<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 March 31, 1998
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.)
30 North LaSalle Street, Chicago, Illinois 60602
(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 March 31, 1998 and
December 31, 1997. . . . . . . . . . . . . . . . . . . . . 4
Statements of Operations for the three months
ended March 31, 1998 and 1997. . . . . . . . . . . . . . . 5
Statements of Partners' Capital for the period
January 1, 1997 to March 31, 1998. . . . . . . . . . . . . 6
Statements of Cash Flows for the three months
ended March 31, 1998 and 1997. . . . . . . . . . . . . . . 7
Notes to Financial Statements. . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . 30
Item 3. Quantitative and Qualitative Disclosures about
Market Risk. . . . . . . . . . . . . . . . . . . . . . . . 39
PART II Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 40
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . 45
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . 45
Item 4. Submissions of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . 45
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . 45
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, 1997 Balance Sheet, the following
Balance Sheet as of March 31, 1998, Statements of Operations for
the three months ended March 31, 1998 and 1997, Statements of
Partners' Capital for the period January 1, 1997 to March 31, 1998
and Statements of Cash Flows for the three months ended March 31,
1998 and 1997 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 1997 Annual Report on Form 10-K.
<PAGE>
BRAUVIN HIGH YIELD FUND L.P.
(a Delaware limited partnership)
BALANCE SHEETS
March 31, December 31,
1998 1997
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 (3,722,052) (3,625,393)
Net investment in real estate 15,600,923 15,697,582
Investment in Joint Ventures (Note 5):
Brauvin High Yield Venture 22,080 31,007
Brauvin Funds Joint Venture 2,424,587 2,431,037
Brauvin Gwinnett County Venture 541,678 543,333
Brauvin Bay County Venture 165,469 166,329
Cash and cash equivalents 1,622,859 1,030,464
Prepaid offering costs 15,703 15,703
Other assets 3,645 2,070
Total Assets $20,396,944 $19,917,525
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued
expenses $ 127,349 $ 118,882
Environmental remediation accrual 80,000 80,000
Rent received in advance 40,134 30,699
Tenant security deposits 51,934 51,934
Due to affiliates 2,183 2,175
Total Liabilities 301,600 283,690
PARTNERS' CAPITAL:
General Partners 109,603 174,353
Interest Holders 19,985,741 19,459,482
Total Partners' Capital 20,095,344 19,633,835
Total Liabilities and
Partners' Capital $20,396,944 $19,917,525
See accompanying notes to financial statements.
BRAUVIN HIGH YIELD FUND L.P.
(a Delaware limited partnership)
STATEMENTS OF OPERATIONS
For the Three Months Ended March 31,
1998 1997
INCOME:
Rental $600,246 $598,148
Interest 19,381 30,963
Other 85 92
Total income 619,712 629,203
EXPENSES:
General and administrative 40,141 55,074
Management fees (Note 3) 6,216 6,588
Transaction costs (Note 6) 26,710 50,075
Depreciation 96,659 96,659
Total expenses 169,726 208,396
Income before equity interest in
joint ventures 449,986 420,807
Equity Interest in Joint Venture's
Net Income:
Brauvin High Yield Venture 78 1,470
Brauvin Funds Joint Venture 71,950 68,575
Brauvin Gwinnett County Venture 11,685 12,444
Brauvin Bay County Venture 3,300 2,903
Net income $536,999 $506,199
Net income allocated to the General
Partners $ 10,740 $ 10,124
Net income allocated to the Interest
Holders $526,259 $496,075
Net income per Unit outstanding (a) $ 0.20 $ 0.19
(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, 1997 to March 31, 1998
General Interest
Partners Holders * Total
Balance, January 1, 1997 $134,218 $21,246,396 $21,380,614
Net income 40,135 1,966,633 2,006,768
Cash distributions -- (3,753,547) (3,753,547)
Balance, December 31, 1997 174,353 19,459,482 19,633,835
Net income 10,740 526,259 536,999
Cash distributions (75,490) -- (75,490)
Balance, March 31, 1998 $109,603 $19,985,741 $20,095,344
* Total Units outstanding at March 31, 1998 and December 31, 1997
were 2,627,503. Cash distributions to Interest Holders per Unit
were approximately $1.43 for the year ended December 31, 1997.
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 Three Months Ended March 31,
1998 1997
Cash flows from operating activities:
Net income $ 536,999 $ 506,199
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 96,659 96,659
Equity interest in net income from:
Brauvin High Yield Venture (78) (1,470)
Brauvin Funds Joint Venture (71,950) (68,575)
Brauvin Gwinnett County Venture (11,685) (12,444)
Brauvin Bay County Venture (3,300) (2,903)
Change in due from affiliates - 20
Change in other assets (1,575) 17,034
Change in accounts payable
and accrued expenses 8,467 (5,154)
Change in rents received in advance 9,435 (7,729)
Change in due to affiliates 8 20
Net cash provided by operating activities 562,980 521,657
Cash flows from investing activities:
Return of capital from Brauvin High
Yield Venture 7,505 --
Distributions from:
Brauvin High Yield Venture 1,500 1,800
Brauvin Funds Joint Venture 78,400 73,500
Brauvin Gwinnett County Venture 13,340 15,210
Brauvin Bay County Venture 4,160 4,000
Cash provided by investing activities 104,905 94,510
Cash flows from financing activities:
Cash distributions to General Partners (75,490) --
Cash distributions to Interest Holders -- (597,605)
Cash used in financing activities (75,490) (597,605)
Net increase in cash and cash equivalents 592,395 18,562
Cash and cash equivalents at beginning
of period 1,030,464 2,231,481
Cash and cash equivalents at end of period $1,622,859 $2,250,043
See accompanying notes to financial statements.
<PAGE>
BRAUVIN HIGH YIELD FUND L.P.
(a Delaware limited partnership)
NOTES TO FINANCIAL STATEMENTS
(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. 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 March 31, 1998 and December 31, 1997 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 March 31, 1998 and December
31, 1997. As of March 31, 1998, 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
March 31, 1998 and December 31, 1997. Accordingly, no impairment
loss has been recorded in the accompanying financial statements for
the three months ended March 31, 1998 or the year ended December
31, 1997.
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.
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 March 31, 1998 and
December 31, 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.
The carrying amounts of the following items are a reasonable
estimate of fair value: cash and cash equivalents; due from
affiliates; accounts payable and accrued expenses; environmental
remediation accrual; rent received in advance; tenant security
deposits; and due to affiliates.
(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 one of the General Partners 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 three months ended
March 31, 1998 and 1997 were as follows:
1998 1997
Management fees $ 6,216 $ 6,588
Reimbursable operating
expenses 29,475 41,201
As of March 31, 1998 and December 31, 1997, the Partnership has
made all payments to affiliates except for $2,183 and $2,175,
respectively, 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:
<PAGE>
BRAUVIN HIGH YIELD VENTURE
March 31, December 31,
1998 1997
Land and buildings, net $4,032,224 $4,922,583
Other assets 11,704 15,554
$4,043,928 $4,938,137
Liabilities $ 30,764 $ 32,310
Partners' capital 4,013,164 4,905,827
$4,043,928 $4,938,137
Three Months Ended March 31,
1998 1997
Rental and other income $152,110 $181,434
Expenses:
Depreciation 25,657 30,063
Management fees 1,440 1,848
Operating and
administrative 5,064 2,491
32,161 34,402
Net income before
loss on sale of property 119,949 147,032
Loss on the sale
of property (112,104) --
Net Income $ 7,845 $147,032
<PAGE>
BRAUVIN FUNDS JOINT VENTURE
March 31, December 31,
1998 1997
Land and buildings, net $4,568,784 $4,596,308
Other assets 437,875 420,444
$5,006,659 $5,016,752
Liabilities $ 5,276 $ 2,205
Partners' capital 5,001,383 5,014,547
$5,006,659 $5,016,752
Three Months Ended March 31,
1998 1997
Rental and other income $178,647 $179,256
Expenses:
Depreciation 27,524 27,524
Management fees 1,651 1,666
Operating and
administrative 2,636 10,118
31,811 39,308
Net Income $146,836 $139,948
<PAGE>
BRAUVIN GWINNETT COUNTY VENTURE
March 31, December 31,
1998 1997
Land and buildings, net $2,274,425 $2,285,006
Other assets 56,947 75,185
$2,331,372 $2,360,191
Liabilities $ 3,134 $ 24,884
Partners' capital 2,328,238 2,335,307
$2,331,372 $2,360,191
Three months Ended March 31,
1998 1997
Rental and other income $68,938 $65,805
Expenses:
Depreciation 10,582 10,582
Management fees 446 875
Operating and
administrative 7,980 1,169
19,008 12,626
Net Income $ 49,930 $53,179
BRAUVIN BAY COUNTY VENTURE
March 31, December 31,
1998 1997
Land and buildings, net $1,047,176 $1,051,588
Other assets 1,947 11,989
$1,049,123 $1,063,577
Liabilities $ 4,740 $ 13,820
Partners' capital 1,044,383 1,049,757
$1,049,123 $1,063,577
Three Months Ended March 31,
1998 1997
Rental and other income $ 27,357 $27,914
Expenses:
Depreciation 4,412 2,984
Management fees 291 292
Operating and administrative 2,027 6,493
6,730 9,769
Net Income $ 20,627 $18,145
(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, December 31, 1997 and March 31, 1998 (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, as of
April 1, 1996. Subsequently, the Partnership purchased a 16%
interest in Brauvin Bay County Venture. Based on the terms of the
Merger Agreement, the fair market value of the Assets will be
increased by the amount of the investment in Brauvin Bay County
Venture, and correspondingly, the Partnership's cash holdings were
reduced by the same amount and, therefore, the total redemption
amount remains unchanged. 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. Of the original cash redemption amount,
approximately $0.48 was distributed to Interest Holders in the
December 31, 1997 distribution.
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 (as defined below).
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. See Note 7. The reserve is based on a
third party technical environmental evaluation, however, the
ultimate cost may be more or less. In addition, 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
Cushman and Wakefield appraised value.
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 June 30, 1998. It is anticipated that the Merger
Agreement will be extended past June 30, 1998 in the hope that the
pending litigation will be resolved.
Distributions of the Partnership's net earnings for the periods
January 1, 1997 to March 31, 1997, April 1, 1997 to June 30, 1997,
July 1, 1997 to September 30, 1997 and October 31, 1997 to December
31, 1997 were made to the Interest Holders on March 31, 1997, July
15, 1997, October 22, 1997 and December 31, 1997, respectively, in
the amounts of approximately $597,600, $529,000, $721,300 and
$1,903,700. In addition, distributions of approximately $2,000
were paid to various states for income taxes on behalf of all
Interest Holders during 1997
A distribution of the Partnership's net earnings for the period
January 1, 1998 to March 31, 1998 was made to Interest Holders on
May 8, 1998 in the amount of approximately $650,000. Net earnings
accruing after March 31, 1998 will be included with the final cash
distribution to the Interest Holders from the Merger. However, as
detailed in "Litigation," by agreement of the Partnership and the
General Partners and pursuant to a motion of the General Partners,
the District Court entered an order preventing the Partnership and
the General Partners from completing the Merger or otherwise
disposing of all or substantially all of the Partnership's assets
until further order of the Court.
Litigation
Two legal actions, as hereinafter described, are pending 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. One additional legal action, which was dismissed
on January 28, 1998, had also been brought against the General
Partners and affiliates of such General Partners, as well as the
Partnership on a nominal basis in connection with the Merger. With
respect to the pending actions, 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 Dismissed 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, were each named as a "Nominal
Defendant" in this lawsuit. The named plaintiffs were 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, were
named as defendants in this lawsuit. James L. Brault, an officer
of the Corporate General Partner and the son of Jerome J. Brault,
was also named as a defendant. This lawsuit was dismissed for want
of prosecution on January 28, 1998.
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
Transaction.
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 Transaction. 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 Interest Holders,
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 Interest Holders. 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 Interest Holders
without filing such letter with the Securities and Exchange
Commission (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 Interest Holders 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 Interest Holders' 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 Agreement does
not allow the Interest Holders to vote in favor of or against the
Transaction 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 named the Partnership as a "Nominal Defendant."
Plaintiffs also added a new claim, alleging that the General
Partners violated certain of the rules of the Commission 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. After conducting a
lengthy hearing on May 1, 1997, the District Court denied
plaintiffs' motion to preliminarily enjoin the closing of the
Transaction. 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. This appeal was dismissed by the
Seventh District Court of Appeals on January 23, 1998 based on the
appellate courts finding that the District Court's order of January
16, 1998 rendered the appeal moot.
On January 16, 1998, by agreement of the Partnership and the
General Partner and pursuant to a motion of the General Partner,
the District Court entered an order preventing the Partnership and
the General Partners from completing the Merger, or otherwise
disposing of all or substantially all of the Partnership's assets,
until further order from the Court.
On January 16, 1998, by agreement of the Partnership and the
General Partners and pursuant to a motion of the General Partners,
the District Court entered an order preventing the Partnership and
the General Partners from completing the Sale, or otherwise
disposing of all or substantially all of the Partnership's assets,
until further order of the Court.
On January 28, 1998, the District Court entered an Order of
Reference to Special Master, designating a Special Master and
vesting the Special Master with authority to resolve certain
aspects of the lawsuit subject to the District Court's review and
confirmation. The Special Master has been empowered to determine
how the assets of the Partnership should be sold or disposed of in
a manner which allows the Interest Holders to maximize their
financial return in the shortest practicable time frame. In
addition, early in the second quarter of 1998, the Special Master
retained a financial advisor (the "Financial Advisor"), at the
expense of the Partnership, to assist the Special Master. The
Financial Advisor has been engaged to perform a valuation of the
properties of the Partnership as well as a valuation of the
Partnership itself. Further, the Financial Advisor is to
recommend a strategy and procedure that will allow for the
efficient and expedient disposition of the Partnership's
properties. The General Partners anticipate that the Financial
Advisor will make its recommendations to the Special Master in the
second quarter of 1998. The cost to the Partnership for the
services of the Financial Advisor is $135,000 plus reasonable
expenses.
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 were 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 represented them in the Florida lawsuit.
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. The General Partners
deny these allegations and intend to vigorously defend against
these claims. There have been no material developments with
respect to this lawsuit since it was filed on June 20, 1997.
(7) 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 having 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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
Certain statements in this Annual Report that are not historical
fact constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. 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.
Year 2000
In 1997, the Partnership initiated the conversion from its
existing accounting software to a program that is year 2000
compliant. Management has determined that the year 2000 issue will
not pose significant operational problems for its computer system.
All costs associated with this conversion are being expensed as
incurred; and are immaterial.
Also in 1997, management of the Partnership initiated formal
communications with all of its significant third party vendors,
service providers and financial institutions to determine the
extent to which the Partnership is vulnerable to those third
parties' failure to remedy their own year 2000 issues. There can
be no guarantee that the systems of these third parties' will be
timely converted and would not have an adverse effect on the
Partnership.
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 March 31, 1998 and December 31,
1997, through Units purchased by certain Interest Holders investing
their distributions of Operating Cash Flow in additional Units
through the Plan, which process was continued when the proxy
solicitation process began. As of March 31, 1998 and December 31,
1997, 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 1998 (a) 1997(b) 1996 1995
February 15 $.2473 $.2274 $.2500 $.2500
May 15 .2013 .2500 .2500
August 15 .2745 -- .2500
November 15 .7245 -- .2500
(a) The 1998 distribution was made on May 8, 1998.
(b) The 1997 distributions were made on March 31, 1997, July 15,
1997, October 22, 1997 and December 31, 1997.
Per the terms of the cash out Merger, the Partnership's net
earnings from April 1996 through July 1996 were to be distributed
to the Interest Holders in conjunction with the closing of the
Merger. However, because of the lengthy delay and the uncertainty
of the ultimate closing date, the General Partners decided to make
a significant distribution on December 31, 1997 of the Partnership's
earnings. This distribution will not change the effective sales
price being received by the Partnership through the Merger; it will
only adjust the timing of the payout dollar for dollar based on
these earnings being distributed now. Included in the December 31,
1997 distribution was any prior period earnings including amounts
previously reserved for anticipated closing costs. These reserves
will be re-established by the Partnership immediately once a
definitive closing date is scheduled.
During the three months ended March 31, 1998 and the year ended
December 31, 1997, the General Partners and its affiliates earned
management fees of $6,216 and $24,929, respectively, and received
$75,490 and $0 in Operating Cash Flow distributions for the three
months and the year ended March 31, 1998 and December 31, 1997,
respectively.
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.
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. 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. Of the total
redemption price stated above approximately $0.48 was distributed
to Interest Holders in the December 31, 1997 distribution.
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.
Mr. Jerome J. Brault is the Managing General Partner of the
Partnership and Brauvin Realty Advisors, Inc. is the Corporate
General Partner. On April 23, 1997, Mr. David M. Strosberg resigned
as an Individual General Partner of the Partnership. Mr. Cezar M.
Froelich resigned his position as an Individual General Partner of
the Partnership effective as of September 17, 1996. 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
remaining General Partners do not believe that Mr. Strosberg's or
Mr. Froelich's lack of involvement has had an adverse effect, and
should not in the future have any adverse effect, on the operations
of the Partnership.
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 of
the Partnership and those of the Affiliated Partnerships. The due
diligence process revealed certain concerns relating to potential
environmental problems at some of the properties of the Partnership
and the Affiliated Partnerships. 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 Cushman & Wakefield appraised value.
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 June 30, 1998 to allow the Purchaser time to complete
its due diligence. It is anticipated that the Merger Agreement will
be extended past June 30, 1998 in the hope that the pending
litigation will be resolved.
The litigation, as described herein, has now been pending for
approximately 20 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 were based on the net
earnings of the Partnership in 1997. These distributions were lower
than prior distributions because the Partnership incurred
significant legal costs to defend against the lawsuit. 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. In January 1998, the Brauvin High
Yield Venture partnership sold 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.
On January 16, 1998, by agreement of the Partnership and the
General Partner and pursuant to a motion of the General Partner, the
District Court entered an order preventing the Partnership and the
General Partners from completing the Merger, or otherwise disposing
of all or substantially all of the Partnership's assets, until
further order from the Court.
On January 28, 1998, the District Court entered an Order of
Reference to Special Master, designating a Special Master and
vesting the Special Master with authority to resolve certain aspects
of the lawsuit subject to the District Court's review and
confirmation. The Special Master has been empowered to determine
how the assets of the Partnership should be sold or disposed of in
a manner which allows the Interest Holders to maximize their
financial return in the shortest practicable time frame. In
addition, early in the second quarter of 1998, the Special Master
retained a financial advisor (the "Financial Advisor"), at the
expense of the Partnership, to assist the Special Master. The
Financial Advisor has been engaged to perform a valuation of the
properties of the Partnership as well as a valuation of the
Partnership itself. Further, the Financial Advisor is to
recommend a strategy and procedure that will allow for the efficient
and expedient disposition of the Partnership's properties. The
General Partners anticipate that the Financial Advisor will make its
recommendations to the Special Master in the second quarter of 1998.
The cost to the Partnership for the services of the Financial
Advisor is $135,000 plus reasonable expenses.
Distributions of the Partnership's net earnings for the periods
January 1, 1997 to March 31, 1997, April 1, 1997 to June 30, 1997,
July 1, 1997 to September 30, 1997 and October 31, 1997 to December
31, 1997 were made to the Interest Holders on March 31, 1997, July
15, 1997, October 22, 1997 and December 31, 1997, respectively, in
the amounts of approximately $597,600, $529,000, $721,300 and
$1,903,700. In addition, distributions of approximately $2,000 were
paid to various states for income taxes on behalf of all Interest
Holders during 1997
A distribution of the Partnership's net earnings for the period
January 1, 1998 to March 31, 1998 was made to Interest Holders on
May 8, 1998 in the amount of approximately $650,000. Net earnings
accruing after March 31, 1998 will be included with the final cash
distribution to the Interest Holders from the Merger. However, as
detailed in "Litigation," by agreement of the Partnership and the
General Partners and pursuant to a motion of the General Partners,
the District Court entered an order preventing the Partnership and
the General Partners from completing the Merger or otherwise
disposing of all or substantially all of the Partnership's assets
until further order of the Court.
Results of Operations - Three months ended March 31, 1998 and 1997
Results of operations for the three months ended March 31, 1998
reflected net income of $536,999 compared to net income of $506,199
for the three months ended March 31, 1997, an increase of
approximately $30,800.
Total income for the three months ended March 31, 1998 was
$619,712 as compared to $629,203 for the period ended March 31,
1997, a decrease of approximately $9,500. The decrease in total
income is primarily due to the decrease in interest income, which
was the result of lower cash balances during the first quarter of
1998.
Total expenses for the three months ended March 31, 1998 were
$169,726 as compared to $208,396 for the period ended March 31,
1997, a decrease of approximately $38,700. The decrease in expenses
was primarily due to a decrease in Transaction costs and general and
administrative expense associated with the Partnership's 1997
attempt to resolve some of the due diligence issues and related
items associated with the Merger, as discussed above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Partnership does not engage in any hedge transactions or
derivative financial instruments.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
Two legal actions, as hereinafter described, are pending 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. One additional legal action, which was dismissed
on January 28, 1998, had also been brought against the General
Partners and affiliates of such General Partners, as well as the
Partnership on a nominal basis in connection with the Merger. With
respect to the pending actions, 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 Dismissed 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, were each named as a "Nominal Defendant" in this
lawsuit. The named plaintiffs were 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, were named as defendants in this
lawsuit. James L. Brault, an officer of the Corporate General
Partner and the son of Jerome J. Brault, was also named as a
defendant. This lawsuit was dismissed for want of prosecution on
January 28, 1998.
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
Transaction.
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 Transaction. 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 Interest Holders,
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 Interest Holders. 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 Interest Holders
without filing such letter with the Securities and Exchange
Commission (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 Interest Holders 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 Interest Holders' 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 Interest Holders to vote in favor of
or against the Transaction 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 named the Partnership as a "Nominal Defendant."
Plaintiffs also added a new claim, alleging that the General
Partners violated certain of the rules of the Commission 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. After conducting a
lengthy hearing on May 1, 1997, the District Court denied
plaintiffs' motion to preliminarily enjoin the closing of the
Transaction. 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. This appeal was dismissed by the Seventh District
Court of Appeals on January 23, 1998 based on the appellate courts
finding that the District Court's order of January 16, 1998 rendered
the appeal moot.
On January 16, 1998, by agreement of the Partnership and the
General Partner and pursuant to a motion of the General Partner, the
District Court entered an order preventing the Partnership and the
General Partners from completing the Merger, or otherwise disposing
of all or substantially all of the Partnership's assets, until
further order from the Court.
On January 28, 1998, the District Court entered an Order of
Reference to Special Master, designating a Special Master and
vesting the Special Master with authority to resolve certain aspects
of the lawsuit subject to the District Court's review and
confirmation. The Special Master has been empowered to determine
how the assets of the Partnership should be sold or disposed of in
a manner which allows the Interest Holders to maximize their
financial return in the shortest practicable time frame. In
addition, early in the second quarter of 1998, the Special Master
retained a financial advisor (the "Financial Advisor"), at the
expense of the Partnership, to assist the Special Master. The
Financial Advisor has been engaged to perform a valuation of the
properties of the Partnership as well as a valuation of the
Partnership itself. Further, the Financial Advisor is to
recommend a strategy and procedure that will allow for the efficient
and expedient disposition of the Partnership's properties. The
General Partners anticipate that the Financial Advisor will make its
recommendations to the Special Master in the second quarter of 1998.
The cost to the Partnership for the services of the Financial
Advisor is $135,000 plus reasonable expenses.
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 were 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 represented
them in the Florida lawsuit.
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. The General Partners
deny these allegations and intend to vigorously defend against these
claims. There have been no material developments with respect to
this lawsuit since it was filed on June 20, 1997.
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.
On May 15, 1998, B. Allen Aynessazian resigned as Chief Financial
Officer from the Corporate General Partner. Mr. Aynessazian is
returning to Giordano's Enterprises, a privately held restaurant
concern where he worked from 1989 until 1996, prior to joining the
Brauvin organization.
Mr. Aynessazian is being succeeded by Mr. Thomas E. Murphy, age
31. Mr. Murphy will be the Partnership's Principal Accounting
Officer. He is responsible for the daily operations of Partnership
accounting and financial reporting to regulatory agencies. Mr.
Murphy received a B.S. degree from Northern Illinois University in
1988. Prior to joining the Brauvin organization he was in the
accounting department of Zell/Merrill Lynch and First Capital Real
Estate Funds where he was responsible for the preparation of the
accounting and financial reporting for several real estate limited
partnerships and corporations. Mr. Murphy is a Certified Public
Accountant and is a member of the Illinois Certified Public
Accountants Society.
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: May 15, 1998
BY: /s/ B. Allen Aynessazian
B. Allen Aynessazian
Chief Financial Officer and Treasurer
DATE: May 15, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,622,859
<SECURITIES> 3,153,814 <F1>
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 19,322,975 <F2>
<DEPRECIATION> 3,722,052
<TOTAL-ASSETS> 20,396,944
<CURRENT-LIABILITIES> 301,600
<BONDS> 0
0
0
<COMMON> 20,095,344 <F3>
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,396,944
<SALES> 0
<TOTAL-REVENUES> 619,712 <F4>
<CGS> 0
<TOTAL-COSTS> 169,726 <F5>
<OTHER-EXPENSES> (87,013) <F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 536,999
<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>
