<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 June 30, 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 0-17556
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.)
30 North LaSalle Street, Chicago, Illinois 60602
(Address of principal executive offices) (Zip Code)
(312)759-7660
(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
(a Delaware limited partnership)
INDEX
Page
PART I Financial Information
Item 1. Consolidated Financial Statements. . . . . . . 3
Consolidated Balance Sheets at June 30, 1998
and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations for the
six months ended June 30, 1998 and 1997 . . . . . . . . . . . . 5
Consolidated Statements of Operations for the
three months ended June 30, 1998 and 1997 . . . . . . . . . . . 6
Consolidated Statements of Partners' Capital for
the periods January 1, 1997 to June 30, 1998. . . . . . . . . . 7
Consolidated Statements of Cash Flows for the
three months ended June 30, 1998 and 1997 . . . . . . . . . . . 8
Notes to Consolidated Financial Statements. . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 25
Item 3. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . 33
PART II Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . 38
Item 2. Changes in Securities. . . . . . . . . . . . . 38
Item 3. Defaults Upon Senior Securities. . . . . . . . 38
Item 4. Submissions of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 5. Other Information. . . . . . . . . . . . . . . 38
Item 6. Exhibits and Reports on Form 8-K . . . . . . . 38
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Except for the December 31, 1997 Consolidated Balance Sheet,
the following Consolidated Balance Sheet as of June 30, 1998,
Consolidated Statements of Operations for the six months ended June
30, 1998 and 1997, Consolidated Statements of Operations for the
three months ended June 30, 1998 and 1997, Consolidated Statements
of Partners' Capital for the periods January 1, 1997 to June 30,
1998 and Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 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 1997 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,
1998 1997
ASSETS
Investment in real estate:
Land $10,371,772 $10,961,124
Buildings 23,064,882 24,440,040
33,436,654 35,401,164
Less: Accumulated depreciation (6,035,603) (6,066,215)
Net investment in real estate 27,401,051 29,334,949
Investment in Brauvin Bay
County Venture (Note 5) 273,370 275,500
Cash and cash equivalents 2,295,767 1,198,267
Rent receivable 70,408 79,726
Deferred rent receivable 443,880 410,100
Due from General Partners (Note 3) 140,000 140,000
Other assets 24,989 25,591
Total Assets $30,649,465 $31,464,133
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued
expenses $ 356,925 $ 165,430
Rent received in advance 35,056 50,768
Due to an affiliate 3,361 3,412
Undisbursed insurance proceeds -- 199,452
Security deposits 85,903 87,992
Total Liabilities 481,245 507,054
MINORITY INTEREST:
Brauvin High Yield Venture 21,835 31,007
Brauvin Funds Joint Venture 2,418,020 2,431,037
PARTNERS' CAPITAL:
General Partners 344,931 342,441
Limited Partners 27,383,434 28,152,594
Total Partners' Capital 27,728,365 28,495,035
Total Liabilities and
Partners' Capital $30,649,465 $31,464,133
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,
1998 1997
INCOME
Rental $2,022,749 $2,110,668
Interest 65,519 73,433
Other 934 243
Total income 2,089,202 2,184,344
EXPENSES
General and administrative 226,138 185,072
Management fees (Note 3) 20,141 20,795
Amortization of deferred
organization costs and
other assets 600 600
Depreciation 338,619 351,309
Provision for impairment 130,000 --
Valuation fees 157,250 --
Transaction costs (Note 6) 79,611 159,780
Total expenses 952,359 717,556
Income before loss on sale of
properties and minority and
equity interests' share of
net income 1,136,843 1,466,788
Loss on the sale of properties (110,741) --
Income before minority interest
in joint ventures 1,026,102 1,466,788
Minority interest share
in net income:
Brauvin High Yield Venture (1,333) (2,826)
Brauvin Funds Joint Venture (143,783) (140,739)
Equity interest in:
Brauvin Bay County Venture's
net income 10,610 8,898
Net income $ 891,596 $1,332,121
Net income allocated to the
General Partners $ 22,290 --
Net income allocated to the
Limited Partners $ 869,306 $1,332,121
Net income per
Unit outstanding (a) $ 21.55 $ 33.02
See accompanying notes to consolidated financial statements.
BRAUVIN HIGH YIELD FUND L.P. II
(a Delaware limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30,
1998 1997
INCOME
Rental $1,012,706 $1,075,247
Interest 34,390 38,480
Other 836 (390)
Total income 1,047,932 1,113,337
EXPENSES
General and administrative 143,603 110,121
Management fees (Note 3) 10,018 10,377
Amortization of deferred
organization costs and
other assets 300 300
Depreciation 167,369 175,654
Valuation fees 157,250 --
Transaction costs (Note 6) 45,228 105,841
Total expenses 523,768 402,293
Income before gain on the sale
of property and minority and
equity interests' share of net
income 524,164 711,044
Gain on the sale of property 1,363 --
Income before minority and
equity interests' share
of net income 525,527 711,044
Minority interest share
in net income:
Brauvin High Yield Venture (1,255) (1,356)
Brauvin Funds Joint Venture (71,833) (72,164)
Equity interest in:
Brauvin Bay County Venture's
net income 5,247 4,180
Net income $ 457,686 $ 641,704
Net income allocated to the
General Partners $ 11,442 $ --
Net income allocated to the
Limited Partners $ 446,244 $ 641,704
Net income per
Unit outstanding (a) $ 11.06 $ 15.90
See accompanying notes to consolidated financial statements.
BRAUVIN HIGH YIELD FUND L.P. II
(a Delaware limited partnership)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the periods from January 1, 1997 to June 30, 1998
General Limited
Partners Partners* Total
Balance, January 1, 1997 $319,429 $30,286,089 $30,605,518
Net income 23,012 2,654,101 2,677,113
Cash distributions -- (4,787,596) (4,787,596)
Balance, December 31, 1997 342,441 28,152,594 28,495,035
Net income 22,290 869,306 891,596
Return of capital distribution -- (742,995) (742,995)
Cash distributions (19,800) (895,471) (915,271)
Balance, June 30, 1998 $344,931 $27,383,434 $27,728,365
* Total Units outstanding at June 30, 1998 and December 31, 1997
were 40,347. Operating cash distributions to Limited Partners per
Unit were $22.19 and $118.66, respectively, for the six months
ended June 30, 1998 and the year ended December 31, 1997.
See accompanying notes to consolidated financial statements.
BRAUVIN HIGH YIELD FUND L.P. II
(a Delaware limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30,
1998 1997
Cash Flows From Operating Activities:
Net income $891,596 $1,332,121
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 339,219
Provision for impairment 130,000 351,909
Loss on sale 110,741 --
Minority interest's share of income from:
Brauvin High Yield Venture 1,333 2,826
Brauvin Funds Joint Venture 143,783 140,739
Equity interest share of income
from Brauvin Bay County Venture (10,610) (8,898)
Change in rent receivable 9,318 (17,688)
Change in deferred rent receivable (33,780) (33,780)
Change in other assets 2 2,793
Change in accounts payable
and accrued expenses 191,495 (9,259)
Change in rent received in advance (15,712) (106,177)
Change in due to affiliates (51) 3,806
Change in security deposits (2,089) 87,992
Net cash provided by operating activities 1,755,245 1,746,384
Cash Flows From Investing Activities:
Change in disbursed insurance proceeds (199,452) 199,452
Cash from sale of property 1,354,538 --
Distributions from Brauvin Bay
County Venture 12,740 11,700
Net cash provided by investing activities 1,167,826 211,152
Cash Flows From Financing Activities:
Return of capital to Limited Partners (742,995) --
Cash distributions to General Partners (19,800) --
Cash distributions to Limited Partners (895,471) (820,367)
Return of capital to minority interest
Brauvin High Yield Venture (7,505) --
Cash distribution to minority interest:
Brauvin High Yield Venture (3,000) (3,600)
Brauvin Funds Joint Venture (156,800) (151,900)
Cash used in financing activities (1,825,571) (975,867)
Net increase in cash and
cash equivalents 1,097,500 981,669
Cash and cash equivalents at
beginning of period 1,198,267 2,413,914
Cash and cash equivalents at
end of period $2,295,767 $3,395,583
See accompanying notes to consolidated financial statements
(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, 1998 and December 31, 1997, the Partnership has sold
$42,982,178 of Units. These totals include $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, 1998 and December 31, 1997. As of June
30,1998, 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, one Blockbuster
Video store, 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 inter-company 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, 1998 or December 31,
1997, except as described below.
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).
During the first quarter of 1998, the Partnership recorded an
impairment of $130,000 related to an other than temporary decline
in real estate for the Ponderosa located in Sweden, New York. This
allowance has been recorded as a reduction of the property's cost,
and allocated to the land and buildings based on the original
acquisition percentages of 30% (land) and 70% (building) in April
1998, this property was sold to an unaffiliated third party.
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, 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; rent receivable;
due from General Partners; accounts payable and accrued expenses;
rent received in advance; due to an affiliate; undisbursed
insurance proceeds; and tenant security deposits.
(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 original General Partners owe the Partnership $140,000 at
June 30, 1998 and December 31, 1997, relating to the Distribution
Guaranty Reserve.
The Partnership paid affiliates of the General Partners selling
commissions of 8-1/2% of the capital contributions received for
Units sold by the affiliates.
The Partnership paid 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 were expensed as incurred.
An affiliate of one of the General Partners provided securities
and real estate counsel to the Partnership.
Fees, commissions and other expenses paid or payable to the
General Partners or their affiliates for the six months ended June
30, 1998 and 1997 were as follows:
1998 1997
Management fees $20,141 $20,795
Reimbursable operating
expenses 94,042 93,469
Legal fees -- 239
As of June 30, 1998 and December 31, 1997, the Partnership has
made all payments to affiliates except for $3,361 and $3,412,
respectively, related to management fees.
(4) WORKING CAPITAL RESERVES
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 original 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 original General Partners agreed to
continue the Distribution Guaranty up to the net $140,000 of
Distribution Guaranty previously paid to them. At June 30, 1998
and December 31, 1997, $140,000 was due from the original General
Partners related to the Distribution Guaranty.
(5) INVESTMENT IN JOINT VENTURE
BRAUVIN BAY COUNTY VENTURE
June 30, December 31,
1998 1997
Land and buildings, net $1,042,765 $1,051,588
Other assets 1,829 11,989
$1,044,594 $1,063,577
Liabilities $ 3,031 $ 13,820
Partners' capital 1,041,563 1,049,757
$1,044,594 $1,063,577
Six months Ended June 30,
1998 1997
Rental and other income $54,714 $55,271
Expenses:
Depreciation 8,823 7,396
Management fees 582 685
Operating and administrative 4,503 12,970
13,908 21,051
Net Income $40,806 $34,220
<PAGE>
(6) MERGER AND LITIGATION
Merger
Pursuant to the terms of an agreement and plan of merger dated
as of June 14, 1996, as amended March 24, 1997, June 30, 1997,
September 30, 1997, December 31, 1997, March 31, 1998 and June 30,
1998 (the "Merger Agreement"), the Partnership proposed 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.
Although the Merger will not be consummated, the following text
describes the transaction. Promptly upon consummation of the
Merger, the Partnership would have ceased to exist and the
Purchaser, as the surviving entity, would succeed to all of the
assets and liabilities of the Partnership. The Limited Partners
holding a majority of the Units voted on the Merger on November 8,
1996. The Limited Partners voted on 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 was 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 at April 1, 1996 to be
$30,183,300, or $748.09 per Unit. Subsequently, the Partnership
purchased a 26% 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
$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. Of the original cash
redemption amount, approximately $31.13 was distributed to the
Limited Partners in the December 31, 1997 distribution.
The General Partners were not to receive any payment in exchange
for the redemption of their general partnership interests nor would
they have received 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,
were to 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. Because of
the August 12, 1998 rulings of the District Court in the Christman
Litigation, as described below, it is not possible for the Merger
to be consummated.
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 1, 1997 to December
31, 1997 were made to the Limited Partners on March 31, 1997, July
15, 1997, October 22, 1997 and December 31, 1997, respectively, in
the amounts of approximately $814,500, $761,000, $922,600 and
$2,283,600, respectively. In addition, distributions of
approximately $5,900 were paid to various states on behalf of all
Limited Partners in 1997.
Distributions of the Partnership's net earnings for the periods
January 1, 1998 to March 31, 1998 and April 1, 1998 to June 30,
1998 were made to Limited Partners on May 8, 1998, and August 15,
1998, respectively in the amounts of approximately $884,000 and
$593,200.
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 Assets until further order of the Court.
As the result of a property sale by Brauvin High Yield Venture
a return of capital distribution was also made to Limited Partners
on May 8, 1998 in the amount of approximately $743,000.
Additionally, on August 15, 1998, a return of capital distribution
was made to Limited Partners in the approximate amount of $611,500
from the sale of the Ponderosa located in Sweden, New York. See
Note 7.
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
against the Partnership on a nominal basis in connection with the
Merger. Each of these actions was brought by Limited Partners of
the Partnership. With respect to the pending actions, the
Partnership, 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 Plaintiffs, Scialpi and
Friedlander, are Limited Partners in the Partnership. 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. 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, 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 Limited Partners,
requesting that they revoke their previously-mailed proxies in
favor of the Merger. On October 11, 1996, the General Partners
filed a counterclaim against plaintiffs and their counsel, The
Mills Law Firm, alleging that plaintiffs and The Mills Law Firm
violated the federal securities laws and proxy rules by sending
their September 27, 1996 letter to the Limited Partners. The
plaintiffs and The Mills Law Firm have moved to dismiss this
counterclaim. The District Court has taken this motion under
advisement and has yet to issue a ruling.
On October 10 and 11, 1996, the District Court conducted an
evidentiary hearing on the motion of the General Partners to
invalidate revocations of proxies procured as a result of The Mills
Law Firm's September 27, 1996 letter. In that evidentiary hearing,
The Mills Law Firm admitted that it violated the proxy rules by
sending its September 27, 1996 letter to the Limited Partners
without filing such letter with the 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 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
Circuit 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 Agreement does
not allow the Limited Partners to vote in favor of or against the
Transaction by proxy. On August 12, 1998, the District Court
granted plaintiffs' motion for partial summary judgment, holding
that the Agreement did not allow the Limited Partners to vote in
favor or against the Transaction by proxy.
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 with the Purchaser. Plaintiffs filed a notice of
appeal to the Seventh Circuit Court of Appeals from the District
Court's May 1, 1997 order denying plaintiffs' motion to
preliminarily enjoin the closing of the Transaction. This appeal
was dismissed by the Seventh Circuit Court of Appeals on January
23, 1998, based on the appeal court's finding that the District
Court's order of January 16, 1998 (as described below) rendered the
appeal moot.
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 Merger, 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 Limited Partners 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
Assets of the Partnership as well as a valuation of the
Partnership itself. The cost to the Partnership for the services
of the Financial Advisor is $185,000 plus reasonable expenses. On
August 4, 1998, the Special Master filed a Report and
Recommendation with the District Court, expressing the Special
Master's recommendation that the Partnership's properties be
disposed of in an auction conducted by the Financial Advisor under
the direction of the Special Master.
On August 12, 1998, the District Court ruled in favor of the
Plaintiffs motion for partial summary judgement, holding that the
Partnership Agreement did not allow Limited Partners to vote in
favor or against the Transaction by proxy.
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 described above,
Scialpi and Friedlander are Limited Partners in the Partnership,
but have no relationship with the Affiliated Partnerships. 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 these
claims. There have been no material developments with respect to
this lawsuit since it was filed on June 20, 1997.
(7) PROPERTY SALES
In January 1998, Ponderosa unit 850, located in Mansfield, Ohio,
was sold by its joint venture partnership. This closed property
was sold to an unaffiliated third party for approximately $750,000.
This sale resulted in a loss to the Partnership of approximately
$112,000. The Partnerships share of the proceeds from this sale
were included with the May 15, 1998 distribution to the Limited
Partners.
In April 1998, Ponderosa unit 876, located in Sweden, New York,
was sold by the Partnership. This closed property was sold to an
unaffiliated third party for approximately $425,000. In addition,
as a result of the sale, the Partnership transferred the
undisbursed insurance proceeds of $199,452 from its reserve account
to its general cash account. The sale resulted in a loss to the
Partnership of approximately $130,000, which was recognized as a
provision for impairment during the first quarter of 1998. The
Partnership is continuing to pursue its lawsuit against the former
tenant for lost rents.
<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 not material.
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 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 for and issued between June 17, 1988 and September
30, 1989, pursuant to the public offering.
The Plan raised $4,059,178 through June 30, 1998 from Limited
Partners investing their distributions of Operating Cash Flow in
additional Units. As of June 30, 1998, 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, one Blockbuster video store 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 "Bay County Venture"). The 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).
During the first quarter of 1998, the Partnership recorded an
impairment of $130,000 related to an other than temporary decline
in real estate for the Ponderosa located in Sweden, New York. This
allowance has been recorded as a reduction of the property's cost,
and allocated to the land and buildings 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 Reserve previously paid to them. At June 30,
1998 and December 31, 1997, $140,000 was due from the original
General Partners related to the Distribution Guaranty.
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 $ -- $20.1875 $22.3597 $22.3597
May 15 21.9087 18.8614 22.3597 22.3597
August 15 14.8189 22.8662 -- 22.3597
November 15 56.6001 -- 22.3597
(a) The 1998 distributions were made on May 8, 1998 and August 15,
1998, respectively, and the amounts indicated above do not include
return of capital distributions of approximately $18.4152 and
$15.1571 per Unit, respectively.
(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 Merger, the Partnership's net earnings from
April 1996 through July 1996 were to be distributed to the Limited
Partners 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.
Included in the December 31, 1997 distribution was any prior period
earnings including amounts previously reserved for anticipated
closing costs. Based on the August 12, 1998 ruling of the District
Court in the Christman litigation, it is not possible for the
Merger will not be consummated. The reserves will be re-
established by the Partnership as soon as a definitive sale process
has been determined and the associated costs and reserves can be
identified.
During the six months ended June 30, 1998 and the year ended
December 31, 1997, the General Partners and their affiliates earned
management fees of $20,141 and $41,080, respectively, and received
$19,800 and $0, respectively, for Operating Cash Flow
distributions.
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.
Although the Merger will not be consummated, the following text
describes the Transaction. Pursuant to the terms of the Merger
Agreement, the Limited Partners would have received approximately
$779.22 per Unit in cash (of this original amount approximately
$31.13 has already been distributed to the Limited Partners).
Promptly upon consummation of the Merger, the Partnership would
have ceased to exist and the Purchaser, as the surviving entity,
would have succeeded to all of the assets and liabilities of the
Partnership.
The Partnership drafted a proxy statement, which required prior
review and comment by the Securities and Exchange 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, 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 would have
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. 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 was 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, at April 1, 1996. Subsequently,
the Partnership purchased a 26% 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 $779.22 per Unit also included 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 $31.13 was distributed to Limited Partners in the
December 31, 1997 distribution.
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.
Mr. Jerome J. Brault is the Managing General Partner of the
Partnership and Brauvin Realty Advisors II, 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 effective as of September 17, 1996. The General Partners
were not to receive any payment in exchange for the redemption of
their general partnership interests nor were they to 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, were to have a
minority ownership interest in the Purchaser. Therefore, the
Messrs. Brault had an indirect economic interest in consummating
the Transaction that was 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 an affirmative vote of
the majority of the Limited Partners was received, the District
Court ruled on August 12, 1998 in favor of the Plaintiff's motion
for partial summary judgement, holding that the Agreement did not
allow the Limited Partners to vote in favor or against the
Transaction by proxy.
The litigation, as described herein, has now been pending for
approximately 23 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.
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.
The 1997 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 six of the Partnership's properties. (The
Partnership owned three of them directly and had a majority joint
venture interest in the other three.) The General Partners are
working to remedy this vacancy situation. As of June 30, 1998, two
of the closed properties have been sublet to local concept
operators. However, one of the closed properties incurred
significant fire damage in a and Ponderosa terminated its lease.
The Partnership has commenced a lawsuit against the tenant to
recover lost rent and damages related to the fire. 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. In January 1998, one
of the closed joint venture Ponderosa restaurants located in
Mansfield, Ohio was sold to an unaffiliated third party. In April
1998, the fire damaged property located in Sweden, New York was
sold by the Partnership to an unaffiliated third party.
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 Merger, 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 Limited Partners 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. The cost to the Partnership for the services
of the Financial Advisor is $185,000 plus reasonable expenses. On
August 4, 1998, the Special Master filed a Report and
Recommendation with the District Court expressing the Special
Master's recommendation that the Partnership's properties be
disposed of in an auction conducted by the Financial Advisor under
the direction of the Special Master.
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 1, 1997 to December
31, 1997 were made to the Limited Partners on March 31, 1997, July
15, 1997, October 22, 1997 and December 31, 1997, respectively in
the amounts of approximately $814,500, $761,000, $922,600 and
$2,283,600, respectively. In addition, distributions of
approximately $5,900 were paid to various states for income taxes
on behalf of all Limited Partners.
Distributions of the Partnership's net earnings for the periods
January 1, 1998 to March 31, 1998 and April 1, 1998 to June 30,
1998 were made to Limited Partners on May 8, 1998 and August 15,
1998, respectively, in the amounts of approximately $884,000 and
$593,200.
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.
As the result of a property sale by Brauvin High Yield Venture a
return of capital distribution was also made to Limited Partners on
May 8, 1998 in the amount of approximately $743,000. Additionally
on August 15, 1998, a return of capital distribution was made to
Limited Partners in the approximate amount of $611,500 from the
sale of the Ponderosa located in Sweden, New York.
Results of Operations - Six months ended June 30, 1998 and 1997
Results of operations for the six months ended June 30, 1998
reflected net income of $891,596 compared to net income of
$1,332,121 for the six months ended June 30, 1997, a decrease of
approximately $440,500. The decrease in net income is primarily due
to the $130,000 provision for an other than temporary decline in
the value of the Ponderosa property located in Sweden, New York, a
$110,741 loss on the sale of the properties and an increase in the
valuation fees of $157,250 during the first six months of 1998.
Total income for the six months ended June 30, 1998 was
$2,089,202 as compared to $2,184,344 for the period ended June 30,
1997, a decrease of approximately $95,100. The decrease in total
income was primarily due to the decrease in rental income resulting
from the property sales in 1998.
Total expenses for the six months ended June 30, 1998 were
$952,359 as compared to $717,556 for the period ended June 30,
1997, an increase of approximately $234,800. The decrease in
expenses was primarily due to an increase in valuation fees of
approximately $157,250 and an increase of $130,000 in the provision
for an other than temporary decline in the value of the Ponderosa
property located in Sweden, New York which was sold in April, 1998.
Partially offsetting the 1998 increase in expenses was a decrease
in Transaction costs of approximately $80,200.
Results of Operations - Three months ended June 30, 1998 and 1997
Results of operations for the three months ended June 30, 1998
reflected net income of $457,686 compared to net income of $641,704
for the three months ended June 30, 1997, a decrease of
approximately $184,000. The decrease in net income is primarily due
to the $157,250 increase in valuation fees.
Total income for the three months ended June 30, 1998 was
$1,047,932 as compared to $1,113,337 for the period ended June 30,
1997, a decrease of approximately $65,400. The decrease in total
income is primarily due to the decrease in rental income, which was
primarily the result of the 1998 property sales.
Total expenses for the three months ended June 30, 1998 were
$523,768 as compared to $402,293 for the period ended June 30,
1997, an increase of approximately $121,500. The increase in
expenses was primarily due to an increase in valuation fees of
approximately $157,300 which was incurred as a result of the
ongoing litigation.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk.
The Partnership does not engage in any hedge transactions or own
any 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
against the Partnership on a nominal basis in connection with the
Merger. Each of these actions was brought by limited partners of
the Partnership. With respect to the pending actions, the
Partnership, 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 Plaintiffs, Scialpi and
Friedlander, are limited partners in the Partnership. 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. 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, 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 Limited Partners,
requesting that they revoke their previously-mailed proxies in
favor of the Merger. On October 11, 1996, the General Partners
filed a counterclaim against plaintiffs and their counsel, The
Mills Law Firm, alleging that plaintiffs and The Mills Law Firm
violated the federal securities laws and proxy rules by sending
their September 27, 1996 letter to the Limited Partners. The
plaintiffs and The Mills Law Firm have moved to dismiss this
counterclaim. The District Court has taken this motion under
advisement and has yet to issue a ruling.
On October 10 and 11, 1996, the District Court conducted an
evidentiary hearing on the motion of the General Partners to
invalidate revocations of proxies procured as a result of The Mills
Law Firm's September 27, 1996 letter. In that evidentiary hearing,
The Mills Law Firm admitted that it violated the proxy rules by
sending its September 27, 1996 letter to the Limited Partners
without filing such letter with the 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 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
Circuit 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 Agreement does
not allow the Limited Partners to vote in favor of or against the
Transaction by proxy. On August 12, 1998, the District Court
granted plaintiff's motion for partial summary judgement, holding
that the Agreement did not allow the Limited Partners to vote in
favor or against the Transaction by proxy.
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 Securities and
Exchange Commission (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 with the Purchaser. Plaintiffs filed a notice of
appeal to the Seventh Circuit Court of Appeals from the District
Court's May 1, 1997 order denying plaintiffs' motion to
preliminarily enjoin the closing of the Transaction. This appeal
was dismissed by the Seventh Circuit Court of Appeals on January
23, 1998, based on the appeal court's finding that the District
Courts order of January 16, 1998 (as described below) rendered the
appeal moot.
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 Merger, 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 Limited Partners 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. The cost to the Partnership for the services of
the Financial Advisor is $185,000 plus reasonable expenses. On
August 4, 1998, the Special Master filed a Report and
Recommendation with the District Court, expressing the Special
Master's recommendation that the Partnership's properties be
disposed of in an auction conducted by the Financial Advisor under
the direction of the Special Master.
On August 12, 1998, the District Court ruled in favor of the
Plaintiffs motion for partial summary judgement, holding that the
Partnership Agreement did not allow Limited Partners to vote in
favor or against the Transaction by proxy.
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 described above,
Scialpi and Friedlander are limited partners in the Partnership,
but have no relationship with the Affiliated Partnerships. 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 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.
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 19, 1998
BY: /s/ Thomas E. Murphy
Thomas E. Murphy
Chief Financial Officer and Treasurer
DATE: August 19, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,295,767
<SECURITIES> 273,370 <F1>
<RECEIVABLES> 514,288
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 33,436,654 <F2>
<DEPRECIATION> 6,035,603
<TOTAL-ASSETS> 30,649,465
<CURRENT-LIABILITIES> 481,245
<BONDS> 2,439,855 <F3>
0
0
<COMMON> 27,728,365 <F4>
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 30,649,465
<SALES> 0
<TOTAL-REVENUES> 2,089,202 <F5>
<CGS> 0
<TOTAL-COSTS> 952,359 <F6>
<OTHER-EXPENSES> 134,506 <F7>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 110,741
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 891,596
<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> "BONDS" REPRESENTS MINORITY INTEREST IN JOINT VENTURES
<F4> "COMMON" REPRESENTS TOTAL PARTNERS CAPITAL
<F5> "TOTAL REVENUES" REPRESENTS RENTAL, INTEREST, AND OTHER
INCOME
<F6> "TOTAL COSTS" REPRESENTS TOTAL EXPENSES
<F7> "OTHER EXPENSES" REPRESENTS MINORITY INTEREST SHARE OF
NET INCOME
</FN>
</TABLE>
