<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 0-17557
Brauvin High Yield Fund L.P.
(Exact name of registrant as specified in its charter)
Delaware 36-3569428
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 South Wacker Drive, Chicago, Illinois 60606
(Address of principal executive offices) (Zip Code)
(312) 443-0922
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 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 .
<PAGE>
BRAUVIN HIGH YIELD FUND L.P.
(a Delaware limited partnership)
INDEX
Page
PART I Financial Information
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . 3
Balance Sheets at September 30, 1997 and
December 31, 1996. . . . . . . . . . . . . . . . . . . . . 4
Statements of Operations for the nine months
ended September 30, 1997 and 1996. . . . . . . . . . . . . 5
Statements of Operations for the three months
ended September 30, 1997 and 1996. . . . . . . . . . . . . 6
Statements of Partners' Capital for the period
January 1, 1996 to September 30, 1997. . . . . . . . . . . 7
Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996. . . . . . . . . . . . . 8
Notes to Financial Statements. . . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . 32
PART II Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 41
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . 45
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . 46
Item 4. Submissions of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . 46
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . 46
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 46
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Except for the December 31, 1996 Balance Sheet, the following
Balance Sheet as of September 30, 1997, Statements of Operations
for the nine months ended September 30, 1997 and 1996, Statements
of Operations for the three months ended September 30, 1997 and
1996, Statements of Partners' Capital for the period January 1,
1996 to September 30, 1997 and Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 for Brauvin High
Yield Fund L.P. (the "Partnership") are unaudited and have not been
examined by independent public accountants but reflect, in the
opinion of the management, all adjustments necessary to present
fairly the information required. All such adjustments are of a
normal recurring nature.
These financial statements should be read in conjunction with the
financial statements and notes thereto included in the
Partnership's 1996 Annual Report on Form 10-K.
<PAGE>
BRAUVIN HIGH YIELD FUND L.P.
(a Delaware limited partnership)
BALANCE SHEETS
September 30, December 31,
1997 1996
----------- ------------
ASSETS
Investment in real estate, at cost:
Land $ 5,768,768 $ 5,768,768
Buildings 13,554,207 13,554,207
----------- -----------
19,322,975 19,322,975
Less: Accumulated depreciation (3,528,735) (3,238,758)
----------- -----------
Net investment in real estate 15,794,240 16,084,217
Investment in Joint Ventures (Note 5):
Brauvin High Yield Venture 31,297 32,374
Brauvin Funds Joint Venture 2,434,215 2,450,861
Brauvin Gwinnett County Venture 545,509 550,625
Brauvin Bay County Venture 167,618 171,433
Cash and cash equivalents 3,052,814 2,231,481
Due from affiliates -- 20
Prepaid offering costs 15,703 15,703
Other assets 3,329 17,283
----------- -----------
Total Assets $22,044,725 $21,553,997
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued
expenses $ 73,308 $ 29,018
Environmental remediation accrual 80,000 --
Tenant security deposits 51,934 --
Due to affiliates 1,922 --
Rent received in advance 48,298 144,365
----------- -----------
Total Liabilities 255,462 173,383
PARTNERS' CAPITAL:
General Partners 164,963 134,218
Interest Holders 21,624,300 21,246,396
----------- -----------
Total Partners' Capital 21,789,263 21,380,614
----------- -----------
Total Liabilities and
Partners' Capital $22,044,725 $21,553,997
=========== ===========
See accompanying notes to financial statements.
<PAGE>
BRAUVIN HIGH YIELD FUND L.P.
(a Delaware limited partnership)
STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30,
1997 1996
---------- ----------
INCOME:
Rental $1,920,911 $1,847,555
Interest 99,844 60,941
Other 294 312
---------- ----------
Total income 2,021,049 1,908,808
EXPENSES:
General and administrative 146,180 136,827
Management fees (Note 3) 19,072 18,860
Transaction costs (Note 6) 212,558 233,173
Valuation fees -- 89,016
Environmental remediation expense 80,000 --
Depreciation 289,977 289,977
---------- ----------
Total expenses 747,787 767,853
---------- ----------
Income before equity interest in
joint ventures 1,273,262 1,140,955
Equity Interest in Joint Venture's
Net Income:
Brauvin High Yield Venture 4,423 4,381
Brauvin Funds Joint Venture 213,654 218,842
Brauvin Gwinnett County Venture 37,238 37,135
Brauvin Bay County Venture 8,665 --
---------- ----------
Net income $1,537,242 $1,401,313
========== ==========
Net income allocated to the General
Partners $ 30,745 $ 28,026
========== ==========
Net income allocated to the Interest
Holders $1,506,497 $1,373,287
========== ==========
Net income per Unit outstanding (a) $ 0.57 $ 0.52
========== ==========
(a) Net income per Unit was based on the average Units outstanding
during the period since they were of varying dollar amounts and
percentages based upon the dates Interest Holders were admitted to
the Partnership and additional Units were purchased through the
distribution reinvestment plan (the "Plan").
See accompanying notes to financial statements
<PAGE>
BRAUVIN HIGH YIELD FUND L.P.
(a Delaware limited partnership)
STATEMENTS OF OPERATIONS
For the Three Months Ended September 30,
1997 1996
-------- --------
INCOME:
Rental $661,236 $635,857
Interest 36,240 22,212
Other 110 92
-------- --------
Total income 697,586 658,161
EXPENSES:
General and administrative 33,106 50,608
Management fees (Note 3) 6,140 6,385
Transaction costs (Note 6) 65,407 217,344
Valuation fees -- 3,816
Depreciation 96,660 96,659
-------- --------
Total expenses 201,313 374,812
-------- --------
Income before equity interest in
joint ventures 496,273 283,349
Equity Interest in Joint Venture's
Net Income:
Brauvin High Yield Venture 1,597 1,482
Brauvin Funds Joint Venture 72,915 73,572
Brauvin Gwinnett County Venture 12,554 12,892
Brauvin Bay County Venture 3,190 --
-------- --------
Net income $586,529 $371,295
======== ========
Net income allocated to the General
Partners $ 11,731 $ 7,426
======== ========
Net income allocated to the Interest
Holders $574,798 $363,869
======== ========
Net income per Unit outstanding (a) $ 0.22 $ 0.14
======== ========
(a) Net income per Unit was based on the average Units outstanding
during the period since they were of varying dollar amounts and
percentages based upon the dates Interest Holders were admitted to
the Partnership and additional Units were purchased through the
distribution reinvestment plan (the "Plan").
See accompanying notes to financial statements
<PAGE>
BRAUVIN HIGH YIELD FUND L.P.
(a Delaware limited partnership)
STATEMENTS OF PARTNERS' CAPITAL
For the Period January 1, 1996 to September 30, 1997
General Interest
Partners Holders * Total
----------- ----------- -----------
Balance, January 1, 1996 $124,295 $20,710,959 $20,835,254
Contributions, net -- 67,546 67,546
Selling commissions and
other offering costs -- (10,070) (10,070)
Net income 36,721 1,799,342 1,836,063
Cash distributions (26,798) (1,321,381) (1,348,179)
-------- ----------- -----------
Balance, December 31, 1996 134,218 21,246,396 21,380,614
Net income 30,745 1,506,497 1,537,242
Cash distributions -- (1,128,593) (1,128,593)
-------- ----------- -----------
Balance, September 30, 1997 $164,963 $21,624,300 $21,789,263
======== =========== ===========
* Total Units outstanding at September 30, 1997 and December 31,
1996 were 2,627,503. Cash distributions to Interest Holders per
Unit were approximately $0.43 and $0.50 for the nine months ended
September 30, 1997 and the year ended December 31, 1996,
respectively. Cash distributions to Interest Holders per Unit are
based on the average Units outstanding during the year since they
were of varying dollar amounts and percentages based upon the dates
Interest Holders were admitted to the Partnership and additional
Units were purchased through the Plan.
See accompanying notes to financial statements.
<PAGE>
BRAUVIN HIGH YIELD FUND L.P.
(a Delaware limited partnership)
STATEMENTS OF CASH FLOWS
For Nine Months Ended September 30,
1997 1996
Cash flows from operating activities:
Net income $1,537,242 $1,401,313
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 289,977 289,977
Equity interest in Brauvin High
Yield Venture's net income (4,423) (4,381)
Equity interest in Brauvin Funds
Joint Venture's net income (213,654) (218,842)
Equity interest in Brauvin Gwinnett
County Venture's net income (37,238) (37,135)
Equity interest in Brauvin Bay
County Venture's net income (8,665) --
Repayment from affiliates 20 358
Decrease in other assets 13,954 600
Increase in accounts payable
and accrued expenses 44,290 163,645
Increase in environmental remediation
accrual 80,000 --
Increase in tenant security deposits 51,934 --
Increase in due to affiliates 1,922 --
Decrease in rent received in advance (96,067) (5,664)
---------- ----------
Net cash provided by operating activities 1,659,292 1,589,871
Cash flows from investing activities:
Distributions from Brauvin High Yield Venture 5,500 5,400
Distributions from Brauvin Funds Joint Venture 230,300 235,200
Distributions from Brauvin Gwinnett
County Venture 42,354 42,120
Distributions from Brauvin Bay County Venture 12,480 --
---------- ----------
Cash provided by investing activities 290,634 282,720
Cash flows from financing activities:
Sale of Units, net of liquidations, selling
commissions and other offering costs -- 56,988
Cash distributions to General Partners -- (26,798)
Cash distributions to Interest Holders (1,128,593) (1,321,381)
Net cash used in financing activities (1,128,593) (1,291,191)
---------- ----------
Net increase in cash and cash equivalents 821,333 581,400
Cash and cash equivalents at beginning
of period 2,231,481 1,363,085
---------- ----------
Cash and cash equivalents at end of period $3,052,814 $1,944,485
========== ==========
See accompanying notes to financial statements.
<PAGE>
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
BRAUVIN HIGH YIELD FUND L.P. (the "Partnership") is a Delaware
limited partnership organized for the purpose of acquiring debt-free
ownership of existing, free-standing, income-producing retail,
office and industrial real estate properties predominantly subject
to "triple-net" leases. The General Partners of the Partnership
are Brauvin Realty Advisors, Inc. and Jerome J. Brault. Brauvin
Realty Advisors, Inc. is owned primarily by Messrs. Brault
(beneficially)(44%) and Cezar M. Froelich (44%). Mr. Froelich
resigned as a director of the Corporate General Partner in December
1994 and as an individual General Partner effective as of September
17, 1996. Mr. David M. Strosberg resigned as an Individual General
Partner effective as of April 23, 1997. Brauvin Securities, Inc.,
an affiliate of the General Partners, was the selling agent of the
Partnership. The Partnership is managed by an affiliate of the
General Partners.
The Partnership was formed on January 6, 1987 and filed a
Registration Statement on Form S-11 with the Securities and
Exchange Commission which became effective on September 4, 1987.
The sale of the minimum of $1,200,000 of depository units
representing beneficial assignments of limited partnership
interests of the Partnership (the "Units") necessary for the
Partnership to commence operations was achieved on November 18,
1987. The Partnership's offering closed on May 19, 1988. A total
of $25,000,000 of Units were subscribed for and issued between
September 4, 1987 and May 19, 1988, pursuant to the Partnership's
public offering. Through September 30, 1997 and December 31, 1996
the Partnership had sold $27,922,102 of Units. This total includes
$2,922,102 of Units purchased by Interest Holders who utilized
their distributions of Operating Cash Flow to purchase additional
Units through the distribution reinvestment plan (the "Plan").
Units valued at $1,647,070 have been repurchased by the Partnership
from Interest Holders liquidating their investment in the
Partnership and have been retired as of September 30, 1997 and
December 31, 1996. As of September 30, 1997, the Plan participants
have acquired Units under the Plan which approximate 10% of total
Units outstanding.
The Partnership has acquired the land and buildings underlying 20
Taco Bell restaurants, 11 Ponderosa restaurants and two Children's
World Learning Centers. The Partnership also acquired 1%, 49%,
23.4% and 16% equity interests in four joint ventures with three
entities affiliated with the Partnership. These ventures own the
land and buildings underlying six Ponderosa restaurants, a
Scandinavian Health Spa, a CompUSA store and a Blockbuster Video
store, respectively.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management's Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management 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 these estimates.
Accounting Method
The accompanying financial statements have been prepared using
the accrual method of accounting.
Federal Income Taxes
Under the provisions of the Internal Revenue Code, the
Partnership's income and losses are reportable by the partners on
their respective income tax returns. Accordingly, no provision is
made for Federal income taxes in the financial statements.
However, in certain instances, the Partnership has been required
under applicable state law to remit directly to the tax authorities
amounts representing withholding from distributions paid to
partners.
Investment in Real Estate
The operating properties acquired by the Partnership are stated
at cost including acquisition costs. Depreciation expense is
computed on a straight-line basis over approximately 35 years.
In 1995, the Partnership 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"
(SFAS 121). The Partnership has performed an analysis of its long-
lived assets, and the Partnership's management determined that
there were no events or changes in circumstances that indicated
that the carrying amount of the assets may not be recoverable at
September 30, 1997 and December 31, 1996. Accordingly, no
impairment loss has been recorded in the accompanying financial
statements for the nine months ended September 30, 1997 and 1996.
Investment in Joint Ventures
The Partnership owns a 1% equity interest in Brauvin High Yield
Venture, which owns the land and building underlying six Ponderosa
restaurants; a 49% equity interest in Brauvin Funds Joint Venture,
which owns the land and building underlying a Scandinavian Health
Spa; a 23.4% equity interest in Brauvin Gwinnett County Venture,
which owns the land and building underlying a CompUSA store; and a
16% equity interest in Brauvin Bay County Venture which owns the
land and building underlying a Blockbuster Video store. The
accompanying financial statements include the investments in
Brauvin High Yield Venture, Brauvin Funds Joint Venture, Brauvin
Gwinnett County Venture and Brauvin Bay County Venture, using the
equity method of accounting.
Organization Costs and Prepaid Offering Costs
Prepaid offering costs represent amounts in excess of the defined
percentages of the gross proceeds. Prior to the commencement of
the Partnership's proxy solicitation (see Note 6), gross proceeds
were expected to increase due to the purchase of additional Units
through the Plan and the prepaid offering costs would be
transferred to offering costs and treated as a reduction in
Partners' Capital.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt
instruments with an original maturity within three months of
purchase.
Estimated Fair Value of Financial Instruments
Disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments." The estimated fair value amounts
have been determined by using available market information and
appropriate valuation methodologies. However, considerable
judgement is necessarily required in interpreting market data to
develop estimates of fair value.
The fair value estimates presented herein are based on
information available to management as of September 30, 1997, but
may not necessarily be indicative of the amounts that the
Partnership could realize in a current market exchange. The use of
different assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts. Although
management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements
since that date, and current estimates of fair value may differ
significantly from amounts presented herein.
The carrying amounts of the following items are a reasonable
estimate of fair value: cash and cash equivalents; due to/from
affiliates; accounts payable and accrued expenses; environmental
remediation accrual; tenant security deposits; and rents received
in advance.
Reclassifications
Certain reclassifications have been made to the 1996 financial
statements to conform to classifications adopted in 1997.
(2) PARTNERSHIP AGREEMENT
Distributions
All Operating Cash Flow, as defined in the Partnership Agreement
(the "Agreement"), shall be distributed: (a) first, to the
Interest Holders until the Interest Holders receive an amount equal
to their 10% Current Preferred Return, as such term is defined in
the Agreement; and (b) thereafter, any remaining amounts will be
distributed 98% to the Interest Holders and 2% to the General
Partners.
The net proceeds of a sale or refinancing of a Partnership
property shall be distributed as follows:
first, to the Interest Holders until each Interest Holder has
been paid an amount equal to the 10% Cumulative Preferred
Return, as defined in the Agreement;
second, to the Interest Holders until each Interest Holder has
been paid an amount equal to his Adjusted Investment, as
defined in the Agreement;
third, to the General Partners until they have been paid an
amount equal to a 2% preferred return; and
fourth, 95% of any remaining Net Sale or Refinancing Proceeds,
as such term is defined in the Agreement, to the Interest
Holders and the remaining 5% to the General Partners.
Profits and Losses
Net profits and losses from operations of the Partnership
[computed without regard to any allowance for depreciation or cost
recovery deductions under the Internal Revenue Code of 1986, as
amended (the "Code")] for each taxable year of the Partnership
shall be allocated 98% to the Interest Holders and 2% to the
General Partners. Notwithstanding the foregoing, all depreciation
and cost recovery deductions allowed under the Code shall be
allocated 2% to the General Partners and 98% to the Taxable
Interest Holders, as defined in the Agreement.
The net profit of the Partnership from any sale or other
disposition of a Partnership property shall be allocated (with
ordinary income being allocated first) as follows: (a) first, an
amount equal to the aggregate deficit balances of the Partners'
Capital Accounts, as such term is defined in the Agreement, shall
be allocated to each Partner who or which has a deficit Capital
Account balance in the same ratio as the deficit balance of such
Partner's Capital Account bears to the aggregate of the deficit
balances of all Partners' Capital Accounts; (b) second, to the
Interest Holders until the Interest Holders have been allocated
profits equal to their 10% Cumulative Preferred Return; (c) third,
to the Interest Holders until the Interest Holders have been
allocated an amount of profit equal to the amount of their Adjusted
Investment; (d) fourth, to the General Partners until such time as
they have been allocated profits equal to a 2% preferred return;
and (e) thereafter, 95% to the Interest Holders and 5% to the
General Partners. The net loss of the Partnership from any sale or
other disposition of a Partnership property shall be allocated as
follows: (a) first, an amount equal to the aggregate positive
balances in the Partners' Capital Accounts, to each Partner in the
same ratio as the positive balance in such Partner's Capital
Account bears to the aggregate of all Partners' positive Capital
Accounts balances; and (b) thereafter, 98% to the Interest Holders
and 2% to the General Partners.
(3) TRANSACTIONS WITH RELATED PARTIES
An affiliate of the General Partners manages the Partnership's
real estate properties for an annual management fee equal to up to
1% of gross revenues derived from the properties. The property
management fee is subordinated, annually, to receipt by the
Interest Holders of an annual 10% non-cumulative, non-compounded
return on Adjusted Investment (as defined).
The Partnership pays affiliates of the General Partners selling
commissions of 8-1/2% of the capital contributions received for
Units sold by the affiliates.
An affiliate of the former General Partner provided securities
and real estate counsel to the Partnership.
The Partnership pays an affiliate of the General Partners an
acquisition fee in the amount of up to 4.5% of the gross proceeds
of the Partnership's offering for the services rendered in
connection with the process pertaining to the acquisition of a
property. Acquisition fees related to the properties not
ultimately purchased by the Partnership are expensed as incurred.
Fees, commissions and other expenses paid or payable to the
General Partners or their affiliates for the nine months ended
September 30, 1997 and 1996 were as follows:
1997 1996
------- -------
Selling commissions $ -- $ 9,010
Management fees 19,072 18,860
Reimbursable operating
expenses 90,867 94,674
Legal fees 267 2,545
As of September 30, 1997, the Partnership has made all payments
to affiliates except for $1,922 related to management fees.
(4) WORKING CAPITAL RESERVES
The Partnership set aside 1% of the gross proceeds of its
Offering as a working capital reserve. At any time two years
subsequent to the termination of the Partnership's offering (May
19, 1990), it became permissible to reduce the working capital
reserve to an amount equal to not less than 1/2% of the proceeds of
the Offering ($125,000) if the General Partners believed such
reduction to be in the best interests of the Partnership and the
Interest Holders. As a result thereof, $125,000 was paid to an
affiliate of the General Partners in the fourth quarter of 1990 as
an additional Acquisition Fee and $125,000 remains in reserve.
(5) INVESTMENT IN JOINT VENTURES
The Partnership owns equity interests in the Brauvin High Yield
Venture, Brauvin Funds Joint Venture, Brauvin Gwinnett County
Venture and Brauvin Bay County Venture and reports its investments
on the equity method. The following are condensed financial
statements for the Brauvin High Yield Venture, Brauvin Funds Joint
Venture, Brauvin Gwinnett County Venture and Brauvin Bay County
Venture:
BRAUVIN HIGH YIELD VENTURE
September 30, December 31,
1997 1996
------------ ------------
Land and buildings, net $4,952,646 $5,042,833
Other assets 12,780 18,144
---------- ----------
$4,965,426 $5,060,977
========== ==========
Liabilities $ 30,614 $ 18,442
Partners' capital 4,934,812 5,042,535
---------- ----------
$4,965,426 $5,060,977
========== ==========
Nine Months Ended September 30,
1997 1996
--------- ---------
Rental and other income $ 542,812 $ 537,179
Expenses:
Depreciation 90,187 90,188
Management fees 5,684 5,581
Operating and
administrative 4,664 3,286
-------- --------
100,535 99,055
-------- --------
Net Income $442,277 $438,124
======== ========
<PAGE>
BRAUVIN FUNDS JOINT VENTURE
September 30, December 31,
1997 1996
---------- ----------
Land and buildings, net $4,623,832 $4,706,404
Other assets 398,781 348,975
---------- ----------
$5,022,613 $5,055,379
========== ==========
Liabilities $ 1,580 $ 374
Partners' capital 5,021,033 5,055,005
---------- ----------
$5,022,613 $5,055,379
========== ==========
Nine Months Ended September 30,
1997 1996
--------- ---------
Rental and other income $ 536,572 $ 537,725
Expenses:
Depreciation 82,572 82,572
Management fees 4,991 5,061
Operating and
administrative 12,981 3,476
--------- --------
100,544 91,109
--------- --------
Net Income $ 436,028 $446,616
========= ========
<PAGE>
BRAUVIN GWINNETT COUNTY VENTURE
September 30, December 31,
1997 1996
---------- ----------
Land and buildings, net $2,299,014 $2,330,758
Other assets 69,414 59,531
---------- ----------
$2,368,428 $2,390,289
========== ==========
Liabilities $ 23,823 $ 23,820
Partners' capital 2,344,605 2,366,469
---------- ----------
$2,368,428 $2,390,289
========== ==========
Nine Months Ended September 30,
1997 1996
-------- --------
Rental and other income $205,483 $198,607
Expenses:
Depreciation 31,744 34,314
Management fees 2,178 1,656
Operating and
administrative 12,424 3,941
-------- --------
46,346 39,911
-------- --------
Net Income $159,137 $158,696
======== ========
<PAGE>
BRAUVIN BAY COUNTY VENTURE
September 30, December 31,
1997 1996
---------- ----------
Land and buildings, net $1,057,470 $1,069,277
Other assets 1,532 13,531
---------- ----------
$1,059,002 $1,082,808
========== ==========
Liabilities $ 1,191 $ 1,155
Partners' capital 1,057,811 1,081,653
---------- ----------
$1,059,002 $1,082,808
========== ==========
Nine Months Ended September 30,
1997
-------
Rental income $82,628
Expenses:
Depreciation 11,807
Management fees 879
Operating and administrative 15,783
-------
28,469
-------
Net Income $54,159
=======
<PAGE>
(6) MERGER AND LITIGATION
Merger
Pursuant to the terms of an agreement and plan of merger dated
as of June 14, 1996, as amended March 24, 1997, June 30, 1997 and
September 30, 1997(the "Merger Agreement"), the Partnership
proposes to merge with and into Brauvin Real Estate Funds L.L.C.,
a Delaware limited liability company (the "Purchaser"), affiliated
with certain of the General Partners through a merger (the
"Merger") of its Units. Promptly upon consummation of the Merger,
the Partnership will cease to exist and the Purchaser, as the
surviving entity, will succeed to all of the assets and liabilities
of the Partnership. The Interest Holders holding a majority of the
Units approved the Merger on November 8, 1996. By approving the
Merger, the Interest Holders also approved an amendment to the
Agreement allowing the Partnership to sell or lease property to
affiliates (this amendment, together with the Merger shall be
referred to herein as the "Transaction").
The redemption price to be paid to the Interest Holders in
connection with the Merger is based on the fair market value of the
properties of the Partnership (the "Assets"). Cushman & Wakefield
Valuation Advisory Services ("Cushman & Wakefield"), an independent
appraiser, the largest real estate valuation and consulting
organization in the United States, was engaged by the Partnership
to prepare an appraisal of the Assets, to satisfy the Partnership's
requirements under the Employee Retirement Income Security Act of
1974, as amended. Cushman & Wakefield determined the fair market
value of the Assets to be $23,198,450, or $8.83 per Unit. The
redemption price of $9.31 per Unit also includes all remaining cash
of the Partnership, less net earnings of the Partnership from and
after August 1, 1996 through December 31, 1996, less the
Partnership's actual costs incurred and accrued through the
effective time at the filing of the certificate of merger,
including reasonable reserves in connection with: (i) the proxy
solicitation; (ii) the Transaction (as detailed in the Merger
Agreement); and (iii) the winding up of the Partnership, including
preparation of the final audit, tax return and K-1s (collectively,
the "Transaction Costs") and less all other Partnership
obligations.
The General Partners will not receive any payment in exchange for
the redemption of their general partnership interests nor will they
receive any fees from the Partnership in connection with the
Transaction. The Managing General Partner and his son, James L.
Brault, an executive officer of the Corporate General Partner, will
have a minority ownership interest in the Purchaser.
The Merger has not been completed primarily due to certain
litigation, as described below, that is still pending. The
General Partners believe that these lawsuits are without merit and,
therefore, continue to vigorously defend against them.
Following receipt of Interest Holder approval, representatives
of the Purchaser commenced in earnest the finalization of the
Purchaser's financing and its due diligence review of the Assets
and the assets of the Affiliated Partnerships. The due diligence
process has revealed certain concerns relating to a potential
environmental problem at one of the properties of the Partnership.
In the second quarter of 1997, the Partnership established a
reserve in the amount of $80,000 to address this environmental
problem. The reserve is based on a third party technical
environmental evaluation. The estimated amount of the reserve is
based on this evaluation which included the estimated costs to
remediate the problem, however, the ultimate cost may be more or
less. However, to the extent possible, the Partnership will seek
to be reimbursed for the remediation costs by the current tenant
and environmental agency funds, if available.
The due diligence review has also raised questions regarding the
interpretation of certain terms in the leases governing some of the
Partnership's and the Affiliated Partnerships' properties. A very
significant tenant is interpreting certain purchase options
contained in its leases in a way that would cause the value of the
properties leased by such tenant to be significantly below the
current appraised value. Members of management of the Partnership
and the Affiliated Partnerships have been working diligently with
the Purchaser to assess these risks and to resolve them in a way
that will allow the Merger and the related transactions to be
consummated without any changes to the terms or the Merger price.
The Purchaser is continuing to assess certain lease provisions,
assess the costs and risks of the litigation discussed below, and
finalize its financing in light of these developments.
In accordance with the terms of the Merger Agreement, the
General Partners suspended all distributions to Interest Holders;
however, as a result of the unforeseen delays brought about by the
litigation and the due diligence issues highlighted above, the
General Partners felt it was appropriate that an earnings
distribution be made to the Interest Holders. Although the terms
of the Merger Agreement provide that the Assets being acquired by
the Purchaser in connection with the Merger include all earnings of
the Partnership from and after August 1, 1996, the Purchaser has
agreed to allow the Partnership to make distributions to the
Interest Holders of net earnings for the period from and after
January 1, 1997 until the Merger is consummated. In exchange, the
Partnership has agreed to extend the termination date of the Merger
Agreement to December 31, 1997 to allow the Purchaser time to
complete its due diligence. Notwithstanding the extension of the
termination date, the Partnership and the Purchaser continue to
work through the due diligence issues outlined above, with the
intent of closing the Merger as soon as possible.
A distribution of the Partnership's net earnings for the periods
January 1, 1997 to March 31, 1997 and April 1, 1997 to June 30,
1997 were made to the Interest Holders on March 31, 1997 and July
15, 1997, respectively in the amounts of approximately $597,600 and
$529,000. A distribution of the Partnership's net earnings for the
period July 1, 1997 to September 30, 1997 was made to the Interest
Holders on October 22, 1997 in the amount of approximately
$721,300. Net earnings accruing after September 30, 1997 through
the closing date will be included with the final cash distribution
to the Interest Holders from the Merger.
The litigation as described below has now been pending for
approximately 14 months. The suits continue to command the time,
attention and resources of the Partnership. The General Partners
believe the lawsuits are unfounded and without merit. The delay
and expense of this action continues to frustrate the will and
majority vote of the Interest Holders. Unfortunately, the General
Partners are unable to predict when this matter will be resolved,
however, the delay is having an adverse effect on the Partnership
today as well as on future prospects.
For example, the 1997 distributions are based on the net earnings
of the Partnership for the nine months in 1997. These distributions
were lower than prior distributions because the Partnership has
incurred significant legal costs to defend against the lawsuit.
The General Partners anticipate that these costs will continue as
long as the litigation is pending. In addition, the remaining term
on the Partnership's properties' leases continue to shrink. This
fact is causing the Partnership to potentially face the risks and
costs of lease rollover. This heightened degree of risk may also
have an adverse effect on the ultimate value of the Assets.
Further, the Partnership's most significant tenant, Ponderosa, has
recently closed and vacated four of the Partnership's properties.
(The Partnership owns one of them directly and has a joint venture
interest in the other three.) The General Partners are working to
remedy this situation. The Partnership currently has an agreement
to sell one of these assets to a third party not related to either
the Purchaser or the Partnership. Although the closing of the
restaurants should not have a significant short term effect, it
could materially affect the Assets' long term prospects.
Unfortunately, these recent developments are some of the exact
risks and costs the Partnership was seeking to avoid with the
successful completion of the Merger.
Litigation
Three legal actions, as hereinafter described, were filed against
the General Partners and affiliates of such General Partners, as
well as against the Partnership on a nominal basis in connection
with the Merger. Each of these actions was brought by Interest
Holders of the Partnership. The Partnership and the General
Partners and their named affiliates, deny all allegations set forth
in the complaints and are vigorously defending against such claims.
A. The Florida Lawsuit
On September 17, 1996, a lawsuit was filed in the Circuit Court
of the Seventeenth Judicial Circuit in and for Broward County,
Florida, styled Rebecca Scialpi and Helen Friedlander v. Jerome J.
Brault, Brauvin Realty Advisors, Inc., Brauvin Realty Advisors II,
Inc., Brauvin Realty Advisors III, Inc., and Brauvin Realty
Advisors IV, Inc., James L. Brault, and Brauvin Real Estate Funds,
L.L.C. and Brauvin High Yield Fund L.P., Brauvin High Yield Fund
L.P. II, Brauvin Income Plus L.P. III, and Brauvin Corporate Lease
Program IV, L.P., Docket No. 96012807. The Partnership and the
other affiliated partnerships named in this lawsuit (the
"Affiliated Partnerships") that are proposed to be a party to a
merger or sale with the Purchaser, are each named as a "Nominal
Defendant" in this lawsuit. The named plaintiffs are not limited
partners in the Partnership. Rather, the named plaintiffs are
limited partners in Brauvin High Yield Fund L.P. II, one of the
Affiliated Partnerships. Jerome J. Brault, the Managing General
Partner of the Partnership, and Brauvin Realty Advisors, Inc., the
Corporate General Partner of the Partnership, as well as certain
corporate general partners of the Affiliated Partnerships, have
been named as defendants in this lawsuit. James L. Brault, an
officer of the Corporate General Partner and the son of Jerome J.
Brault, is also named as a defendant.
Plaintiffs filed an amended complaint on October 8, 1996. The
amended complaint alleges a purported class action consisting of
claims for breach of fiduciary duties, fraud, breach of the
Agreement, and civil racketeering. The amended complaint seeks
injunctive relief, as well as compensatory and punitive damages,
relating to the proposed Transactions with the Purchaser. The
defendants have answered plaintiffs' amended complaint, and have
denied each of the plaintiffs' allegations of wrongful conduct.
On October 2, 1996, the plaintiffs in this action requested that
the Circuit Court enjoin the special meetings of the limited
partners and the proposed transactions with the Purchaser. This
motion was denied by the Circuit Court on October 8, 1996, and the
Florida appellate court denied plaintiffs' appeal of the Circuit
Court's October 8, 1996 ruling. There have been no material
developments with respect to this lawsuit since October 8, 1996.
B. The Illinois Christman Lawsuit
On September 18, 1996, a class action lawsuit was filed in the
United States District Court for the Northern District of Illinois,
styled M. Barbara Christman, Joseph Forte, Janet M. Toolson, John
Archbold, and Ben O. Carroll v. Brauvin Realty Advisors, Inc.,
Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors III,
Inc., Brauvin Realty Advisors IV, Inc., Jerome J. Brault, Brauvin
Real Estate Funds, L.L.C. and Brauvin High Yield Fund L.P., Brauvin
High Yield Fund L.P. II, Brauvin Income Plus L.P. III, and Brauvin
Corporate Lease Program IV L.P., Docket No. 96C6025. The
Partnership and the Affiliated Partnerships are each named as a
"Nominal Defendant" in the lawsuit. Jerome J. Brault and the
Corporate General Partner of the Partnership, as well as the
corporate general partners of the Affiliated Partnerships, are
named as defendants.
The plaintiffs filed an amended complaint on October 8, 1996,
which alleges claims for breach of fiduciary duties, breaches of
the Agreement, and violation of the Illinois Deceptive Trade
Practices Act. The amended complaint seeks injunctive relief,
as well as compensatory and punitive damages, relating to the
proposed Transaction with the Purchaser.
On October 2, 1996, the District Court certified plaintiffs'
proposed class as all of the limited partners of the Partnership
and of the Affiliated Partnerships, and appointed plaintiffs'
counsel, The Mills Law Firm, as counsel for the class. On October
2, 1996, the District Court also conducted a hearing on plaintiffs'
motion to preliminarily enjoin the special meetings of the limited
partners and the proposed Transaction with the Purchaser. The
District Court denied plaintiffs' motion for a preliminary
injunction at the conclusion of the October 2, 1996 hearing.
On September 27, 1996, counsel for plaintiffs, The Mills Law
Firm, mailed a solicitation to all of the Limited Partners,
requesting that they revoke their previously-mailed proxies in
favor of the Merger. On October 11, 1996, the General Partners
filed a counterclaim against plaintiffs and their counsel, The
Mills Law Firm, alleging that plaintiffs and The Mills Law Firm
violated the federal securities laws and proxy rules by sending
their September 27, 1996 letter to the Limited Partners. The
plaintiffs and The Mills Law Firm have moved to dismiss this
counterclaim. The District Court has taken this motion under
advisement and has yet to issue a ruling.
On October 10 and 11, 1996, the District Court conducted an
evidentiary hearing on the motion of the General Partners to
invalidate revocations of proxies procured as a result of The Mills
Law Firm's September 27, 1996 letter. In that evidentiary hearing,
The Mills Law Firm admitted that it violated the proxy rules by
sending its September 27, 1996 letter to the Limited Partners
without filing such letter with the Commission in violation of the
Commission's requirements. At the conclusion of the hearing on
October 10 and 11, the District Court found that the General
Partners have a likelihood of succeeding on the merits with respect
to their claim that the September 27, 1996 letter sent to the
Limited Partners by plaintiffs and The Mills Law Firm is false or
misleading in several significant respects.
Notwithstanding this finding, the District Court did not
invalidate the revocations of proxies resulting from The Mills Law
Firm's September 27, 1996 letter because it did not believe it
possessed the authority to do so under present law. This ruling
was appealed to the Seventh Circuit Court of Appeals. The Seventh
Court of Appeals subsequently dismissed this appeal on the grounds
that the appeal was rendered moot by the Limited Partners' approval
November 8, 1996 of the Merger.
On October 16, 1996 and on November 6, 1996, the parties filed
cross-motions for partial summary judgement addressing the
allegation in plaintiffs' amended complaint that the Partnership
Agreement does not allow the Limited Partners to vote in favor of
or against the proposed Transaction with the Purchaser by proxy.
These cross-motions for partial summary judgement were taken under
advisement by the District Court, and the District Court has yet to
issue a ruling.
On April 2, 1997, the Court granted plaintiffs' leave to again
amend their complaint. In their second amended complaint,
plaintiffs have named the Partnership as a "Nominal Defendant."
Plaintiffs have also added a new claim, alleging that the General
Partners violated certain of the Commission's rules by making false
and misleading statements in the Proxy. Plaintiffs also allege
that the General Partners breached their fiduciary duties, breached
various provisions of the Agreement, violated the Illinois
Deceptive Trade Practice Act, and violated section 17-305 of the
Delaware Revised Uniform Limited Partnership Act. The General
Partners deny those allegations and will continue to vigorously
defend against these claims.
On April 2, 1997, plaintiffs again requested that the District
Court enjoin the closing of the Transaction with the Purchaser.
After conducting a lengthy hearing on May 1, 1997, the District
Court denied plaintiffs' motion to preliminarily enjoin the closing
of the Transaction with the Purchaser. Plaintiffs filed a notice
of appeal to the Seventh Circuit Court of Appeals from the District
Court's May 1, 1997 order denying plaintiffs' motion to
preliminarily enjoin the closing of the Transaction with the
Purchaser. This appeal is pending and the parties are currently
engaging in discovery.
C. The Scialpi Illinois Lawsuit
On June 20, 1997, another lawsuit was filed in the United States
District Court for the Northern District of Illinois, styled
Benjamin Siegel, Rebecca Scialpi, Helen Friedlander, and BHS &
Associates, Inc. v. Jerome J. Brault, Brauvin Realty Advisors,
Inc., Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors
III, Inc., Brauvin Realty Advisors IV, Inc., James L. Brault,
Brauvin Real Estate Funds LLC, Brauvin High Yield Fund L.P.,
Brauvin High Yield Fund II L.P., Brauvin Income Plus L.P. III, and
Brauvin Corporate Lease Program IV, L.P. docket number 97 C 4450.
The Partnership and the Affiliated Partnerships are each named as
"Nominal Defendant" in the lawsuit, Jerome J. Brault and the
Corporate General Partner of the Partnership, as well as the
corporate general partners of the Affiliated Partnerships, have
been named as defendants in this lawsuit. James L. Brault, an
officer of the Corporate General Partner and the son of Jerome J.
Brault, is also named as a defendant.
Notably, the complaint was filed by two of the same parties,
Scialpi and Friedlander, who are plaintiffs in the Florida lawsuit,
which is described above. As also indicated above, Scialpi and
Friedlander are not limited partners of the Partnership, but are
limited partners in one of the Affiliated Partnerships, Brauvin
High Yield Fund L.P. II. On August 15, 1997 the plaintiffs filed
an amended complaint dropping Benjamin Siegel as a plaintiff. The
plaintiffs are also represented by the same lawyers that represent
them in the Florida lawsuit. Neither the complaint nor the amended
complaint has been served upon any of the defendants.
The complaint alleges a putative class action consisting of
claims that certain Commission rules were violated by making false
and misleading statements in the Proxy, the defendants breached
their fiduciary duties, and breached the Agreement. The complaint
was consolidated with the Christman lawsuit, which is described
above, pursuant to General Rule 2.31 of the United States District
Court of the Northern District of Illinois, and is presently
pending before Judge Gottschall.
Pursuant to the Agreement and Delaware law, the Partnership will
advance to the defendants their defense costs. The Corporate
General Partner has agreed to repay the Partnership for the
advances if it is ever determined that the parties were not
entitled to receive the advances. No estimate can reasonably be
made at this time of any potential liability from the litigation or
the costs of defense.
(7) WITHDRAWAL OF GENERAL PARTNER
On April 23, 1997, Mr. David M. Strosberg notified the Managing
General Partner of the Partnership of his decision to resign and
withdraw as an individual General Partner of the Partnership as of
such date.
(8) RESERVE FOR ENVIRONMENTAL REMEDIATION
In connection with the Merger (see Note 6), the Partnership has
undertaken environmental studies of potentially affected
properties. One of the Partnership's properties has been
identified by the environmental study as a potential environmental
issue. A remedial investigation and feasibility study has been
completed, and the results of that study have been forwarded to the
appropriate authorities. The study indicates a range of viable
remedial approaches, but agreement has not yet been reached with
the authorities on the final remediation approach. The Partnership
has accrued its best estimate of the costs that will be incurred to
complete the environmental remediation at this property.
In connection with the purchase of the above property by the
Partnership, the Partnership was to be reimbursed by the former
owner for environmental clean up. The Partnership will therefore
seek reimbursement of the costs from this former owner. No
estimate of the collectibility of this reimbursement can be made at
this time.
(9) SUBSEQUENT EVENT
On October 22, 1997, the Partnership paid Interest Holders a
distribution that totaled approximately $721,300.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
Certain statements in this Quarterly Report that are not
historical fact constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.
Discussions containing forward-looking statements may be found in
this section. Without limiting the foregoing, words such as
"anticipates," "expects," "intends," "plans" and similar
expressions are intended to identify forward-looking statements.
These statements are subject to a number of risks and
uncertainties. Actual results could differ materially from those
projected in the forward-looking statements. The Partnership
undertakes no obligation to update these forward-looking statements
to reflect future events or circumstances.
Liquidity and Capital Resources
The Partnership commenced an offering to the public on September
4, 1987 of 1,500,000 Units which was subsequently increased to
2,500,000 Units. The offering closed on May 19, 1988 after
2,500,000 Units were sold. The Partnership purchased the land and
buildings underlying seven Taco Bell restaurants in 1987. In 1988,
the Partnership purchased 13 Taco Bell restaurants, nine Ponderosa
restaurants and an interest in a joint venture which purchased six
Ponderosa restaurants. In 1989, the Partnership purchased the land
and building underlying a Ponderosa restaurant, an interest in a
joint venture which purchased a Scandinavian Health Spa, the land
and buildings underlying two Children's World Learning Centers and
the land and building underlying an additional Ponderosa
restaurant.
On November 9, 1993, the Partnership purchased a 23.4% interest
in a joint venture with affiliated public real estate limited
partnerships (the "Venture"). The Venture acquired the land and
building underlying a 25,000 square foot CompUSA computer
superstore from an unaffiliated seller.
On October 31, 1996, the Partnership purchased a 16.0% interest
in a joint venture with affiliated public real estate limited
partnerships (the "Brauvin Bay County Venture"). The Brauvin Bay
County Venture purchased real property upon which a newly
constructed Blockbuster Video store is operated. The property
contains a 6,466 square foot building located on a 40,075 square
foot parcel of land.
The Partnership raised $25,000,000 through its initial offering
and an additional $2,922,102, as of September 30, 1997 and December
31, 1996, through Units purchased by certain Interest Holders
investing their distributions of Operating Cash Flow in additional
Units through the Plan, which process was discontinued when the
proxy solicitation process began. As of September 30, 1997 and
December 31, 1996, Units valued at $1,647,070 have been repurchased
by the Partnership from Interest Holders liquidating their original
investment and have been retired. The Partnership has no funds
available to purchase additional property.
Below is a table summarizing the four year historical data for
distribution rates per unit:
Distribution
Date 1997 (a) 1996 1995 1994
------ ------ ------ ------
February 15 $.2274 $.2500 $.2500 $.2500
May 15 .2013 .2500 .2500 .2500
August 15 .2745 -- .2500 .2500
November 15 -- -- .2500 .2625
(a) The 1997 distributions were made on March 31, 1997, July 15,
1997 and October 22, 1997.
Should the Merger not occur, future increases in the
Partnership's distributions will largely depend on increased sales
at the Partnership's properties resulting in additional percentage
rent and, to a lesser extent on rental increases, which will occur
due to increases in receipts from certain leases based upon
increases in the Consumer Price Index or scheduled increases of base
rent.
During the period ended September 30, 1997 and the year ended
December 31, 1996, the General Partners and its affiliates collected
management fees of $17,150 and $24,994, respectively, and received
$0 and $26,798 in Operating Cash Flow distributions for the period
and year ended September 30, 1997 and December 31, 1996,
respectively.
Pursuant to the terms of the Merger Agreement, the Interest
Holders will receive approximately $9.31 per Unit in cash. Promptly
upon consummation of the Merger, the Partnership will cease to exist
and the Purchaser, as the surviving entity will succeed to all of
the assets and liabilities of the Partnership. The Interest Holders
holding a majority of the Units approved the Merger on November 8,
1996.
The Partnership drafted a proxy statement, which required prior
review and comment by the Commission, to solicit proxies for use at
the Special Meeting originally scheduled to be held at the offices
of the Partnership on September 24, 1996. As a result of various
legal issues, as described in legal proceedings, the Special Meeting
was adjourned to November 8, 1996 at 9:00 a.m. The purpose of the
Special Meeting was to vote upon the Merger and certain other
matters as described in the Proxy.
By approving the Merger, the Interest Holders also approved an
amendment to the Agreement allowing the Partnership to sell or lease
property to affiliates (this amendment, together with the Merger
shall be referred to herein as the "Transaction"). The Delaware
Revised Uniform Limited Partnership Act (the "Act") provides that
a merger must also be approved by the general partners of a
partnership, unless the limited partnership agreement provides
otherwise. Because the Agreement did not address this matter, at
the Special Meeting, Interest Holders holding a majority of the
Units were also asked to approve the adoption of an amendment to the
Agreement to allow the majority vote of the Interest Holders to
determine the outcome of the transaction with the Purchaser without
the vote of the General Partners of the Partnership. Neither the
Act nor the Agreement provides the Interest Holders not voting in
favor of the Transaction with dissenters' appraisal rights.
The redemption price to be paid to the Interest Holders in
connection with the Merger is based on the fair market value of the
properties of the Partnership (the "Assets"). Cushman & Wakefield
Valuation Advisory Services ("Cushman & Wakefield"), an independent
appraiser, the largest real estate valuation and consulting
organization in the United States, was engaged by the Partnership
to prepare an appraisal of the Assets, to satisfy the Partnership's
requirements under the Employee Retirement Income Security Act of
1974, as amended. Cushman & Wakefield determined the fair market
value of the Assets to be $23,198,450, or $8.83 per Unit. The
redemption price of $9.31 per Unit also includes all remaining cash
of the Partnership, less net earnings of the Partnership from and
after August 1, 1996 through December 31, 1996, less the
Partnership's actual costs incurred and accrued through the
effective time at the filing of the certificate of merger, including
reasonable reserves in connection with: (i) the proxy solicitation;
(ii) the Transaction (as detailed in the Merger Agreement); and
(iii) the winding up of the Partnership, including preparation of
the final audit, tax return and K-1s (collectively, the "Transaction
Costs") and less all other Partnership obligations.
Cushman & Wakefield subsequently provided an opinion as to the
fairness of the Transaction to the Interest Holders from a financial
point of view. In its opinion, Cushman & Wakefield advised that the
price per Unit reflected in the Transaction is fair, from a
financial point of view, to the Interest Holders. Cushman &
Wakefield's determination that a price is "fair" does not mean that
the price is the highest price which might be obtained in the
marketplace, but rather that based on the appraised values of the
Assets, the price reflected in the Transaction is believed by
Cushman & Wakefield to be reasonable.
The General Partners of the Partnership are Mr. Jerome J. Brault,
the Managing General Partner, and Brauvin Realty Advisors, Inc., the
Corporate General Partner. Mr. Cezar M. Froelich resigned his
position as an Individual General Partner of the Partnership
effective as of September 17, 1996 and Mr. David M. Strosberg
resigned his position as an Individual General Partner of the
Partnership effective as of April 23, 1997. The General Partners
will not receive any payment in exchange for the redemption of their
general partnership interests nor will they receive any fees from
the Partnership in connection with the Transaction.
The Managing General Partner and his son, James L. Brault, an
executive officer of the Corporate General Partner, will have a
minority ownership interest in the Purchaser. Therefore, the
Messrs. Brault have an indirect economic interest in consummating
the Transaction that is in conflict with the economic interests of
the Interest Holders. Messrs. Froelich and Strosberg have no
affiliation with the Purchaser.
Although the Special Meeting was held and the necessary approvals
received, the Merger has not been completed primarily due to the
lawsuits that are still pending. The General Partners believe that
these lawsuits are without merit, and therefore, continue to
vigorously defend against them.
Following receipt of Interest Holder approval, representatives of
the Purchaser commenced in earnest the finalization of the
Purchaser's financing and its due diligence review of the Assets
and the assets of the Affiliated Partnerships. The due diligence
process has revealed certain concerns relating to a potential
environmental problem at one of the properties of the Partnership.
In the second quarter of 1997, the Partnership established a reserve
in the amount of $80,000 to address this environmental problem. The
reserve is based on a third party technical environmental
evaluation. The estimated amount of the reserve is based on this
evaluation which included the estimated costs to remediate the
problem, however, the ultimate cost may be more or less. However,
to the extent possible, the Partnership will seek to be reimbursed
for the remediation costs by the current tenant and environmental
agency funds, if available.
The due diligence review has also raised questions regarding the
interpretation of certain terms in the leases governing some of the
Partnership's and the Affiliated Partnerships' properties. A very
significant tenant is interpreting certain purchase options
contained in its leases in a way that would cause the value of the
properties leased by such tenant to be significantly below the
current appraised value. Members of management of the Partnership
and the Affiliated Partnerships have been working diligently with
the Purchaser to assess these risks and to resolve them in a way
that will allow the Merger and the related transactions to be
consummated without any changes to the terms or the Merger price.
The Purchaser is continuing to assess certain lease provisions,
assess the costs and risks of the litigation discussed below, and
finalize its financing in the light of these developments.
In accordance with the terms of the Merger Agreement, the General
Partners suspended all distributions to Interest Holders; however,
as a result of the unforeseen delays brought about by the litigation
and the due diligence issues highlighted above, the General Partners
felt it was appropriate that an earnings distribution be made to the
Interest Holders. Although the terms of the Merger Agreement
provide that the Assets being acquired by the Purchaser in
connection with the Merger include all earnings of the Partnership
from and after August 1, 1996, the Purchaser has agreed to allow the
Partnership to make distributions to the Interest Holders of net
earnings for the period from and after January 1, 1997 until the
Merger is consummated. In exchange, the Partnership has agreed to
extend the termination date of the Merger Agreement to December 31,
1997 to allow the Purchaser time to complete its due diligence.
Notwithstanding the extension of the termination date, the
Partnership and the Purchaser continue to work through the due
diligence issues outlined above, with the intent of closing the
Merger as soon as possible.
A distribution of the Partnership's net earnings for the periods
January 1, 1997 to March 31, 1997 and April 1, 1997 to June 30, 1997
were made to the Interest Holders on March 31, 1997 and July 15,
1997, respectively in the amounts of approximately $597,600 and
$529,000. A distribution of the Partnership's net earnings for the
period July 1, 1997 to September 30, 1997 was made to the Interest
Holders on October 22, 1997 in the amount of approximately $721,300.
Net earnings accruing after September 30, 1997 through the closing
date will be included with the final cash distribution to the
Interest Holders from the Merger.
The lawsuits as described below have now been pending for
approximately 14 months. The suits continue to command the time,
attention and resources of the Partnership. The General Partners
believe the lawsuits are unfounded and without merit. The delay and
expense of this action continues to frustrate the will and majority
vote of the Interest Holders. Unfortunately, the General Partners
are unable to predict when this matter will be resolved, however the
delay is having an adverse effect on the Partnership today as well
as on future prospects.
For example, the 1997 distributions are based on the net earnings
of the Partnership for the nine months in 1997. These distributions
were lower than prior distributions because the Partnership has
incurred significant legal costs to defend against the lawsuit. The
General Partners anticipate that these costs will continue as long
as the litigation is pending. In addition, the remaining term on
the Partnership's properties' leases continue to shrink. This fact
is causing the Partnership to potentially face the risks and costs
of lease rollover. This heightened degree of risk may also have an
adverse effect on the ultimate value of the Assets. Further, the
Partnership's most significant tenant, Ponderosa, has recently
closed and vacated four of the Partnership's properties. (The
Partnership owns one of them directly and has a joint venture
interest in the other three.) The General Partners are working to
remedy this situation. The Partnership currently has an agreement
to sell one of these assets to a third party not related to either
the Purchaser or the Partnership. Although the closing of the
restaurants should not have a significant short term effect, it
could materially affect the Assets' long term prospects.
Unfortunately, these recent developments are some of the exact risks
and costs the Partnership was seeking to avoid with the successful
completion of the Merger.
Results of Operations - Nine months ended September 30, 1997 and
1996
Results of operations for the Partnership for the nine months
ended September 30, 1997 reflected net income of $1,537,242 as
compared to $1,401,313 for the nine months ended September 30, 1996,
a increase of approximately $135,900. The increase in net income was
a result of an increase in rental and interest income, and a
decrease in transaction costs and valuation fees, which was
partially offset by an increase in environmental remediation
expense.
Total income for the nine months ended September 30, 1997 was
$2,021,049 as compared to $1,908,808 for the nine months ended
September 30, 1996, an increase of approximately $112,200. The
increase in total income was a result of a one time settlement of
outstanding issues with a major tenant of the Partnership which
increased rental income and an increase in interest income as a
result of increased funds invested during 1997.
Total expenses for the nine months ended September 30, 1997 were
$747,787 as compared to $767,853 for the nine months ended September
30, 1996, an decrease of approximately $20,100. The decrease in
total expense was primarily due to a decrease in transaction costs
and valuation fees of approximately $20,600 and $89,000,
respectively. Partially offsetting the decrease in these expenses
was an increase in environmental remediation expense of $80,000.
Results of Operations - Three Months ended September 30, 1997 and
1996
Results of operations for the three months ended September 30,
1997 reflected net income of $586,529 compared to net income of
$371,295 for the three months ended September 30, 1996, an increase
of approximately $215,200.
Total income for the three months ended September 30, 1997 was
$697,586 as compared to $658,161 for the period ended September 30,
1996, an increase of approximately $39,400. The increase in total
income was a result of a one time settlement of outstanding issues
with a major tenant of the Partnership which increased rental income
and an increase in interest income as a result of increased funds
invested during 1997.
Total expenses for the three months ended September 30, 1997 were
$201,313 as compared to $374,812 for the period ended September 30,
1996, a decrease of approximately $173,500. The decrease in total
expense was primarily due to an decrease in transaction costs and
valuation fees of approximately $151,900 and $3,800, respectively.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
Three legal actions, as hereinafter described, were filed against
the General Partners of the Partnership and affiliates of such
General Partners, as well as against the Partnership on a nominal
basis in connection with the Merger. Each of these actions was
brought by Interest Holders of the Partnership. The Partnership and
the General Partners and their named affiliates, deny all
allegations set forth in the complaints and are vigorously defending
against such claims.
A. The Florida Lawsuit
On September 17, 1996, a lawsuit was filed in the Circuit Court
of the Seventeenth Judicial Circuit in and for Broward County,
Florida, styled Rebecca Scialpi and Helen Friedlander v. Jerome J.
Brault, Brauvin Realty Advisors, Inc., Brauvin Realty Advisors II,
Inc., Brauvin Realty Advisors III, Inc., and Brauvin Realty Advisors
IV, Inc., James L. Brault, and Brauvin Real Estate Funds, L.L.C. and
Brauvin High Yield Fund L.P., Brauvin High Yield Fund L.P. II,
Brauvin Income Plus L.P. III, and Brauvin Corporate Lease Program
IV, L.P., Docket No. 96012807. The Partnership and the other
affiliated partnerships named in this lawsuit (the "Affiliated
Partnerships") that are proposed to be a party to a merger or sale
with the Purchaser, are each named as a "Nominal Defendant" in this
lawsuit. The named plaintiffs are not limited partners in the
Partnership. Rather, the named plaintiffs are limited partners in
Brauvin High Yield Fund L.P. II, one of the Affiliated Partnerships.
Jerome J. Brault, the Managing General Partner of the Partnership,
and Brauvin Realty Advisors, Inc., the Corporate General Partner of
the Partnership, as well as certain corporate general partners of
the Affiliated Partnerships, have been named as defendants in this
lawsuit. James L. Brault, an officer of the Corporate General
Partner and the son of Jerome J. Brault, is also named as a
defendant.
Plaintiffs filed an amended complaint on October 8, 1996. The
amended complaint alleges a purported class action consisting of
claims for breach of fiduciary duties, fraud, breach of the
Agreement, and civil racketeering. The amended complaint seeks
injunctive relief, as well as compensatory and punitive damages,
relating to the proposed Transactions with the Purchaser. The
defendants have answered plaintiffs' amended complaint, and have
denied each of the plaintiffs' allegations of wrongful conduct.
On October 2, 1996, the plaintiffs in this action requested that
the Circuit Court enjoin the special meetings of the limited
partners and the proposed transactions with the Purchaser. This
motion was denied by the Circuit Court on October 8, 1996, and the
Florida appellate court denied plaintiffs' appeal of the Circuit
Court's October 8, 1996 ruling. There have been no material
developments with respect to this lawsuit since October 8, 1996.
B. The Illinois Christman Lawsuit
On September 18, 1996, a class action lawsuit was filed in the
United States District Court for the Northern District of Illinois,
styled M. Barbara Christman, Joseph Forte, Janet M. Toolson, John
Archbold, and Ben O. Carroll v. Brauvin Realty Advisors, Inc.,
Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors III, Inc.,
Brauvin Realty Advisors IV, Inc., Jerome J. Brault, Brauvin Real
Estate Funds, L.L.C. and Brauvin High Yield Fund L.P., Brauvin High
Yield Fund L.P. II, Brauvin Income Plus L.P. III, and Brauvin
Corporate Lease Program IV L.P., Docket No. 96C6025. The
Partnership and the Affiliated Partnerships are each named as a
"Nominal Defendant" in the lawsuit. Jerome J. Brault and the
Corporate General Partner of the Partnership, as well as the
corporate general partners of the Affiliated Partnerships, are named
as defendants.
The plaintiffs filed an amended complaint on October 8, 1996,
which alleges claims for breach of fiduciary duties, breaches of the
Agreement, and violation of the Illinois Deceptive Trade Practices
Act. The amended complaint seeks injunctive relief,
as well as compensatory and punitive damages, relating to the
proposed Transaction with the Purchaser.
On October 2, 1996, the District Court certified plaintiffs'
proposed class as all of the limited partners of the Partnership and
of the Affiliated Partnerships, and appointed plaintiffs' counsel,
The Mills Law Firm, as counsel for the class. On October 2, 1996,
the District Court also conducted a hearing on plaintiffs' motion
to preliminarily enjoin the special meetings of the limited partners
and the proposed Transaction with the Purchaser. The District Court
denied plaintiffs' motion for a preliminary injunction at the
conclusion of the October 2, 1996 hearing.
On September 27, 1996, counsel for plaintiffs, The Mills Law
Firm, mailed a solicitation to all of the Limited Partners,
requesting that they revoke their previously-mailed proxies in favor
of the Merger. On October 11, 1996, the General Partners filed a
counterclaim against plaintiffs and their counsel, The Mills Law
Firm, alleging that plaintiffs and The Mills Law Firm violated the
federal securities laws and proxy rules by sending their September
27, 1996 letter to the Limited Partners. The plaintiffs and The
Mills Law Firm have moved to dismiss this counterclaim. The
District Court has taken this motion under advisement and has yet
to issue a ruling.
On October 10 and 11, 1996, the District Court conducted an
evidentiary hearing on the motion of the General Partners to
invalidate revocations of proxies procured as a result of The Mills
Law Firm's September 27, 1996 letter. In that evidentiary hearing,
The Mills Law Firm admitted that it violated the proxy rules by
sending its September 27, 1996 letter to the Limited Partners
without filing such letter with the Commission in violation of the
Commission's requirements. At the conclusion of the hearing on
October 10 and 11, the District Court found that the General
Partners have a likelihood of succeeding on the merits with respect
to their claim that the September 27, 1996 letter sent to the
Limited Partners by plaintiffs and The Mills Law Firm is false or
misleading in several significant respects.
Notwithstanding this finding, the District Court did not
invalidate the revocations of proxies resulting from The Mills Law
Firm's September 27, 1996 letter because it did not believe it
possessed the authority to do so under present law. This ruling
was appealed to the Seventh Circuit Court of Appeals. The Seventh
Court of Appeals subsequently dismissed this appeal on the grounds
that the appeal was rendered moot by the Limited Partners' approval
November 8, 1996 of the Merger.
On October 16, 1996 and on November 6, 1996, the parties filed
cross-motions for partial summary judgement addressing the
allegation in plaintiffs' amended complaint that the Partnership
Agreement does not allow the Limited Partners to vote in favor of
or against the proposed Transaction with the Purchaser by proxy.
These cross-motions for partial summary judgement were taken under
advisement by the District Court, and the District Court has yet to
issue a ruling.
On April 2, 1997, the Court granted plaintiffs' leave to again
amend their complaint. In their second amended complaint,
plaintiffs have named the Partnership as a "Nominal Defendant."
Plaintiffs have also added a new claim, alleging that the General
Partners violated certain of the Commission's rules by making false
and misleading statements in the Proxy. Plaintiffs also allege that
the General Partners breached their fiduciary duties, breached
various provisions of the Agreement, violated the Illinois Deceptive
Trade Practice Act, and violated section 17-305 of the Delaware
Revised Uniform Limited Partnership Act. The General Partners deny
those allegations and will continue to vigorously defend against
these claims.
On April 2, 1997, plaintiffs again requested that the District
Court enjoin the closing of the Transaction with the Purchaser.
After conducting a lengthy hearing on May 1, 1997, the District
Court denied plaintiffs' motion to preliminarily enjoin the closing
of the Transaction with the Purchaser. Plaintiffs filed a notice
of appeal to the Seventh Circuit Court of Appeals from the District
Court's May 1, 1997 order denying plaintiffs' motion to
preliminarily enjoin the closing of the Transaction with the
Purchaser. This appeal is pending and the parties are currently
engaging in discovery.
C. The Scialpi Illinois Lawsuit
On June 20, 1997, another lawsuit was filed in the United States
District Court for the Northern District of Illinois, styled
Benjamin Siegel, Rebecca Scialpi, Helen Friedlander, and BHS &
Associates, Inc. v. Jerome J. Brault, Brauvin Realty Advisors, Inc.,
Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors III, Inc.,
Brauvin Realty Advisors IV, Inc., James L. Brault, Brauvin Real
Estate Funds LLC, Brauvin High Yield Fund L.P., Brauvin High Yield
Fund II L.P., Brauvin Income Plus L.P. III, and Brauvin Corporate
Lease Program IV, L.P. docket number 97 C 4450. The Partnership and
the Affiliated Partnerships are each named as "Nominal Defendant"
in the lawsuit, Jerome J. Brault and the Corporate General Partner
of the Partnership, as well as the corporate general partners of the
Affiliated Partnerships, have been named as defendants in this
lawsuit. James L. Brault, an officer of the Corporate General
Partner and the son of Jerome J. Brault, is also named as a
defendant.
Notably, the complaint was filed by two of the same parties,
Scialpi and Friedlander, who are plaintiffs in the Florida lawsuit,
which is described above. As also indicated above, Scialpi and
Friedlander are not limited partners of the Partnership, but are
limited partners in one of the Affiliated Partnerships, Brauvin High
Yield Fund L.P. II. On August 15, 1997 the plaintiffs filed an
amended complaint dropping Benjamin Siegel as a plaintiff. The
plaintiffs are also represented by the same lawyers that represent
them in the Florida lawsuit. Neither the complaint nor the amended
complaint has been served upon any of the defendants.
The complaint alleges a putative class action consisting of
claims that certain Commission rules were violated by making false
and misleading statements in the Proxy, the defendants breached
their fiduciary duties, and breached the Agreement. The complaint
was consolidated with the Christman lawsuit, which is described
above, pursuant to General Rule 2.31 of the United States District
Court of the Northern District of Illinois, and is presently pending
before Judge Gottschall.
Pursuant to the Agreement and Delaware law, the Partnership will
advance to the defendants their defense costs. The Corporate
General Partner has agreed to repay the Partnership for the advances
if it is ever determined that the parties were not entitled to
receive the advances. No estimate can reasonably be made at this
time of any potential liability from the litigation or the costs of
defense.
ITEM 2. Changes in Securities.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission Of Matters To a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports On Form 8-K.
Exhibit 27. Financial Data Schedule
<PAGE>
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.
BY: Brauvin Realty Advisors, Inc.
Corporate General Partner of
Brauvin High Yield Fund L.P.
BY: /s/ Jerome J. Brault
Jerome J. Brault
Chairman of the Board of Directors,
President and Chief Executive Officer
DATE: November 14, 1997
BY: /s/ B. Allen Aynessazian
B. Allen Aynessazian
Chief Financial Officer and Treasurer
DATE: November 14, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,052,814
<SECURITIES> 3,178,639 <F1>
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 19,322,975 <F2>
<DEPRECIATION> 3,528,735
<TOTAL-ASSETS> 22,044,725
<CURRENT-LIABILITIES> 255,462
<BONDS> 0
0
0
<COMMON> 21,789,263 <F3>
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,044,725
<SALES> 0
<TOTAL-REVENUES> 2,021,049 <F4>
<CGS> 0
<TOTAL-COSTS> 747,787 <F5>
<OTHER-EXPENSES> (263,980) <F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,537,242
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> "SECURITIES" REPRESENTS INVESTMENTS IN JOINT VENTURE
<F2> "PP&E" REPRESENTS INVESTMENT IN REAL ESTATE [LAND AND
BUILDING]
<F3> "COMMON" REPRESENTS TOTAL PARTNERS CAPITAL
<F4> "TOTAL REVENUES" REPRESENTS RENTAL, INTEREST, AND OTHER
INCOME
<F5> "TOTAL COSTS" REPRESENTS TOTAL EXPENSES
<F6> "OTHER EXPENSES" REPRESENTS EQUITY INTEREST IN JOINT
VENTURES' NET INCOME
</FN>
</TABLE>
