially offset by increased revenues at Lakeland Industrial Park due to an increase in occupancy level ($60,000).
Interest income resulted from the temporary investment of Partnership working capital. The increase for the year ended December 31, 1995, as compared to 1994, was attributable to a higher rate-of-return on short-term investments achieved during 1995. In addition, other miscellaneous revenues increased by $11,000 in 1995.
The decrease in operating expenses for the year ended December 1995, as compared to 1994, was primarily attributable to a decrease in parking repairs and maintenance, insurance and utilities at Lakeland Industrial Park.
The increase in real estate taxes for the year ended December 31, 1995, was primarily attributable to an increase in real estate tax accrual at Kennedy Corporate Center due to anticipated higher tax assessment ($46,000). The aforementioned increase was partially offset by a decrease in real estate taxes at Atrium, which was a result of a $25,000 tax refund in 1995.
General and administrative expenses for the year ended December 31, 1995 included charges of $415,000 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 are direct charges of $273,000 relating to audit and tax
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.)
Results of Operations (Cont'd.)
Year Ended December 31, 1995 (Cont'd.)
preparation fees, annual appraisal fees, legal fees, insurance, costs incurred in providing information to the Limited Partners and other miscellaneous costs.
The increase in general and administrative expenses for the year ended December 31, 1995, as compared to 1994, was primarily attributable to an increase in legal and professional services, leasing fees paid to the General Partner and its affiliates for leasing services rendered in connection with leasing space in the Partnership's properties. In addition, appraisal fees and administrative wages were higher during 1995. The aforementioned increases were partially offset by a decrease in asset management fees.
Given the mandate of the May 5, 1993 Information Statement, the General Partner decided to account for the Partnership's properties as assets held for sale, instead of for investment as of December 31, 1995. Accordingly, the General Partner compared the carrying value of each property to its appraised value as of January 1, 1996. If the carrying value of a property and certain related assets was greater than its appraised value, less selling costs, the General Partner reduced the carrying value of the property by the difference. Using this methodology, the General Partner determined that Atrium Place, Kennedy Corporate Center, Lakeland Industrial Park and Cooper Village (58% interest) had carrying values greater than their appraised values, and therefore reduced their carrying values by $167,000, $500,000, $40,000, and $789,000 to $829,000, $2,625,000, $4,929,000, and $3,704,000, respectively.
Year Ended December 31, 1994
The increase in rental income for the year ended December 31, 1994, as compared to 1993, was attributable to several factors. At Creekridge, Delta Dental's lease was successfully renegotiated in November 1993, which resulted in an additional 7,000-square foot occupancy for a 64-month term. In addition, three new leases commenced: Title One in December 1993, and Global Access and Independent Pension Consultants in January 1994. With the expansion of Delta Dental's lease and three new leases, 1994 rental income and operating expense recoveries increased by an aggregate of $138,000. At Kennedy Corporate Center, expansion of four existing tenants and commencement of a new lease with M.Z.M., Inc. in May 1994, increased rental income and operating expense recoveries by $192,000. Also, a tenant lease settlement of $25,000 was received from Wolowicki upon termination of its lease. At Lakeland, five new leases commenced: in August 1993 with Copper & Brass Sales, in July 1994 with Midwest Anodizing Corp., in August 1994 with Midwest Products & Engineering, in September 1994 with the Courtney Company and in November 1994 with Barefoot Grass Lawn. These leases encompassed an aggregate of 51,840 square feet and increased 1994 rental income and operating expenses recoveries by an aggregate of $74,000.
Interest income resulted from the temporary investment of Partnership working capital. The increase for the year ended December 31, 1994, as compared to 1993, was attributable to an increase in working capital and a higher rate of return on short-term investments.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.)
Results of Operations (Cont'd.)
Year Ended December 31, 1994 (Cont'd.)
The increase in operating expenses for the year ended December 31, 1994, as compared to 1993, was primarily attributable to an increase in roof replacement and repairs at Iomega ($15,000), an increase in legal and professional services relating to a minor tenant dispute and real estate tax appeal ($29,000) at Atrium, Lakeland and Ladera-II, an increase in building repairs, cleaning costs and maintenance ($22,000), HVAC repairs and maintenance ($22,000) and electricity costs ($24,000) at Creekridge.
The decrease in real estate taxes for the year ended December 31, 1994, as compared to 1993, was primarily attributable to a lower tax assessment at Lakeland and Creekridge. The aforementioned decreases were partially offset by a higher tax assessment at Kennedy Corporate Center.
General and administrative expenses for the year ended December 31, 1994 included charges of $372,000 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 are direct charges of $266,000 relating to audit and tax preparation fees, annual appraisal fees, legal fees, insurance, costs incurred in providing information to the Limited Partners and other miscellaneous costs.
The decrease in general and administrative expenses for the year ended December 31, 1994, as compared to 1993, was primarily attributable to a decrease in legal and professional services, consultant fees, printing, postage and mailing expenses relating to the Partnership's solicitation of the Limited Partners for the Information Statement administered in 1993. In addition, the charge for reimbursement of certain General Partner expenses allocated to the Partnership decreased in 1994.
Provision was made for impairment loss if the General Partner determined that the carrying amount of the Partnership's investment in a real estate asset may not have been recoverable. The General Partner obtained third party appraisals on the Partnership's properties as required by the Partnership Agreement. If these appraisals indicated that certain of the Partnership's properties had market values below their then- current carrying values, the General Partner considered the appraisals and analyzed the current and anticipated market conditions of the respective properties and determined if an impairment had occurred. At December 31, 1994, after evaluation of Atrium Place, the General Partner estimated a $600,000 impairment of value as compared to its respective carrying value.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DAMSON/BIRTCHER REALTY INCOME FUND-II LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Information required by other schedules called for under Regulation S-X is either not applicable or is included in the financial statements.
DAMSON/BIRTCHER REALTY INCOME FUND-II LIMITED PARTNERSHIP
INDEPENDENT AUDITORS' REPORT
To Birtcher/Liquidity Properties, as General Partner of Damson/Birtcher Realty Income Fund-II, Limited Partnership:
We have audited the financial statements of Damson/Birtcher Realty Income Fund-II, Limited Partnership as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedule listed in the accompanying index. These financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in note 9 to the financial statements, on March 14, 1997 a majority in interest of the limited partners approved the proposal to dissolve the Partnership and sell and liquidate all of its remaining properties.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Damson/Birtcher Realty Income Fund-II, Limited Partnership as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in note 2 to the financial statements, on December 31, 1995 Damson/Birtcher Realty Income Fund-II adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
KPMG PEAT MARWICK LLP
Orange County, California March 25, 1997
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
BALANCE SHEETS
The accompanying notes are an integral part of these Financial Statements.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these Financial Statements.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
The accompanying notes are an integral part of these Financial Statements.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these Financial Statements.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Operations
Damson/Birtcher Realty Income Fund-II, Limited Partnership (the "Partnership") is a limited partnership formed on September 13, 1985, under the laws of the State of Delaware for the purpose of acquiring and operating income-producing retail, commercial and industrial properties. The General Partner of the Partnership is Birtcher/Liquidity Properties, a general partnership consisting of LF Special Fund I, L.P. ("LF-I"), a California limited partnership and Birtcher Investors, a California limited partnership. Birtcher Investors, or its affiliates, provides day-to-day administration, supervision and management of the Partnership and its properties.
In January 1993, the General Partner filed an Information Statement with the Securities and Exchange Commission seeking consent of the Limited Partners to amend the Partnership Agreement. On June 24, 1993, the Partnership completed its solicitation of written consent from its Limited Partners. A majority in interest of the Partnership's Limited Partners approved each of the proposals contained in the Information Statements, dated May 5, 1993. Those proposals have been implemented by the Partnership as contemplated by the Information Statement as amendments to the Partnership Agreement, and are reflected in these Financial Statements as such.
The amendment modified the Partnership Agreement to eliminate the General Partner's 10% subordinated interest in distributions of Distributable Cash (net cash from operations) and to reduce its subordinated interest in such distributions from 10% to 1%. The amendment also modified the Partnership Agreement to eliminate the General Partner's 10% subordinated interest in Sale or Financing Proceeds (net cash from sale or financing of Partnership property) and to reduce its subordinated interest in such proceeds from 15% to 1%. In lieu thereof, the Partnership Agreement now provides for the Partnership's payment to the General Partner of an annual asset management fee equal initially to .75% of the aggregate appraised value of the Partnership's properties. At January 1, 1996 and 1995 the portfolio was appraised at an aggregate value of approximately $30,355,000 (unaudited) and $31,035,000 (unaudited), respectively, which includes the Partnership's interest in Cooper Village Partners which was appraised at $3,735,000 (unaudited) and $4,486,000 (unaudited), respectively. The factor used to calculate the annual asset management fee will be reduced by .10% each year beginning after December 31, 1996 (e.g., from .75% in 1996 to .65% in 1997).
The amendment modified the Partnership Agreement to eliminate the subordination provisions with respect to future property disposition fees payable under that section and authorizes payment to the General Partner and its affiliates of the foregoing property disposition fees as earned. The fees will not be subordinated to the return to the Limited Partners Preferred Return and Adjusted Invested Capital or any other amount. The disposition fees will be paid to the General Partner or its affiliates in an amount equal to 50% of the competitive real estate brokerage commission that would be charged by unaffiliated third parties providing comparable services in the area in which a property is located, but in no event more than three percent of the gross sale price of the property, and is to be reduced by the amount by which any brokerage or similar commissions paid to any unaffiliated third parties in connection with the sale of the property exceed three percent of the gross sale price. This amount is not payable, unless and to the extent that the sale price of the property in
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(1) Organization and Operations (Cont'd.)
question, net of any other brokerage commissions (but not other costs of sale), exceeds the appraised value of the property as of January 1, 1993.
The amendment states that the Partnership is no longer authorized to pay the General Partner or its affiliates any insurance commission or any property financing fees. No such commission or fees have been paid or accrued by the Partnership since its inception.
The amendment modified the provisions of the Partnership Agreement regarding allocations of Partnership income, gain and other tax items between the General Partner and the Limited Partners primarily to conform to the changes in the General Partner's interest in distributions of Distributable Cash and Sale or Financing Proceeds effected by the amendment.
It is not anticipated that the adoption and implementation of the amendment will have any material adverse effect on future allocations of income, gain, loss or other tax items to the Limited Partners. However, if any of the Partnership's properties are sold for a gain, a special allocation to the General Partner would have the effect of reducing the amount of Sale or Financing Proceeds otherwise distributable to the Limited Partners and correspondingly increasing the amount of such distributions to be retained by the General Partner. The amount of such distributions to be affected would be approximately equal to any deficit balance in the General Partner's capital account in the Partnership at the time of the allocation.
The Limited Partners have certain priorities in the allocation of cash distributions by the Partnership. Out of each distribution of net cash, the Limited Partners generally have certain preferential rights to receive payments that, together with all previous payments to them, would provide an overall 9% per annum (cumulative non-compounded) return (a "9% Preferential Return") on their investment in the Partnership. Any distributions not equaling this 9% Preferential Return in any quarter are to be made up in subsequent periods if and to the extent distributable cash is available.
Distributable cash from operations is paid out each quarter in the following manner: 99% to the Limited Partners and 1% to the General Partner. These payments are made each quarter to the extent that there is sufficient distributable cash available.
Sale or financing proceeds are to be distributed, to the extent available, as follows: (i) to the Limited Partners until all cash distributions to them amount to a 9% Preferential Return on their investment cumulatively from the date of their admission to the Partnership, (ii) then to the Limited Partners in an amount equal to their investment; and (iii) the remainder, 99% to Limited Partners and 1% to the General Partner.
The unpaid 9% Preferential Return to the Limited Partners aggregates approximately $26,102,000 as of December 31, 1996.
Income or loss for financial statement purposes is allocated 99% to the Limited Partners and 1% to the General Partner.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(1) Organization and Operations (Cont'd.)
The amendment modified the Partnership Agreement so as to restrict the Partnership from entering into a future "Reorganization Transaction" (as defined in the amendment) sponsored by the General Partner or any of its affiliates unless such transaction is approved by a "supermajority" of at least 80% in interest of the Limited Partners and the General Partner.
The amendment also prohibits the modification of this restriction on Reorganization Transactions without the approval of at least 80% in interest of the Limited Partners.
The Partnership's original investment objectives contemplated that it would hold its properties for a period of at least five years, with decisions about the actual timing of property sales or other dispositions to be left to the General Partner's discretion based on the anticipated remaining economic benefits of continued ownership and other factors.
The General Partner recently mailed a consent solicitation (the "Consent Solicitation") dated February 18, 1997 to the Limited Partners, pursuant to which the Limited Partners consented to dissolve the Partnership and 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.
As of December 31, 1995 the General Partner decided to treat its properties as held for sale, instead of for investment, for financial statement purposes. Since adoption of the 1993 amendment, the General Partner has considered several preliminary indications of interest from third parties to acquire some or all of the Partnership's properties. Apart from the sale of Atrium Place, these transactions never materialized, primarily because the General Partner rejected as too low the valuations of the Partnership's remaining properties as proposed by the potential purchasers. The Partnership's properties were held for sale throughout 1996 and continue to be held for sale.
In accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (see Note 2), the carrying value of these properties was evaluated to ensure that each property is carried on the Partnership's balance sheets at the lower of cost or fair value less selling costs. The General Partner estimated fair value for this purpose based on appraisals performed as of January 1, 1997 at December 31, 1996 and as of January 1, 1996 at December 31, 1995.
The January 1, 1997 appraisals assume that the properties will be sold within approximately two years and that the sales will take place on a property by property basis between willing buyers and willing sellers. Among the strategies the General Partner will consider to accomplish the dissolution is a sale of the Partnership's portfolio in a single transaction, or a sale of some or all of the Partnership's properties in a "package" with properties of affiliated partnerships. If the properties were sold in a "package" such sale would most likely result in a lower aggregate sales price, but more rapid distribution of dissolution proceeds to the Limited Partners, as compared to a series of individual sale transactions. Furthermore, fair value can only be determined based upon sales to third parties, and sales proceeds could differ substantially from appraised values.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(2) Summary of Significant Accounting Policies
Carrying Value of Real Estate
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("FAS 121"). This Statement requires that if the General Partner believes factors are present that may indicate long-lived assets are impaired, the undiscounted cash flows, before debt service, related to the assets should be estimated. If these estimated cash flows are less than the carrying value of the asset, then impairment is deemed to exist. If impairment exists, the asset should be written down to the estimated fair value.
Further, assets held for sale, including any unrecoverable accrued rent receivable or capitalized leasing commissions, should be carried at the lower of carrying value or fair value less estimated selling costs. Any adjustment to carrying value is recorded as a valuation allowance against property held for sale. Each reporting period, the General Partner will review their estimates of fair value, which may be decreased or increased up to the original carrying value. Finally, assets held for sale are no longer depreciated. The General Partner adopted FAS 121 at December 31, 1995 and the adoption did not have a material impact on the Partnership's operations or financial position as prior to December 31, 1995, the Partnership had not had any properties held for sale.
As noted above, as of December 31, 1995 the General Partner decided to account for the Partnership's properties as assets held for sale, assuming a 12 month holding period, instead of for investment. Accordingly, the General Partner compared the carrying value of each property to its appraised value as of January 1, 1996. If the carrying value of a property and certain related assets was greater than its appraised value, less selling costs, the General Partner reduced the carrying value of the property by the difference. Using this methodology, the General Partner determined that Atrium Place, Kennedy Corporate Center, Lakeland Industrial Park and Cooper Village (58% interest) had carrying values greater than they had appraised values, and therefore reduced their carrying values by $167,000, $500,000, $40,000, and $789,000 to $829,000, $2,625,000, $4,929,000 and $3,704,000, respectively.
Utilizing the same methodology, assuming a twelve month holding period, for the year ended December 31, 1996, the General Partner determined that Ladera-II Shopping Center and Kennedy Corporate Center had carrying values greater than their respective appraised values, less selling costs. As a result, the carrying values were adjusted by $185,000 and $343,000 to $2,200,000 and $2,460,000, respectively. In addition, the carrying value of Atrium Place was reduced in September 1996 by $75,000 in order to reflect its approximate selling price and the carrying value of Lakeland Industrial Park was increased by $40,000 to $5,300,000, its estimated fair value less selling costs.
Prior to the adoption of FAS 121, provision was made for impairment loss if the General Partner determined that the carrying amount of the Partnership's investment in a real estate asset was not recoverable. The General Partner obtained third party appraisals on the Partnership's properties as required by the Partnership Agreement. If these appraisals indicated that certain of the Partnership's properties had market values below their then-current carrying values, the General Partner considered
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(2) Summary of Significant Accounting Policies (Cont'd.)
Carrying Value of Real Estate (Cont'd)
the appraisals and analyzed the current and anticipated market conditions of the respective properties and determined if an impairment had occurred.
Prior to the adoption of FAS 121, provision was made for impairment loss if the General Partner determined that the carrying amount of the Partnership's investment in a real estate asset was not recoverable. The General Partner obtained third party appraisals on the Partnership's properties as required by the Partnership Agreement. If these appraisals indicated that certain of the Partnership's properties had market values below their then-current carrying values, the General Partner considered the appraisals and analyzed the current and anticipated market conditions of the respective properties and determined if an impairment had occurred.
At December 31, 1994, after evaluation of the Atrium Place, the General Partner estimated a $600,000 impairment of value as compared to its respective carrying value.
Cash and Cash Equivalents
The Partnership invests its excess cash balances in short-term investments (cash equivalents). These investments are stated at cost, which approximates market, and consist of money market, certificates of deposit and other non-equity-type cash investments. Cash equivalents at December 31, 1996 and 1995, totaled $1,442,000 and $955,000, respectively. Cash equivalents are defined as temporary non-equity investments with original maturities of three months or less, which can be readily converted into cash and are not subject to changes in market value.
Depreciation
Through December 31, 1995, depreciation expense was computed using the straight-line method. Rates used in the determination of depreciation were based upon the following estimated useful lives:
Revenue Recognition
Rental income pertaining to operating lease agreements which specify scheduled rent increases or free rent periods, is recognized on a straight-line basis over the period of the related lease agreement.
Income Taxes
Income taxes are not levied at the Partnership level, but rather on the individual partners; therefore, no provision or liability for Federal and State income taxes has been reflected in the accompanying financial statements.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(2) Summary of Significant Accounting Policies (Cont'd.)
Income Taxes (Cont'd)
Following are the Partnership's assets and liabilities as determined in accordance with generally accepted accounting principles ("GAAP") and for federal income tax reporting purposes at December 31:
Following are the differences between Financial Statement and tax return income:
Significant Tenants
Rental income from Iomega Corporation totaled $1,210,000 in 1996, $1,120,000 in 1995 and $1,207,000 in 1994, or approximately 25%, 24% and 26%, respectively, of the Partnership's total rental income. Rental income from Delta Dental Corporation totaled $755,000 in 1996, $701,000 in 1995, $694,000 in 1994, or approximately 16%, 16% and 15%, respectively, of the Partnership's total rental income.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(2) Summary of Significant Accounting Policies (Cont'd.)
Earnings and Distributions 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.
Estimations
The preparation of financial statements in conformity with generally accepted accounting principles requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Investment in Cooper Village
The Partnership uses the equity method of accounting to account for its investment in Cooper Village Partners inasmuch as control of Cooper Village Partners is shared jointly between the Partnership and Real Estate Income Partners III, Limited Partnership. The accounting policies of Cooper Village Partners are consistent with those of the Partnership.
(3) Investment in Cooper Village Partners
During 1987 and 1988, Cooper Village Partners ("CV Partners"), a California general partnership consisting of the Partnership and Real Estate Income Partners III, Limited Partnership ("Fund III"), an affiliated limited partnership, acquired Cooper Village. In connection therewith, the Partnership and Fund III contributed capital contributions of $5,937,000 (58%) and $4,300,000 (42%), respectively, and share in the profits, losses and distributions of CV Partners in proportion to their respective ownership interests.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(3) Investment in Cooper Village Partners (Cont'd.)
Condensed summary financial information for CV Partners is presented below.
(4) 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 years ended December 31, 1996, 1995 and 1994, the Partnership was charged with approximately $130,000, $161,000 and $101,000, respectively, of such expenses.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(4) Transactions with Affiliates (Cont'd.)
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 $168,000 in 1996, $158,000 in 1995, and $159,000 in 1994. The General Partner was also paid a leasing fee for services rendered in connection with leasing space in a partnership property after the expiration or termination of any lease of such space including renewal options. Such fees amounted to $19,000, $55,000, and $40,000 for the years ended December 31, 1996, 1995, and 1994, respectively. Those fees have been recorded in general and administrative expenses in the accompanying statements of operations for the years ended December 31, 1996, 1995, and 1994. As reimbursement of costs for on-site property management personnel and other related costs, an affiliate of the General Partner received $108,000 in 1996, $122,000 in 1995 and $119,000 in 1994. In addition to the aforementioned, the General Partner was also paid $54,000, $51,000 and $52,000 related to the Partnership's portion (58%) of property management fees, leasing fees, reimbursement of on-site property management personnel and other reimbursable expenses for CV Partners for the year ended December 31, 1996, 1995 and 1994, respectively.
The amended Partnership Agreement provides for the Partnership's payment to the General Partner of an annual asset management fee equal to .75% of the aggregate appraised value of the Partnership's properties as determined by independent appraisal undertaken in January of each year. Such fees for the year ended December 31, 1996, 1995 and 1994, amounted to $199,000, $199,000 and $231,000, respectively. In addition to the aforementioned, the General Partner was also paid $28,000, $34,000 and $31,000, related to the Partnership's portion (58%) of asset management fees for Cooper Village Partners for the years ended December 31, 1996, 1995 and 1994, respectively.
(5) Gain on Disposition of Assets
On November 21, 1996, the Partnership sold Atrium Place, a single-story 23,970 square foot office building located on 1.74 acres of land in Arlington Heights, Illinois to an unaffiliated third party. The sales price was $825,000 ($784,000 net of closing costs and escrow fees) and the net proceeds of the sale amounted to approximately $720,000 after all prorations and credits to the buyer. In December 1995, the General Partner had adjusted the carrying value of the property in accordance with the guildlines of FAS 121, which resulted in a write-down of $167,000 and an adjusted carrying value of $829,000. In September 1996, the General Partner adjusted the carrying value by another $75,000 to $754,000 upon disposition. The resulting gain on sale, after taking into consideration all costs of disposition, amounted to $30,000 as reflected in the Statement of Operations. The General Partner was not paid a commission or disposition fee as part of this transaction.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(6) Commitments and Contingencies
Litigation
The Partnership is not a party to any pending legal proceedings other than ordinary routine litigation incidental to its business. It is the General Partner's belief, that the outcome of these proceedings will not be material to the business, financial condition, or results of operations of the Partnership. See note 9 for subsequent events.
Future Minimum Annual Rentals
The Partnership has determined that all leases which had been executed as of December 31, 1996, are properly classified as operating leases for financial reporting purposes. Future minimum annual rental income to be received under such leases as of December 31, 1996, is as follows:
Certain of these leases also provide for, among other things: tenant reimbursements to the Partnership of certain operating expenses; payments of additional rents in amounts equal to a set percentage of the tenant's annual revenue in excess of specified levels; and escalations in annual rents based upon the Consumer Price Index.
(7) Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(8) Allowance for Doubtful Accounts
(9) Subsequent Events
On February 28, 1997, the Partnership made an aggregate cash distribution of $600,000 to its Limited Partners.
On March 14, 1997, a majority in interest of the Limited Partners approved the proposal to dissolve the Partnership and sell and liquidate all of its remaining properties pursuant to the Consent Solicitation dated February 18, 1997.
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.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS)
NOTE: Columns B and G are either none or are not applicable.
See notes to table on following page.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO SCHEDULE III
(a) For a description of the properties, see "Item 2. Properties." This schedule does not include the investment in Cooper Village Partners which is accounted for under the equity method of accounting.
(b) During the year ended December 31, 1996, the General Partner determined that Ladera-II Shopping Center and Kennedy Corporate Center had carrying values greater than their respective appraised values, less selling costs, and therefore provided an aggregate valuation allowance of $528,000 against property held for sale. In addition, the carrying value of Lakeland Industrial Park was increased by $40,000 to $5,300,000, its estimated fair value less selling costs.
At December 31, 1995, the General Partner determined that Atrium Place, Kennedy Corporate Center, and Lakeland Industrial Park had carrying values greater than they had appraised values less selling costs, and therefore provided a valuation allowance of $707,000 against the properties held for sale.
At December 31, 1994, after evaluation of the Atrium Place, the General Partner estimated a $600,000 impairment of value as compared to its respective carrying value.
The aggregate cost of land, buildings and improvements for Federal income tax purposes (unaudited) was $41,531,000 as of December 31, 1996. The differences between the aggregate cost of land, buildings and improvements for tax reporting purposes as compared to financial reporting purposes are primarily attributable to: 1) amounts received under rental agreements for non-occupied space, which were recorded as income for tax reporting purposes but were recorded as a reduction of the corresponding property basis for financial reporting purposes, and; 2) the adjustments to the carrying value of real estate for financial statement purposes have no effect for tax reporting purposes.
(c) The initial cost to the Partnership includes acquisition fees paid to the General Partner.
(d)
RECONCILIATION OF REAL ESTATE
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
NOTES TO SCHEDULE III (Cont'd.)
RECONCILIATION OF ACCUMULATED DEPRECIATION
(e) Through December 31, 1995, depreciation expense was computed based upon the following estimated useful lives:
Due to the adoption of FAS 121 on December 31, 1995, properties held for sale were not depreciated in 1996.
COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP)
INDEPENDENT AUDITORS' REPORT
To Damson/Birtcher Realty Income Fund-II, Limited Partnership and Real Estate Income Partners III, Limited Partnership as General Partners of Cooper Village Partners:
We have audited the financial statements of Cooper Village Partners, a general partnership, as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedule listed in the accompanying index. These financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in note 7 to the financial statements, in March 1997 a majority in interest of the limited partners of the general partners approved the proposal to dissolve the general partners and sell and liquidate all of their remaining properties.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cooper Village Partners as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in note 2 to the financial statements, on December 31, 1995 Cooper Village Partners adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
KPMG PEAT MARWICK LLP
Orange County, California March 25, 1997
COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP)
BALANCE SHEETS
The accompanying notes are an integral part of these Financial Statements.
COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP)
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these Financial Statements.
COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
The accompanying notes are an integral part of these Financial Statements.
COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP)
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these Financial Statements.
COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(1) Organization
Cooper Village Partners, (the "Partnership") was formed on December 18, 1987 under the laws of the State of California. The General Partners of the Partnership are Damson Birtcher Realty Income Fund II, Limited Partnership ("Fund II") and Real Estate Income Partners III, Limited Partnership ("Fund III"). During 1987 and 1988, The Partnership acquired Cooper Village Shopping Center in Mesa, Arizona. In connection with this acquisition, Fund II and Fund III contributed capital of $5,937,000 (58%) and $4,300,000 (42%), respectively. Fund II and Fund III share in the profits, losses and distributions of the Partnership in proportion to their respective ownership interests. The Partnership maintains its accounting records and prepares its financial statements in accordance with generally accepted accounting principles.
The General Partner of Funds II and III recently mailed a consent solicitation (the "Consent Solicitation") dated February 18, 1997 to the Limited Partners, pursuant to which the Limited Partners consented to dissolve those partnerships and gradually settle and close their respective businesses and dispose of and convey their respective properties as soon as practicable, consistent with obtaining reasonable value for the properties.
As of December 31, 1995 the General Partners decided to treat their properties, as well as the Partnership's property, as held for sale, instead of for investment, for financial statement purposes. Since 1993, the General Partners have considered several preliminary indications of interest from third parties to acquire the Partnership's property. The Partnership's sole property was held for sale throughout 1996 and it is currently held for sale.
In accordance with Statement of Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived Assets to Be Disposed Of" (see Note 2), the carrying value of the Partnership's property was evaluated to ensure it is carried on the Partnership's balance sheets at the lower of cost or fair value less selling costs. The General Partners' estimated fair value for this purpose was based on an appraisal performed as of January 1, 1997 at December 31, 1996 and as of January 1, 1996 at December 31, 1995.
The January 1, 1997 appraisal assumes that the property will be sold within two years and that the sale will take place on an individual property basis between a willing buyer and a willing seller. Among the strategies the General Partners will consider to accomplish the dissolution is a sale of the Partnership's property in a single transaction, or the sale of the Partnership's property in a "package" with properties of affiliated partnerships. If the property was sold in a "package", such sale would most likely result in a lower sale price, but more rapid distribution of dissolution proceeds to the General Partners, as compared to an individual property sale transaction. Furthermore, fair value can only be determined based upon sales to third parties, and sales proceeds could differ substantially from appraised values.
COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(2) Summary of Significant Accounting Policies
Carrying Value of Real Estate
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("FAS 121"). This Statement requires that if management believes factors are present that may indicate long-lived assets are impaired, the undiscounted cash flows, before debt service, related to the assets should be estimated. If these estimated cash flows are less than the carrying value of the asset, then impairment is deemed to exist. If impairment exists, the asset should be written down to the estimated fair value.
Further, assets held for sale, including any unrecoverable accrued rent receivable or capitalized leasing commissions, should be carried at the lower of carrying value or fair value less estimated selling costs. Any adjustment to carrying value is recorded as a valuation allowance against property held for sale. Each reporting period, the General Partners will review their estimates of fair value, which may be decreased or increased up to the original carrying value. Finally, assets held for sale are no longer depreciated. The General Partners adopted FAS 121 at December 31, 1995 and the initial adoption did not have a material impact on the Partnership's operations or financial position as prior to December 31, 1995 the Partnership had not had any properties held for sale.
As noted above, as of December 31, 1995 the General Partners decided to account for the Partnership's property as an asset held for sale, assuming a 12 month holding period, instead of for investment. Accordingly, the General Partners compared the carrying value of the property to its appraised value as of January 1, 1996. The carrying value of the property and certain related assets was greater than it's appraised value, less selling costs, and the General Partner reduced the carrying value of the property by the difference of $1,360,000. At December 31, 1996, after comparing the carrying value to the January 1, 1997 appraised value, the property's carry value was adjusted by an additional $412,000.
Prior to the adoption of FAS 121, provision was made for impairment loss if the General Partners determined that the carrying amount of the Partnership's investment in a real estate asset was not recoverable. The General Partners obtained a third party appraisal on the Partnership's property as required by the Partnership Agreement. If this appraisal indicated that the Partnership's property had a market value below its then-current carrying value, the General Partners considered the appraisal and analyzed the current and anticipated market conditions of the respective property and determined if an impairment had occurred.
Cash and Cash Equivalents
The Partnership invests its excess cash balances in short-term investments ("cash equivalents"). These investments are stated at cost, which approximates market, and consist of money market accounts, certificates of deposit and other nonequity-type cash investments. Cash equivalents at December 31, 1996 and 1995, totaled $301,000 and $407,000, respectively. Cash equivalents are defined as temporary non-equity investments with original maturities of three months or less, which can be readily converted into cash and are not subject to changes in market value.
COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(2) Summary of Significant Accounting Policies (Cont'd.)
Depreciation
Through December 31, 1995 depreciation expense was computed using the straight-line method. Rates used in the determination of depreciation were based upon the following estimated useful lives:
Revenue Recognition
Rental income pertaining to operating lease agreements which specify scheduled rent increases or free rent periods, is recognized on a straight-line basis over the period of the related lease agreement.
Estimations
The preparation of financial statements in conformity with generally accepted accounting principles requires the General Partners to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income Taxes
Income taxes are not levied at the Partnership level, therefore, no provision or liability for Federal and State income taxes has been reflected in the accompanying financial statements.
Following are the Partnership's assets and liabilities as determined in accordance with generally accepted accounting principles ("GAAP") and for federal income tax reporting purposes at December 31:
COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(2) Summary of Significant Accounting Policies (Cont'd.)
Income Taxes (Cont'd.)
Following are the differences between Financial Statement and tax return income:
(3) Transactions with Affiliates
The Partnership has no employees and, accordingly, Birtcher Properties, an affiliate of the General Partner of Fund II and Fund III and its affiliates perform services on behalf of the Partnership in connection with administering the affairs of the Partnership. Birtcher Properties and affiliates are reimbursed for their general and administrative costs actually incurred and associated with services performed on behalf of the Partnership. For the years ended December 31, 1996, 1995 and 1994, the Partnership was charged with approximately $1,000, $0 and $0, respectively, of such expenses.
An affiliate of the General Partner of Fund II and Fund III provides property management services with respect to the Partnership's property and receives a fee for such services not to exceed 6% of the gross receipts from the property under management provided that leasing services were performed, otherwise not to exceed 3%. Such fees amounted to approximately $54,000 in 1996, $52,000 in 1995 and $52,000 in 1994. In addition, as reimbursement of costs for on-site property management personnel and other related costs, an affiliate of the General Partner received $35,000 in 1996, $33,000 in 1995 and $32,000 in 1994, as reimbursement of costs for on-site property management personnel and other reimbursable costs.
The amended Partnership Agreements for Fund II and Fund III provide for payments to Birtcher Properties or its affiliates of an annual asset management fee equal to .75% of the aggregate appraised value of Cooper Village as determined by independent appraisal undertaken in January of each year. Such fees for the years ended December 31, 1996, 1995 and 1994, amounted to $48,000, $58,000 and $53,000, respectively. In addition, the amended Partnership Agreements for Fund II and Fund III provide for payment to the General Partner or its affiliates of a leasing fee for services rendered in connection with leasing space in the Partnership property after the expiration or termination of any lease of such space including renewal options. Fees for leasing services for the years ended December 31, 1996, 1995 and 1994, amounted to $3,000, $2,000 and $5,000, respectively.
COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(4) Commitments and Contingencies
Litigation
The Partnership is not a party to any material pending legal proceedings other than ordinary routine litigation incidental to its business. It is the General Partners' belief, that the outcome of these proceedings will not be material to the business, financial condition, or results of operations of the Partnership. See note 7 for subsequent events.
Future Minimum Annual Rentals
The Partnership has determined that all leases which had been executed as of December 31, 1996, are properly classified as operating leases for financial reporting purposes. Future minimum annual rental income to be received under such leases as of December 31, 1996, are as follows:
Certain of these leases also provide for, among other things: tenant reimbursements to the Partnership of certain operating expenses; payments of additional rents in amounts equal to a set percentage of the tenant's annual revenue in excess of specified levels; and escalations in annual rents based upon the Consumer Price Index.
(5) Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(6) Allowance for Doubtful Accounts
(7) Subsequent Events
On February 28, 1997, the Partnership made an aggregate cash distribution of $120,000 to its General Partners.
In March 1997, a majority in interest of the Limited Partners of the General Partners approved a proposal to dissolve the General Partners and sell and liquidate all of their remaining properties pursuant to the Consent Solicitation dated February 18, 1997.
On March 25, 1997, a limited partner of the General Partners 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.
COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP)
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS)
NOTE: Columns B and G are either none or are not applicable.
COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP)
NOTES TO SCHEDULE III
(a) For a description of the property, see "Item 2. Properties."
(b) At December 31, 1995, the General Partner determined that the Partnership's property had a carrying value greater than its appraised value less selling cost, and therefore provided a valuation allowance of 1,360,000 against property held for sale.
At December 31, 1996, the General Partner determined that the Partnership's property had a carrying value greater than its appraised value less selling cost, and therefore provided an additional valuation allowance of $412,000 against property held for sale.
The aggregate cost of land, buildings and improvements for Federal income tax purposes (unaudited) was $9,781,000 as of December 31, 1996. The differences between the aggregate cost of land, buildings and improvements for tax reporting purposes as compared to costs for financial reporting purposes are primarily attributable to: 1) amounts received under rental agreements for non-occupied space, which were recorded as income for tax reporting purposes but were recorded as a reduction of the corresponding property basis for financial reporting purposes, and; 2) the adjustments to the carrying value of real estate for financial statement purposes no effect for tax reporting purposes.
(c) The initial cost to the Partnership includes acquisition fees paid to Birtcher Investments and Equity Properties Inc.
(d) Through December 31, 1995, depreciation was computed based upon the following estimated useful lives:
Due to the adoption of FAS 121 on December 31, 1995, the property held for sale was not depreciated in 1996.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership and the General Partner have no directors or executive officers. The General Partner of the Partnership is Birtcher/Liquidity Properties, a California general partnership of which Birtcher Investors, a California limited partnership, and LF Special Fund I, L.P., a California limited partnership, are the general partners. Under the terms of the Partnership Agreement, Birtcher Investors is responsible for the day-to-day management of the Partnership's assets.
The general partner of LF Special Fund I, L.P., is Liquidity Fund Asset Management, Inc., a California corporation affiliated with Liquidity Financial Group, L.P. The principals and officers of Liquidity Fund Asset Management, Inc. are as follows:
Richard G. Wollack, Chairman of the Board Brent R. Donaldson, President Deborah M. Richard, Chief Financial Officer
The general partner of Birtcher Investors is Birtcher Investments, a California general partnership. Birtcher Investments' general partner is Birtcher Limited, a California limited partnership and its general partner is BREICORP, a California corporation. The principals and relevant officers of BREICORP are as follows:
Ronald E. Birtcher, Co-Chairman of the Board Arthur B. Birtcher, Co-Chairman of the Board Robert M. Anderson, Executive Director
Item 11.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth the fees, compensation and other expense reimbursements paid to the General Partner and its affiliates in all capacities for each year in the three-year period ended December 31, 1996.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
Item 11. EXECUTIVE COMPENSATION (Cont'd.)
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of January 31, 1997, there was no entity or individual holding more than 5% of the limited partnership interests of the Registrant.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning transactions to which the Registrant was or is to be a party in which the General Partner or its affiliates had or are to have a direct or indirect interest, see Notes 1, 3, and 4 to the Financial Statements in Item 8, which information is incorporated herein by reference.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) 1. and 2. Financial Statements and Financial Statements Schedules:
See accompanying Index to Financial Statements and Schedules to Item 8, which information is incorporated herein by reference.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Cont'd.)
3. Exhibits: Articles of Incorporation and Bylaws
(a) Agreement of Limited Partnership incorporated by reference to Exhibit No. 3.1 to the Partnership's registration statement on Form S-11 (Commission File No. 2-99421), dated August 5, 1985, as filed under the Securities Act of 1933.
10. Material Contracts
(a) Form of Property Management Agreement between Birtcher Properties and the Registrant incorporated by reference to Exhibit No. 10.1 of the Partnership's registration statement on Form S-11 (Commission File No. 2-99421), as filed September 24, 1985, under the Securities Act of 1933. (SUPERSEDED)
(b) Letter of Intent regarding Purchase and Sale of Real Property (Cooper Village, Phase I) dated September 3, 1987, by and between Arizona Building and Development, the Wolfswinkel Group and Birtcher Realty Corporation incorporated by reference to Exhibit 19(a) of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1987.
(c) Agreement of Purchase and Sale of Real Property (Cooper Village, Phase I) dated November 13, 1987, by and between Broadway Village Partners and Birtcher Acquisition Corporation incorporated by reference to Form 8-K, as filed December 30, 1987.
(d) Agreement of General Partnership, dated December 15, 1987, by and between Damson/Birtcher Realty Income Fund-II, Limited Partnership and Real Estate Income Partners III, Limited Partnership incorporated by reference to Form 8-K, as filed December 30, 1987.
(e) Property Management Agreement dated October 24, 1991, between Glenborough Management Corporation and the Registrant for Atrium Place, Creekridge Center, Iomega/Northpointe Business Center, Kennedy Corporate Center I, Ladera II Shopping Center and Lakeland Industrial Park. Incorporated by reference to Exhibit 1 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991. (SUPERSEDED)
(f) Property Management Agreement dated October 24, 1991, between Glenborough Management Corporation and Cooper Village Partners for Cooper Village Shopping Center. Incorporated by reference to Exhibit 2 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991. (SUPERSEDED)
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Cont'd.)
10. Material Contracts (Cont'd.)
(g) Agreement for Partnership Administrative Services dated October 24, 1991, between Glenborough Management Corporation and the Registrant for the services described therein. Incorporated by reference to Exhibit 3 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991. (SUPERSEDED)
(h) Property Management Agreement, dated October 29, 1993, between Birtcher Properties and the Registrant for Atrium Place, Creekridge Center, Iomega Business Center, Kennedy Corporate Center-I, Ladera-II Shopping Center, and Lakeland Industrial Park. Incorporated by reference to Exhibit 1 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991. (SUPERSEDED)
(i) Property Management Agreement, dated October 29, 1993, between Birtcher Properties and Cooper Village Partners for Cooper Village Shopping Center. Incorporated by reference to Exhibit 2 of the Partnership Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
(27) Financial Data Schedule
b) Reports on Form 8-K:
Report filed on November 21, 1996 regarding the sale of Atrium Place. See Item 8, Note 5 to the Financial Statements, herein incorporated by reference.
DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Birtcher/Liquidity Properties (General Partner of the Registrant) and in the capacities and on the dates indicated.