10-Q 1 a72423e10-q.txt FORM 10-Q PERIOD ENDED MARCH 31, 2001 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2001 --------------------------------------------------------------- Commission file number 0-14633 ---------------------------------------------------------- DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP ---------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3294820 -------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 27611 La Paz Road, P.O. Box 30009, Laguna Niguel, California 92607-0009 ----------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (949) 643-7700 ---------------------------------------------------- (Registrant's telephone number, including area code) N/A --------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 12(g), 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 2 DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2001 INDEX

2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP STATEMENTS OF NET ASSETS IN LIQUIDATION

The accompanying notes are an integral part of these financial statements. 3 4 DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP STATEMENTS OF CHANGES OF NET ASSETS IN LIQUIDATION (UNAUDITED)

The accompanying notes are an integral part of these financial statements. 4 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, 2000. The Partnership uses the liquidation basis of accounting. 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). Segment Reporting 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. Rental income from Iomega Corporation totaled $0 and $102,000 for the three months ended March 31, 2001 and 2000, respectively, or approximately 0% and 100%, respectively, of the Partnership's total rental income. (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 March 31, 2001 and 2000 the Partnership incurred approximately $5,000 and $3,000, respectively, of such expenses. An affiliate of the General Partner provided property management services with respect to the Partnership's properties and received 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 $7,000, respectively, for the three months ended March 31, 2001 and 2000. In addition, an affiliate of the General Partner received $0 and $1,000 for the three months ended March 31, 2001 and 2000, respectively, as reimbursement of costs of on-site property management personnel and other reimbursable expenses. 5 6 DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.) (2) Transactions with Affiliates (Cont'd.) Leasing fees for the three months ended March 31, 2001 and 2000, included charges of $0 and $2,000, 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. The amended Partnership Agreement provides for the Partnership's payment to the General Partner of an annual asset management fee equal to .25% for 2001 and .35% for 2000 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 March 31, 2001 and 2000, amounted to $0 and $4,000, respectively. Since the Partnership has sold all of its properties, the Partnership no longer pays an asset management fee. (3) Commitments and Contingencies Litigation So far as is known to the General Partner, the Partnership is not 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. 6 7 DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (3) Commitments and Contingencies (Cont'd.) Litigation (Cont'd.) Bigelow Diversified Secondary Partnership Fund 1990 litigation (Cont'd.) 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. 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 4, 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. Plaintiff has engaged in preliminary discovery. On October 27, 2000, defendants sought permission of the court to communicate an offer to settle to individual limited partners of the Partnership. Plaintiff's counsel opposed that motion. On December 4, 2000, the court ruled that defendants could communicate an offer to settle to individual limited partners. Thereafter, on December 12, 2000, the Partnership and the General Partner mailed to the limited partners an offer to settle this lawsuit and all other claims (including the Madison Partnership Liquidity Investors Litigation referenced below) for payment of each settling limited partner's pro rata share of the proceeds available for distribution from liquidation of the Partnership's properties (approximately $171 per $1,000 of original investment interest) plus a nominal payment of $1.00 from the General Partners for an assignment of all of a settling limited partner's interest in the Partnership to the General Partner. Limited partners holding 42% of the interests (including the Grape Settlement) in the Partnership settled on these terms. The aggregate distribution in connection with the December 12, 2000 offer, which was reflected as an accrual at December 31, 2000, was approximately $3,267,000. It has been paid in full as of March 31, 2001. 7 8 DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (3) Commitments and Contingencies (Cont'd.) Litigation (Cont'd.) Bigelow Diversified Secondary Partnership Fund 1990 litigation (Cont'd.) On March 6, 2001, all of the defendants other than the Partnership and the general partners filed a motion to be dismissed from the case. Plaintiff has filed responsive papers. The court has not yet set a hearing date for this motion. 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. On August 14, 2000, plaintiffs petitioned the court for an order certifying the action as a class action. Plaintiffs also asked the court to issue a writ mandating that the Partnership immediately distribute all liquidation proceeds to the limited partners. On December 19, 2000, the court denied both motions. The case is currently proceeding only as a derivative action. The court has set a status conference for May 25, 2001. As noted above, limited partners holding 42% of the interests in the Partnership have settled this (and all other) cases against the Partnership and the General Partner. (4) Accrued Expenses for Liquidation Accrued expenses for liquidation as of March 31, 2001, include estimates of costs to be incurred in carrying out the dissolution and liquidation of the Partnership through December 31, 2001. 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 March 31, 2001, the Partnership incurred $94,000 of such expenses. The actual costs could vary significantly from the related provisions due to the uncertainty related to the ongoing litigation discussed in note 3. The 8 9 DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.) (4) Accrued Expenses for Liquidation (Cont'd.) accrued expenses for liquidation do not take into consideration the possible outcome of the ongoing litigation (aside from estimated attorney fees through December 31, 2001). Such costs are unknown and are not estimable at this time. The Partnership is seeking reimbursement of certain litigation expenses and indemnity for any potential liability from its insurers. To date, the insurers have refused to reimburse any expenses and have denied coverage for potential liability, subject to a reservation of rights to reconsider their decision. (5) Loss on Sale of Real Estate 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. 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 bore 9% interest, with monthly payments based upon a 20-year amortization schedule. It was due on June 15, 2000 and was secured by a first deed of trust and assignment of rents and leases on Iomega. The Second Note bore 12% interest, with monthly payments of interest only. In addition, any "net cash flow" generated by Iomega was to 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 was 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 was outstanding in full, the Partnership had no rental obligation under the leaseback; if the Second Note was partly paid off, the Partnership's rental obligation would commence proportionately. Upon repayment in full of the Second Note, the Partnership was to place in escrow the total estimated rental payments for the balance of the leaseback period. Thereafter, the Partnership would continue to receive all rental payments paid by Iomega Corporation or any other subtenant. ANA failed to pay off the 9 10 DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (5) Loss from Sale of Real Estate (Cont'd.) First Note and Second Note on their original maturity date, June 15, 2000. The Partnership extended the payment date to September 26, 2000 (or October 26, 2000 if ANA had obtained a binding loan commitment from an institutional lender) in exchange for personal guarantees of the indebtedness by the three principals of ANA. On September 26, 2000, ANA failed to make the payment or obtain a binding loan commitment from an institutional lender. After discussions with ANA, the Partnership agreed to extend the payment period to November 3, 2000 with notification to ANA that the Partnership would foreclose if ANA failed to make the payment at that time. On November 7, 2000, ANA received a binding loan commitment from an institutional lender, subject to a real estate appraisal and other contingencies, in the amount of $6,060,000. On December 22, 2000, the purchaser of Iomega refinanced its purchase of the property, resulting in a cash payment to the Partnership of approximately $5,882,000 plus a new note for the balance of the purchase price in the amount of $1,578,000 million, originally due to mature on March 31, 2001 (the "New Note"). On December 29, 2000, the Partnership sold the New Note to a third party for approximately $1,078,000, realizing a discount of approximately $500,000 from face value. In addition, the Partnership incurred $76,000 in commissions to a third-party broker and other closing costs, resulting in net proceeds from the sale of the New Note of $1,002,000. As part of the final negotiations with ANA, the Partnership's rental obligation (estimated at $70,000 as of September 30, 2000) was forgiven. A consultant was also paid a $50,000 performance/completion bonus to facilitate the sale and negotiations referred to above. Although the loss at March 31, 2000 was $84,000, as reflected on the Statement of Changes of Net Assets in Liquidation, after accounting for the discount on the sale of the New Note and all other costs associated with the sale, the Partnership ultimately realized a loss of $246,000 as reported at December 31, 2000. 10 11 DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Sale of the Properties During the 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, Iomega Business Center. The sale of Iomega Business Center is discussed in note 5 to the Financial Statements. Other Matters The Partnership made no regular distributions during the year ended December 31, 2000 or during the three months ended March 31, 2001. Regular distributions for the year ended December 31, 1999, represented net cash flow generated 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. On October 19, 2000, Grape Investors, LLC ("Grape"), the holder of 6.0001% of the limited partnership interests of the Partnership, settled its portion of the purported class action lawsuits entitled "Bigelow/Diversified Secondary Partnerships Fund 1990 Litigation" and "Madison Partnership and ISA Partnership Litigation" (the "Grape Settlement"). In exchange for a complete settlement and release from Grape, the Partnership paid Grape its pro rata share of the proceeds available for distribution from the liquidation of the Partnership's properties. Grape's final distribution was $134,000, or approximately $42 per $1,000 of original investment, plus its 6.0001% interest in all amounts that were subsequently received in respect of principal and interest payments on the Iomega Note. Grape received approximately $404,000, or approximately $129 per $1,000 of original investment in connection with the collection of the note proceeds for a total distribution of approximately $171 per $1,000 of original investment. The General Partner also paid $1.00 for all of Grape's interest in the Partnership. On December 12, 2000, the Partnership and the General Partner mailed to the limited partners an offer to settle the "Bigelow/Diversified Secondary Partnerships Fund 1990 Litigation" and "Madison Partnership and ISA Partnership Litigation" and the Madison Partnership Liquidity Investors Litigation and all other claims for payment of each settling limited partner's pro rata share of the proceeds available for distribution from liquidation of the Partnership's properties (approximately $171 per $1,000 of original investment interest) plus a nominal payment of $1.00 from the General Partners for an assignment of all of a settling limited partner's interest in the Partnership to the General Partner. Limited partners holding 42% (including the Grape Settlement) of the interests in the Partnership settled on these terms. The aggregate distribution in connection with the December 12, 2000 offer, which was reflected as an accrual at December 31, 2000, was approximately $3,267,000. 11 12 DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.) Liquidity and Capital Resources (Cont'd.) Other Matters (Cont'd.) As of February 9, 2000, the Partnership had sold all of its operating properties. 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. Due to these uncertainties, it is probable that future distributions will be limited to a liquidating distribution upon Partnership wind down should funds be available at that time. Results of Operations for the Three Months Ended March 31, 2001 Because the Partnership was in the process of liquidating its assets through February 2000, 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 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 March 31, 2001, 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 March 31, 2001 when compared to the same period in 2000 was primarily attributable to the sale of Iomega Business Center on February 9, 2000. Interest income resulted from the temporary investment of Partnership working capital and, in 2000, from the interest income earned on Notes Receivable. For the three months ended March 31, 2001, interest income was approximately $92,000. The decrease in interest income was primarily the result of: 1) the payoff of the outstanding Notes Receivable balances, and, 2) the decrease in cash and cash equivalent balances that resulted from the distribution of cash to the limited partners in conjunction with the offer to settle. The loss on sale of real estate for the three months ended March 31, 2000, relates to the sale of Iomega Business Center on February 9, 2000. See Note 5 to the Financial Statements for further discussion. Accrued expenses for liquidation as of March 31, 2001, includes estimates of costs to be incurred in carrying out the dissolution and liquidation of the Partnership through December 31, 2001. These costs include estimates of legal 12 13 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 March 31, 2001 (Cont'd.) fees, accounting fees, tax preparation and filing fees, other professional services and the general partner's liability insurance. During the year ended December 31, 2000, the General Partner continuously re-evaluated the estimated costs to wind up and dissolve the Partnership given the uncertainty involved with the ongoing litigation and the provision for liquidation expenses was accordingly adjusted 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. The accrued expenses for liquidation do not take into consideration the possible outcome of the ongoing litigation (aside from estimated attorney fees through December 31, 2001). Such costs are unknown and are not estimable at this time. Liquidation expenses incurred for the three months ended March 31, 2001 include charges of $5,000 from the General Partner and its affiliates for services rendered in connection with administering the affairs of the Partnership. Also included in liquidation expenses incurred for the three months ended March 31, 2001 are direct charges of $88,000 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 March 31, 2001, the Partnership had cash equivalents of $5,085,000 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. 13 14 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, the Partnership is not 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. 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 4, 2000, Bigelow/Diversified Secondary Partnership Fund 1990 filed a First Amended Class Action and Derivative Complaint against Damson/Birtcher Partners, 14 15 DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP ITEM 1. LEGAL PROCEEDINGS (Cont'd.) Bigelow Diversified Secondary Partnership Fund 1990 litigation (Cont'd.) 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. Plaintiff has engaged in preliminary discovery. On October 27, 2000, defendants sought permission of the court to communicate an offer to settle to individual limited partners of the Partnership. Plaintiff's counsel opposed that motion. On December 4, 2000, the court ruled that defendants could communicate an offer to settle to individual limited partners. Thereafter, on December 12, 2000, the Partnership and the General Partner mailed to the limited partners an offer to settle this lawsuit and all other claims (including the Madison Partnership Liquidity Investors Litigation referenced below) for payment of each settling limited partner's pro rata share of the proceeds available for distribution from liquidation of the Partnership's properties (approximately $171 per $1,000 of original investment interest) plus a nominal payment of $1.00 from the General Partners for an assignment of all of a settling limited partner's interest in the Partnership to the General Partner. Limited partners holding 42% of the interests in the Partnership settled on these terms. The aggregate distribution in connection with the December 12, 2000 offer, which was reflected as an accrual at December 31, 2000, was approximately $3,267,000. It has been paid in full as of March 31, 2001. On March 6, 2001, all of the defendants other than the Partnership and the general partners filed a motion to be dismissed from the case. Plaintiff has filed responsive papers. The court has not yet set a hearing date for this motion. 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 15 16 DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP ITEM 1. LEGAL PROCEEDINGS (Cont'd.) Madison Partnership and ISA Partnership Litigation (Cont'd.) 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. On August 14, 2000, plaintiffs petitioned the court for an order certifying the action as a class action. Plaintiffs also asked the court to issue a writ mandating that the Partnership immediately distribute all liquidation proceeds to the limited partners. On December 19, 2000, the court denied both motions. The case is currently proceeding only as a derivative action. The court has set a status conference for May 25, 2001. As noted above, limited partners holding 42% of the interests in the Partnership have settled this (and all other) cases against the Partnership and the General Partner. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: None. b) Reports on Form 8-K: None filed in the quarter ended March 31, 2001. 16 17 DAMSON/BIRTCHER REALTY INCOME FUND-II, LIMITED PARTNERSHIP SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DAMSON/BIRTCHER REALTY INCOME FUND-II By: BIRTCHER/LIQUIDITY By: BIRTCHER INVESTORS, PROPERTIES a California limited partnership (General Partner) By: BIRTCHER INVESTMENTS, a California general partnership, General Partner of Birtcher Investors By: BIRTCHER LIMITED, a California limited partnership, General Partner of Birtcher Investments By: BREICORP, a California corporation, formerly known as Birtcher Real Estate Inc., General Partner of Birtcher Limited Date: May 14, 2001 By: /s/Robert M. Anderson ---------------------------- Robert M. Anderson Executive Director BREICORP By: LF Special Fund I, L.P., a California limited partnership By: Liquidity Fund Asset Management, Inc., a California corporation, General Partner of LF Special Fund I, L.P. Date: May 14, 2001 By: /s/ Brent R. Donaldson ----------------------------------- Brent R. Donaldson President Liquidity Fund Asset Management, Inc. 17

DAMSON BIRTCHER REALTY INCOME FUND II LTD PARTNERSHIP 10-Q