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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 June 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 0-17556
Brauvin High Yield Fund L.P. II
(Exact name of registrant as specified in its charter)
Delaware 36-3580153
(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 .
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BRAUVIN HIGH YIELD FUND L.P. II
INDEX
Page
PART I Financial Information
Item 1. Consolidated Financial Statements. . . . . . . . . . . 3
Consolidated Balance Sheets at June 30, 1997
and December 31, 1996 . .. . . . . . .. . . . . . . . 4
Consolidated Statements of Operations for the
six months ended June 30, 1997 and 1996 . . . . . . . . 5
Consolidated Statements of Operations for the
three months ended June 30, 1997 and 1996 . . . . . . . 6
Consolidated Statements of Partners' Capital for
the periods January 1, 1996 to June 30, 1997. . . . . . 7
Consolidated Statements of Cash Flows for the six
months ended June 30, 1997 and 1996 . . . . . . . . . . 8
Notes to Consolidated Financial Statements. . . . . . . . 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 29
PART II Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 37
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . 41
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . 41
Item 4. Submissions of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . 42
Item 5. Other Information. . . . . . . . . . . . . . . . . . . 42
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 42
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
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PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Except for the December 31, 1996 Consolidated Balance Sheet,
the following Consolidated Balance Sheet as of June 30, 1997,
Consolidated Statements of Operations for the six months ended
June 30, 1997 and 1996, Consolidated Statements of Operations for
the three months ended June 30, 1997 and 1996, Consolidated
Statements of Partners' Capital for the periods January 1, 1996 to
June 30, 1997 and Consolidated Statements of Cash Flows for the
three months ended June 30, 1997 and 1996 for Brauvin High Yield
Fund L.P. II (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 consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Partnership's 1996 Annual Report on Form
10-K.
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BRAUVIN HIGH YIELD FUND L.P. II
(a Delaware limited partnership)
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
ASSETS
Investment in real estate (Note 5):
Land $10,961,124 $10,961,124
Buildings 24,440,040 24,440,040
35,401,164 35,401,164
Less: Accumulated depreciation (5,708,782) (5,357,473)
Net investment in real estate 29,692,382 30,043,691
Investment in Brauvin Bay
County Venture (Note 6) 280,991 283,793
Cash and cash equivalents 3,395,583 2,413,914
Rent receivable 54,751 37,063
Deferred rent receivable 376,319 342,539
Due from General Partners (Note 4) 140,000 140,000
Other assets 26,189 29,582
Total Assets $33,966,215 $33,290,582
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued
expenses $ 49,974 $ 59,233
Rent received in advance 36,419 142,596
Due to an affiliate 3,806 --
Undisbursed insurance proceeds 199,452 --
Tenant security deposits 87,992 --
Total Liabilities 377,643 201,829
MINORITY INTEREST:
Brauvin High Yield Venture 31,600 32,374
Brauvin Funds Joint Venture 2,439,700 2,450,861
PARTNERS' CAPITAL:
General Partners 319,429 319,429
Limited Partners 30,797,843 30,286,089
Total Partners' Capital 31,117,272 30,605,518
Total Liabilities and
Partners' Capital $33,966,215 $33,290,582
See accompanying notes to consolidated financial statements
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BRAUVIN HIGH YIELD FUND L.P. II
(a Delaware limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30,
1997 1996
INCOME
Rental $2,110,668 $2,088,877
Interest 73,433 40,515
Other 243 388
Total income 2,184,344 2,129,780
EXPENSES
General and administrative 185,072 121,746
Management fees (Note 3) 20,795 21,620
Amortization of deferred
organization costs and
other assets 600 1,897
Depreciation 351,309 361,044
Transaction costs (Note 7) 159,780 14,183
Valuation fees -- 86,900
Total expenses 717,556 607,390
Income before minority and
equity interests' share
of net income 1,466,788 1,522,390
Minority interest share
in net income:
Brauvin High Yield Venture (2,826) (2,899)
Brauvin Funds Joint Venture (140,739) (145,270)
Equity interest in:
Brauvin Bay County Venture's
net income 8,898 --
Net Income $ 1,332,121 $1,374,221
Net income allocated to the
Limited Partners $ 1,332,121 $1,374,221
Net income per
Unit outstanding (a) $ 33.02 $ 34.07
(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 Limited Partners were
admitted to the Partnership and additional Units were purchased
through the distribution reinvestment plan (the "Plan").
See accompanying notes to consolidated financial statements.
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BRAUVIN HIGH YIELD FUND L.P. II
(a Delaware limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30,
1997 1996
INCOME
Rental $1,075,247 $1,048,481
Interest 38,480 19,831
Other (390) 234
Total income 1,113,337 1,068,546
EXPENSES
General and administrative 110,121 66,676
Management fees (Note 3) 10,377 10,833
Amortization of deferred
organization costs and
other assets 300 515
Depreciation 175,654 180,522
Transaction costs (Note 7) 105,841 14,183
Valuation fees -- 43,450
Total expenses 402,293 316,179
Income before minority and
equity interests' share
of net income 711,044 752,367
Minority interest share
in net income:
Brauvin High Yield Venture (1,356) (1,480)
Brauvin Funds Joint Venture (72,164) (72,279)
Equity interest in:
Brauvin Bay County Venture's
net income 4,180 --
Net Income $ 641,704 $ 678,608
Net income allocated to the
Limited Partners $ 641,704 $ 678,608
Net income per
Unit outstanding (a) $ 15.90 $ 16.83
(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 Limited Partners were
admitted to the Partnership and additional Units were purchased
through the distribution reinvestment plan (the "Plan").
See accompanying notes to consolidated financial statements.
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BRAUVIN HIGH YIELD FUND L.P. II
(a Delaware limited partnership)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the periods from January 1, 1996 to June 30, 1997
General Limited
Partners Partners* Total
Balance January 1, 1996 $319,429 $30,261,083 $30,580,512
Contributions, net -- 30,965 30,965
Selling commissions and
other offering costs -- (15,203) (15,203)
Net income -- 1,824,011 1,824,011
Cash distributions -- (1,814,767) (1,814,767)
Balance, December 31, 1996 319,429 30,286,089 30,605,518
Net income -- 1,332,121 1,332,121
Cash distributions -- (820,367) (820,367)
Balance, June 30, 1997 $319,429 $30,797,843 $31,117,272
* Total Units outstanding at June 30, 1997 and December 31, 1996 were
40,347. Cash distributions to Limited Partners per Unit were $20.19
and $45.00 for the six months ended June 30, 1997 and the year ended
December 31, 1996, respectively. Cash distributions to Limited
Partners 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 Limited Partners were admitted to the
Partnership and additional Units were purchased through the Plan.
See accompanying notes to consolidated financial statements.
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BRAUVIN HIGH YIELD FUND L.P. II
(a Delaware limited partnership)
STATEMENTS OF CASH FLOWS
For Six Months Ended June 30,
1997 1996
Cash flows from operating activities:
Net income $1,332,121 $1,374,221
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 351,909 362,941
Minority interest's share of income
from Brauvin High Yield Venture 2,826 2,899
Minority interest's share of income
from Brauvin Funds Joint Venture 140,739 145,270
Equity interest share of income
from Brauvin Bay county Venture (8,898) --
(Increase) decrease in rent receivable (17,688) 16,944
Increase in deferred rent receivable (33,780) (33,781)
Decrease (increase) in other assets 2,793 (1,673)
(Decrease) increase in accounts
payable and accrued expenses (9,259) 29,326
(Decrease)increase in rent
received in advance (106,177) 2,718
Increase in security deposits 87,992 --
Increase in due to affiliates 3,806 10,175
Net cash provided by operating activities 1,746,384 1,909,040
Cash flows from investing activities:
Increase in undisbursed insurance proceeds 199,452 --
Distributions from Brauvin Bay
County Venture 11,700 --
Cash provided by investing activities 211,152 --
Cash flows from financing activities:
Sale of Units, net of liquidations,
selling commissions and other
offering costs -- 18,658
Cash distributions to Limited Partners (820,367) (1,815,124)
Cash distributions to minority interest -
Brauvin High Yield Venture (3,600) (3,600)
Cash distribution to minority interest -
Brauvin Funds Joint Venture (151,900) (156,800)
Net cash used in financing activities (975,867) (1,956,866)
Net increase (decrease) in cash
and cash equivalents 981,669 (47,826)
Cash and cash equivalents at
beginning of period 2,413,914 1,374,779
Cash and cash equivalents at
end of period $3,395,583 $1,326,953
See accompanying notes to consolidated financial statements
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(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
BRAUVIN HIGH YIELD FUND L.P. II (the "Partnership") is a Delaware
limited partnership organized for the purpose of acquiring
debt-free ownership of existing, free-standing, income-producing
retail, office or industrial real estate properties predominantly
all of which will involve "triple-net" leases. The General
Partners of the Partnership are Brauvin Realty Advisors II,
Inc.,and Jerome J. Brault. Brauvin Realty Advisors II, Inc. is
owned primarily by Messrs. Brault (beneficially) (44%) and Cezar M.
Froelich (44%). Mr. Froelich resigned as a director of Brauvin
Realty Advisors II, Inc. in December 1994 and as an Individual
General Partner effective as of September 17, 1996. Brauvin
Securities, Inc., an affiliate of the General Partners, is the
selling agent of the Partnership.
The Partnership was formed on May 3, 1988 and filed a
Registration Statement on Form S-11 with the Securities and
Exchange Commission which became effective on June 17, 1988. The
minimum of $1,200,000 of limited partnership interests of the
Partnership (the "Units") necessary for the Partnership to commence
operations was achieved on July 26, 1988. The offering was
anticipated to close on June 16, 1989 but was extended until and
closed on September 30, 1989. A total of $38,923,000 of Units were
subscribed for and issued between June 17, 1988 and September 30,
1989, pursuant to the Partnership's public offering. Through June
30, 1997 and December 31, 1996, the Partnership has sold
$42,982,178 of Units. This total includes $4,059,178 of Units
purchased by Limited Partners who utilized their distributions of
Operating Cash Flow to purchase Units through the distribution
reinvestment plan (the "Plan"). Units valued at $2,886,915, have
been repurchased by the Partnership from Limited Partners
liquidating their investment in the Partnership and have been
retired as of June 30, 1997 and December 31, 1996. As of June 30,
1997 the Plan participants have acquired Units under the Plan which
approximate 9% of the total Units outstanding.
The Partnership has acquired the land and buildings underlying 14
Ponderosa restaurants, two Taco Bell restaurants, three Children's
World Learning Centers, three Hardee's restaurants, three Avis Lube
Oil Change Centers and three Chi-Chi's restaurants. Also acquired
were 99%, 51% and 26% equity interests in three joint ventures with
affiliated entities, which ventures purchased the land and
buildings underlying six Ponderosa restaurants, a Scandinavian
Health Spa and a Blockbuster Video store, respectively. In 1995,
the Partnership and Metromedia, the parent of Ponderosa
Restaurants, exchanged one of the Ponderosa restaurants for a Tony
Roma's restaurant. The Partnership's acquisition process is now
completed except to the extent funds raised through the Plan are
sufficient to purchase additional properties.
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.
Rental Income
Rental income is recognized on a straight line basis over the
life of the related leases. Differences between rental income
earned and amounts due per the respective lease agreements are
credited or charged, as applicable, to deferred rent receivable.
Consolidation of Joint Ventures
The Partnership owns a 99% equity interest in a joint venture,
Brauvin High Yield Venture, which owns six Ponderosa restaurants,
and a 51% equity interest in another joint venture, Brauvin Funds
Joint Venture, which owns a Scandinavian Health Spa. The
accompanying financial statements have consolidated 100% of the
assets, liabilities, operations and partners' capital of these
ventures. All significant intercompany accounts have been
eliminated.
Investment in Joint Venture
The Partnership owns a 26% equity interest in a joint venture,
Brauvin Bay County Venture, which owns one Blockbuster Video Store.
The accompanying financial statements include the investment in
Brauvin Bay County Venture using the equity 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, net of an allowance for
impairment. 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 Long-Lived Assets to be Disposed Of" (SFAS
121). SFAS 121 requires the provision of an allowance for
impairment to reduce the cost basis of real estate to its estimated
fair value when the real estate is judged to have suffered an
impairment that is other than temporary. 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 June 30, 1997 and December 31,
1996, except as described in Note 5.
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 June 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; rent receivable;
due from General Partners; accounts payable and accrued expenses;
and rent 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 Limited
Partners until the Limited Partners 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 97.5% to the Limited Partners and 2.5% to the General
Partners.
The net proceeds of a sale or refinancing of a Partnership
property shall be distributed as follows:
first, to the Limited Partners until the Limited Partners have
received an amount equal to the 10% Cumulative Preferred Return,
as such term is defined in the Agreement;
second, to the Limited Partners until the Limited Partners have
received an amount equal to the amount of their Adjusted
Investment, as such term is defined in the Agreement; and
third, 95% to the Limited Partners and 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 between the Limited Partners and the General
Partners in accordance with the ratio of aggregate distributions of
Operating Cash Flow attributable to such tax year, although if no
distributions are made in any year, net losses (computed without
regard to any allowance for depreciation or cost recovery
deductions under the Code) shall be allocated 99% to the Limited
Partners and 1% to the General Partners. Notwithstanding the
foregoing, all depreciation and cost recovery deductions allowed
under the Code shall be allocated 2.5% to the General Partners and
97.5% to the Taxable Class Limited Partners, 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
Limited Partners until the Limited Partners have been allocated an
amount of profits equal to their 10% Cumulative Preferred Return as
of such date; (c) third, to the Limited Partners until the Limited
Partners have been allocated an amount of profit equal to the
amount of their Adjusted Investment; and (d) thereafter, 95% to the
Limited Partners 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 Account balances; and (b) thereafter,
95% to the Limited Partners and 5% 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 property 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 Limited Partners of a 9% non-cumulative, non-compounded return
on their Adjusted Investment.
The General Partners owe the Partnership $140,000 at December 31,
1996, relating to the Distribution Guaranty Reserve.
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.
The Partnership pays an affiliate of the General Partners an
acquisition fee in the amount of up to 6% 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.
An affiliate of a former General Partner provided securities and
real estate counsel to the Partnership.
Fees, commissions and other expenses paid or payable to the
General Partners or its affiliates for the six months ended June
30, 1997 and 1996 were as follows:
1997 1996
Selling commissions $ -- $12,307
Management fees 20,795 21,620
Reimbursable operating
expenses 93,469 61,174
Legal fees 239 285
(4) WORKING CAPITAL RESERVES
The Partnership has made quarterly distributions to Limited
Partners for calendar years 1994 and 1995, the first quarter of
1996 and and the first two quarters of 1997. As contemplated in
the Prospectus, the distributions prior to full property
specification exceeded the amount of Operating Cash Flow, as such
term is defined in the Agreement, available for distribution. The
Partnership set aside 1% of the gross proceeds of its offering in
a reserve (the "Distribution Guaranty Reserve"). The Distribution
Guaranty Reserve was structured so as to enable the Partnership to
make quarterly distributions of Operating Cash Flow equal to at
least 9.25% per annum on Adjusted Investment during the period from
the Escrow Termination Date (February 28, 1989), as such term is
defined in Section H.3 of the Agreement, through the earlier of:
(i) the first anniversary of the Escrow Termination Date (February
28, 1990); or (ii) the expenditure of 95% of the proceeds available
for investment in properties, which date was July 26, 1989. The
General Partners guaranteed payment of any amounts in excess of the
Distribution Guaranty Reserve and were entitled to receive any
amounts of the Distribution Guaranty Reserve not used to fund
distributions.
The Partnership's acquisition process was not completed until
March 1991 due to an unusually high number of properties being
declined during the due diligence process because of the General
Partners' unwillingness to lower the Partnership's investment
standards. As a result, the Partnership had a substantial amount of
cash invested in short-term investments, as opposed to properties
and during 1990 did not generate sufficient Operating Cash Flow to
fully support the distributions to Limited Partners.
In order to continue to maintain the 9.25% per annum
distribution through December 31, 1990, the General Partners agreed
to continue the Distribution Guaranty up to the net $140,000 of
Distribution Guaranty previously paid to them. At June 30, 1997
and December 31, 1996, $140,000 was due from the General Partners
related to the Distribution Guaranty.
(5) PROVISION FOR IMPAIRMENT
In 1996, the Partnership engaged Cushman & Wakefield Valuation
Advisory Services ("Cushman & Wakefield") to prepare an appraisal
of the Partnership's properties. As a result of this appraisal,
during the fourth quarter of 1996, the Partnership recorded an
additional provision for impairment of $550,000 related to an other
than temporary decline in real estate for the St. Johns, Michigan
and Albion, Michigan properties. This allowance has been recorded
as a reduction of the properties' cost, and allocated to the land
and buildings based on the original acquisition percentages of 30%
(land) and 70% (building).
(6) INVESTMENT IN JOINT VENTURE
The Partnership owns an equity interest in the Brauvin Bay
County Venture and reports its investment on the equity method.
The following are condensed financial statements for the Brauvin
Bay County Venture:
BRAUVIN BAY COUNTY VENTURE
June 30, 1997 December 31, 1996
Land and buildings, net $1,061,881 $1,069,277
Other assets 19,254 13,531
$1,081,135 $1,082,808
Liabilities $ 10,263 $ 1,155
Partners' capital 1,070,872 1,081,653
$1,081,135 $1,082,808
For the six months ended
June 30, 1997
Rental and other income $55,271
Expenses:
Depreciation 7,396
Management fees 685
Operating and administrative 12,970
21,051
Net income $34,220
<PAGE>
(7) 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 and June 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 affiliated with certain of the General Partners
(the "Purchaser") through a merger (the "Merger") of its Units. In
connection with the Merger, the Limited Partners will receive
approximately $779.22 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 Limited Partners
holding a majority of the Units approved the Merger on November 8,
1996. By approving the Merger, the Limited Partners also approved
an amendment of 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 Limited Partners 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 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 $30,183,300, or $748.09 per Unit. The
redemption price of $779.22 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
Operating General Partners (as defined below) believe that these
lawsuits are without merit and, therefore, continue to vigorously
defend against them. The Purchaser is aware of these lawsuits and
is nonetheless willing to proceed with the Merger, subject to the
satisfaction of its due diligence as outlined below.
Following receipt of Limited Partner approval, the Purchaser
commenced 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 potential environmental
problems at some of the properties of the Partnership and the
Affiliated Partnerships. Two of the Partnership's properties may
need environmental remediation. A plan for the remediation
(including the projected expenses) is currently being developed by
the Partnership. 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 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
Operating General Partners suspended all distributions to Limited
Partners; however, as a result of the unforeseen delays brought
about by the litigation and the due diligence issues highlighted
above, the Operating General Partners felt it was appropriate that
an earnings distribution be made to the Limited Partners. Although
the terms of the Merger Agreement entered into by the Partnership
and the Purchaser 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 Limited
Partners 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 September 30, 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 period
January 1, 1997 to March 31, 1997 was made to the Limited Partners
on March 31, 1997 in the amount of approximately $814,500. A
distribution of the Partnership's net earnings for the period
January 1, 1997 to March 31, 1997 was made to the Limited Partners
on March 31, 1997 in the amount of approximately $761,000. Net
earnings accruing after June 30, 1997 through the closing date will
be included with the final cash distribution to the Limited
Partners from the Merger.
The lawsuit as described below has now been pending for
approximately eleven months. The suit continues to command the
time, attention and resources of the Partnership. The Operating
General Partners believes the lawsuit is unfounded and without
merit. The delay and expense of this action continues to frustrate
the will and majority vote of the Limited Partners. Unfortunately,
the Operating 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 July 15, 1997 distribution is based on the net
earnings of the Partnership for the second quarter. This
distribution was lower than prior distributions because the
Partnership has incurred significant legal costs to defend against
the lawsuit. The Operating 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 six
of the Partnership's properties. (The Partnership owns three of
them directly and has a majority joint venture interest in three
of the others.) The Operating General Partners are working to
remedy this vacancy situation. However, one of the closed
properties incurred significant damage in a fire and this
development will affect the Partnership's earnings in the short
term in that Ponderosa is contesting the lease at the fire damaged
property. In addition, these recent developments 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 certain of 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 limited partners 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
II, L.P., 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. Jerome J. Brault, the Managing General
Partner of the Partnership, and Brauvin Realty Advisors II, 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 Operating 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 Operating 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
Operating 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 Operating
General Partners violated certain of the Commission's rules by
making false and misleading statements in the Proxy. Plaintiffs
also allege that the Operating 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 Operating 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.
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. The complaint has not been
served upon any of the defendants.
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. The plaintiffs are also represented by
the same lawyers that represent 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, 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.
(8) 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.
(9) SUBSEQUENT EVENT
On July 15, 1997, the Partnership paid Limited Partners a
distribution that totaled approximately $761,000.
<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 June 17,
1988 of 25,000 Units (subject to increase to 40,000 units). The
offering was anticipated to close on June 16, 1989 but was extended
and closed on September 30, 1989. A total of $38,923,000 of Units
were subscribed and issued between June 17, 1988 and September 30,
1989, pursuant to the public offering.
Until the proxy solicitation process began, the Plan raised
$4,059,178 through June 30, 1997 and December 31, 1996 from Limited
Partners investing their distributions of Operating Cash Flow in
additional Units. As of June 30, 1997 and December 31, 1996, Units
valued at $2,886,915 have been repurchased by the Partnership from
Limited Partners liquidating their investment in the Partnership
and have been retired.
The Partnership purchased the land and buildings underlying
seven Ponderosa restaurants in 1988, and owns a 99% equity interest
in an affiliated joint venture formed in 1988 which purchased the
land and buildings underlying six Ponderosa restaurants. In 1989,
the Partnership purchased the land and buildings underlying two
Taco Bell restaurants, formed a 51% equity interest in an
affiliated joint venture which purchased a Scandinavian Health Spa
and purchased the land and buildings underlying seven additional
Ponderosa restaurants. In 1990, the Partnership purchased the land
and buildings underlying three Children's World Learning Centers,
three Hardee's restaurants and three Avis Lubes. The Partnership
purchased three Chi-Chi's restaurants in 1991.
On October 31, 1996, the Partnership purchased a 26% equity
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's acquisition process is now completed.
In 1996, the Partnership engaged Cushman & Wakefield to prepare
an appraisal of the Partnership's properties. As a result of this
appraisal, the Partnership recorded an additional provision for
impairment of $550,000 related to an other than temporary decline
in real estate for the St. Johns, Michigan and Albion, Michigan
properties during the fourth quarter of 1996. This allowance has
been recorded as a reduction of the properties' cost, and allocated
to the land and building based on the original acquisition
percentages of 30% (land) and 70% (building).
The Partnership's acquisition process was not completed until
March 1991 due to an unusually high number of properties being
declined during the due diligence process because of the General
Partners' unwillingness to lower the Partnership's investment
standards. As a result, the Partnership had a substantial amount
of cash invested in short-term investments, as opposed to
properties, and during 1990 did not generate sufficient Operating
Cash Flow to fully support the distributions to Limited Partners.
In order to continue to maintain the 9.25% per annum
distribution through December 31, 1990, the General Partners agreed
to continue the Distribution Guaranty up to the net $140,000 of
Distribution Guaranty previously paid to them. At March 31, 1997
and December 31, 1996, $140,000 was due from the General Partners
related to the Distribution Guaranty.
Below is a table summarizing the four year historical data for
distribution rates per unit:
Distribution
Date 1997 1996 1995 1994
February 15 $20.1875(a) $22.3597 $22.3597 $22.3597
May 15 -- 22.3597 22.3597 22.3597
August 15 18.8614(b) -- 22.3597 22.3597
November 15 -- 22.3597 26.1121
(a) The 1997 distribution was made on March 31, 1997.
(b) The 1997 distribution was made on July 15, 1997.
Pursuant to the terms of the Merger Agreement, the Limited
Partners will receive approximately $779.22 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 Limited Partners 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 to be held at the offices of
the Partnership on September 24, 1996. As a result of the various
pending legal issues, as described in legal proceedings, the
Special Meeting was adjourned to November 8, 1996 at 9:30 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 Limited Partners also approved an
amendment of 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, Limited Partners holding a majority
of the Units were asked to approve the adoption of an amendment to
the Agreement to allow the majority vote of the Limited Partners 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 Limited Partners not voting in
favor of the Transaction with dissenters' appraisal rights.
The redemption price to be paid to the Limited Partners in
connection with the Merger is based on the fair market value of the
properties of the Partnership (the "Assets"). 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 $30,183,300, or $748.09
per Unit. The redemption price of $779.22 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 Limited Partners 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 Limited Partners.
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
II, Inc., the Corporate General Partner. Mr. Cezar M. Froelich
resigned his position as an Individual General Partner 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 Limited Partners. 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 Operating General
Partners believe that these lawsuits are without merit and,
therefore, continue to vigorously defend against them. The
Purchaser is aware of these lawsuits and is nonetheless willing to
proceed with the Merger, subject to the satisfaction of its due
diligence as outlined below.
Following receipt of Limited Partner 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 potential
environmental problems at some of the properties of the 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 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 as discussed in Item 1. Legal Proceedings
below, and finalize its financing in the light of these
developments.
In accordance with the terms of the Merger Agreement, the
Operating General Partners suspended all distributions to Limited
Partners, however, as a result of the unforeseen delays brought
about by the litigation and the due diligence issues highlighted
above, the Operating General Partners felt it was appropriate that
an earnings distribution be made to the Limited Partners. Although
the terms of the Merger Agreement entered into by the Partnership
and the Purchaser provides 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 Limited
Partners 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 September 30, 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. Net earnings accruing after June
30, 1997 through the closing date will be included with the final
cash distribution to the Limited Partners from the Merger.
A distribution of the Partnership's net earnings for the
period January 1, 1997 to March 31, 1997 was made to the Limited
Partners on March 31, 1997 in the amount of approximately $814,500.
A distribution of the Partnership's net earnings for the period
April 1, 1997 to June 30, 1997 was made to the Limited Partners on
July 15, 1997 in the amount of approximately $761,000.
The lawsuit as described below has now been pending for
approximately eleven months. The suit continues to command the
time, attention and resources of the Partnership. The Operating
General Partners believe the lawsuit is unfounded and without
merit. The delay and expense of this action continues to frustrate
the will and majority vote of the Limited Partners. Unfortunately,
the Operating 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 July 15, 1997 distribution is based on the
net earnings of the Partnership for the second quarter. This
distribution is lower than prior distributions because the
Partnership has incurred significant legal costs to defend against
the lawsuit. The Operating 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 six
of the Partnership's properties. (The Partnership owns three of
them directly and has a majority joint venture interest in three
of the others.) The Operating General Partners are working to
remedy this vacancy situation. However, one of the closed
properties incurred significant damage in a fire and this
development will affect the Partnership's earnings in the short
term in that Ponderosa is contesting the lease at the fire damaged
property. In addition, these recent developments 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 - Six months ended June 30, 1997 and 1996
Results of operations for the six months ended June 30, 1997
reflected net income of $1,332,121 compared to net income of
$1,374,221 for the six months ended June 30, 1996, a decrease of
approximately $42,100.
Total income for the six months ended June 30, 1997 was
$2,184,344 as compared to $2,129,780 for the period ended June 30,
1996, an increase of approximately $54,600. The increase in total
income was primarily due to the increase in interest income, which
was the result of higher cash balances during 1997.
Total expenses for the six months ended June 30, 1997 were
$717,556 as compared to $607,390 for the period ended June 30,
1996, an increase of approximately $110,200. The increase in total
expense was primarily due to an increase in transaction costs of
approximately $145,600. Partially offsetting the increase in this
expense was a decrease in valuation fees of $86,900.
Results of Operations - Three months ended June 30, 1997 and 1996
Results of operations for the three months ended June 30, 1997
reflected net income of $641,704 compared to net income of $678,608
for the three months ended June 30, 1996, a decrease of
approximately $36,900.
Total income for the three months ended June 30, 1997 was
$1,113,337 as compared to $1,068,546 for the period ended June 30,
1996, an increase of approximately $44,800. 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 June 30, 1997 were
$402,293 as compared to $316,179 for the period ended June 30, 1996
an increase of approximately $86,100. The increase in total
expense was primarily due to an increase in transaction costs of
approximately $91,700. Partially offsetting the increase in this
expense was a decrease in valuation fees of $43,450.
<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 limited partners 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
II, L.P., 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. Jerome J. Brault, the Managing General
Partner of the Partnership, and Brauvin Realty Advisors II, 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 Operating 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 Operating 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
Operating 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 Operating
General Partners violated certain of the Commission's rules by
making false and misleading statements in the Proxy. Plaintiffs
also allege that the Operating 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 Operating 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.
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. The complaint has not been
served upon any of the defendants.
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. The plaintiffs are also represented by
the same lawyers that represent 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, 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 II, Inc.
Corporate General Partner of
Brauvin High Yield Fund L.P. II
BY: /s/ Jerome J. Brault
Jerome J. Brault
Chairman of the Board of Directors,
President and Chief Executive Officer
DATE: August 14, 1997
BY: /s/ B. Allen Aynessazian
B. Allen Aynessazian
Chief Financial Officer and Treasurer
DATE: August 14, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,395,583
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 35,401,164 <F1>
<DEPRECIATION> 5,708,782
<TOTAL-ASSETS> 33,966,215
<CURRENT-LIABILITIES> 377,643
<BONDS> 2,470,300 <F2>
0
0
<COMMON> 31,117,272 <F3>
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 33,966,215
<SALES> 0
<TOTAL-REVENUES> 2,184,344 <F4>
<CGS> 0
<TOTAL-COSTS> 717,556 <F5>
<OTHER-EXPENSES> 134,667 <F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,332,121
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> "PP&E" REPRESENTS INVESTMENT IN REAL ESTATE [LAND AND
BUILDING]
<F2> "BONDS" REPRESENTS MINORITY INTEREST IN JOINT VENTURES
<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 MINORITY INTEREST SHARE OF
NET INCOME
</FN>
</TABLE>
