<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, 2000
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)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. . . . . . . 4
Consolidated Statements of Net Assets in Liquidation
as of June 30, 2000 and December 31, 1999
(Liquidation Basis) . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Changes in Net Assets
in Liquidation for the period January 1, 2000 to
June 30, 2000 (Liquidation Basis) . . . . . . . . . . . 6
Consolidated Statements of Operations for the six
months ended June 30, 2000 (Liquidation Basis) and
the period January 1, 1999 to June 18, 1999 (Going
Concern Basis). . . . . . . . . . . . . . . . . . . . . 7
Consolidated Statements of Operations for the three
months ended June 30, 2000 (Liquidation Basis) and
the period January 1, 1999 to June 18, 1999 (Going
Concern Basis) . . . . . . . . . . . . . . . . . . . . 8
Consolidated Statements of Cash Flows for the period
January 1, 1999 to June 18, 1999 (Going Concern
Basis). . . . . . . . . . . . . . . . . . . . . . . . . 9
Notes to Consolidated Financial Statements. . . . . . . 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 26
Item 3. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . . . . 38
Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . 39
Item 2. Changes in Securities. . . . . . . . . . . . . 39
Item 3. Defaults Upon Senior Securities. . . . . . . . 39
Item 4. Submissions of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . . 39
Item 5. Other Information. . . . . . . . . . . . . . . 39
Item 6. Exhibits and Reports on Form 8-K . . . . . . . 39
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
<PAGE>
BRAUVIN HIGH YIELD FUND L.P. II
(a Delaware limited partnership)
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Except for the December 31, 1999 Consolidated Statement of Net
Assets in Liquidation (Liquidation Basis), the following
Consolidated Statement of Net Assets in Liquidation as of June 30,
2000, Consolidated Statements of Operations for the six months
ended June 30, 2000 (Liquidation Basis) and for the period January
1, 1999 to June 18, 1999 (Going Concern Basis), Consolidated
Statements of Operations for the three months ended June 30, 2000
(Liquidation Basis) and the period April 1, 1999 to June 18, 1999
(Going Concern Basis), and the Consolidated Statement of Cash Flows
for the period January 1, 1999 to June 18, 1999 (Going Concern
Basis) 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 1999 Annual Report on Form
10-K.
<PAGE>
BRAUVIN HIGH YIELD FUND L.P. II
(a Delaware limited partnership)
CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION AS OF
June 30, 2000 AND DECEMBER 31, 1999 (LIQUIDATION BASIS)
June 30, December 31,
2000 1999
ASSETS
Real estate held for sale $20,859,667 $23,203,800
Cash and cash equivalents 780,300 1,160,591
Restricted cash 318,168 310,785
Rent Receivable 25,512 148,749
Due from General Partners (Note 5) 140,000 140,000
Other assets 320 --
Total Assets $22,123,967 $24,963,925
LIABILITIES:
Accounts payable and accrued
expenses $ 449,943 $ 400,573
Rent received in advance 66,363 36,968
Deferred gain of sale of real estate 3,598,037 2,541,216
Reserve for estimated costs during
the period of liquidation 174,200 174,200
Tenant security deposits 58,607 58,607
Environmental remediation accrual 10,000 --
Due to affiliates 2,709 2,635
Total Liabilities 4,359,859 3,214,199
MINORITY INTEREST:
Brauvin High Yield Venture 11,300 15,543
Brauvin Funds Joint Venture 2,139,681 2,177,679
Net Assets in Liquidation $15,613,127 $19,556,504
See accompanying notes to consolidated financial statements
<PAGE>
BRAUVIN HIGH YIELD FUND L.P. II
(a Delaware limited partnership)
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN
LIQUIDATION (LIQUIDATION BASIS) FOR THE PERIOD
JANUARY 1, 2000 TO June 30, 2000
(Unaudited)
Net Assets in Liquidation at
January 1, 2000 (Liquidation Basis) $19,556,504
Income from operations 1,402,258
Gain on sale of property 473,701
Minority interest in share of income
from Joint Venture (171,458)
Operating distribution to
Limited Partners (a) (1,532,001)
Return of capital distribution
to Limited Partners(b) (1,893,001)
Adjustment to liquidation basis (2,222,876)
Net Assets in Liquidation at
June 30, 2000 $15,613,127
(a) Operating distributions were $37.9706 per Unit.
(b) Return of capital distributions were $46.9180.
See accompanying notes to consolidated financial statements.
<PAGE>
BRAUVIN HIGH YIELD FUND L.P. II
(a Delaware limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2000 (Liquidation Basis) and
the Period January 1, 1999 to June 18, 1999 (Going Concern Basis)
(Unaudited)
(Liquidation (Going Concern
Basis) Basis)
INCOME: June 30, 2000 June 18, 1999
Rental $1,660,991 $2,013,600
Interest 63,722 35,469
Other 32,198 67,075
Total income 1,756,911 2,116,144
EXPENSES:
General and administrative 257,296 193,806
Management fees (Note 4) 17,988 20,728
Amortization of deferred
organization costs and
other assets - 1,306
Depreciation - 317,477
Environmental remediation
expense (Note 10) 10,000 --
Transaction costs (Note 7) 69,369 187,552
Total expenses 354,653 720,869
Income before gain on sale of
property and minority and equity
interests' share of net income 1,402,258 1,395,275
Gain on sale of property 473,701 25,108
Income before minority and
equity interests' share
of net income 1,875,959 1,420,383
Minority interest share
in net income:
Brauvin High Yield Venture 1,244 (2,615)
Brauvin Funds Joint Venture (172,702) (145,581)
Equity interest in:
Brauvin Bay County Venture's
net income - 11,299
Income before adjustment to
liquidation basis 1,704,501 1,283,486
Adjustment to liquidation basis (2,222,876) --
Net (loss) income $ (518,375) $1,283,486
Net (loss) income allocated to:
General Partners $ (10,368) $ 32,087
Limited Partners $ (508,007) $1,251,399
Net (loss) income per unit outstanding
(40,347 units outstanding) $ (12.59) $ 31.02
See accompanying notes to consolidated financial statements.
<PAGE>
BRAUVIN HIGH YIELD FUND L.P. II
(a Delaware limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2000 (Liquidation Basis) and
the Period April 1, 1999 to June 18, 1999 (Going Concern Basis)
(Unaudited)
(Liquidation (Going Concern
Basis) Basis)
INCOME: 2000 1999
Rental $ 826,525 $1,007,217
Interest 29,662 17,888
Other 322 12,388
Total income 856,509 1,037,493
EXPENSES:
General and administrative 183,273 131,916
Management fees (Note 4) 8,669 10,064
Amortization of deferred
organization costs and
other assets - 652
Depreciation - 156,062
Environmental remediation
expense (Note 10) 10,000 --
Transaction costs (Note 7) 11,865 92,530
Total expenses 213,807 391,224
Income before loss on sale of
property and minority and equity
interests' share of net income 642,702 646,269
Gain on sale of property -- 25,108
Income before minority and
equity interests' share
of net income 642,702 671,377
Minority interest share
in net income:
Brauvin High Yield Venture (1,284) (1,399)
Brauvin Funds Joint Venture (86,966) (72,826)
Equity interest in:
Brauvin Bay County Venture's
net income - 5,706
Income before adjustment to
liquidation basis 554,452 602,858
Adjustment to liquidation basis (65,717) --
Net income $ 488,735 $ 602,858
Net income allocated to:
General Partners $ 9,775 $ 15,071
Limited Partners $ 478,960 $ 587,787
Net income per unit outstanding
(40,347 units outstanding) $ 11.87 $ 14.57
See accompanying notes to consolidated financial statements.
<PAGE>
BRAUVIN HIGH YIELD FUND L.P. II
(a Delaware limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period January 1, 1999 to June 18, 1999
(Going Concern Basis)
Cash Flows From Operating Activities:
Net income $1,283,486
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 318,783
Loss on sale of property (25,108)
Minority interest's share of income from:
Brauvin High Yield Venture 2,615
Brauvin Funds Joint Venture 145,581
Equity interest share of income
from Brauvin Bay County Venture (11,299)
Changes in:
Restricted Cash (289,140)
Rent receivable (8,913)
Deferred rent receivable (2,777)
Other assets (12,287)
Accounts payable and accrued expenses 24,981
Rent received in advance 44,487
Due to affiliates 319
Net cash provided by operating activities 1,470,728
Cash Flows From Investing Activities:
Proceeds from the sale of property 210,000
Distributions from Brauvin Bay
County Venture 15,600
Cash provided by investing activities 225,600
Cash Flows From Financing Activities:
Cash distributions to Limited Partners (1,922,105)
Cash distribution to minority interest:
Brauvin High Yield Venture (3,050)
Brauvin Funds Joint Venture (173,950)
Cash used in financing activities (2,099,105)
Net decrease in cash and
cash equivalents (402,777)
Cash and cash equivalents at
beginning of period 1,585,830
Cash and cash equivalents at
end of period $ 1,183,053
See accompanying notes to consolidated financial statements
<PAGE>
BRAUVIN HIGH YIELD FUND L.P. II
(a Delaware limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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 subject to "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, 2000, 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, 2000. As of June
30, 2000, 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.
In February 1994, the Partnership sold the Taco Bell Restaurant
located in Schofield, Wisconsin. In January 1998, the joint
venture partnership sold Ponderosa unit 850 located in Mansfield,
Ohio. In April 1998, the Partnership sold Ponderosa unit 876
located in Sweden, New York. In June 1999, the Partnership sold the
former Hardee's property located in Albion, Michigan. In October
1999, the Partnership sold four Ponderosa units located in
Appleton, Wisconsin; Oneonta, New York; Middletown, New York and
Eureka, Missouri. In December 1999, the Partnership sold its joint
venture interest in the Blockbuster Video Store to an affiliated
entity.
In January, 2000, the Partnership sold the Ponderosa Unit 128
located in Bloomington, Illinois and the Chi Chis Unit 366 located
in Clarksville, Tennessee.
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.
Basis of Presentation
As a result of the settlement agreement (see Note 7) which was
approved by the United States District Court for the Northern
District of Illinois on June 18, 1999 the Partnership has begun the
liquidation process and, in accordance with generally accepted
accounting principles, the Partnership's financial statements for
periods subsequent to June 18, 1999 have been prepared on a
liquidation basis. Accordingly, the carrying value of the assets
is presented at estimated net realizable amounts and all
liabilities are presented at estimated settlement amounts,
including estimated costs associated with carrying out the
liquidation. Preparation of the financial statements on a
liquidation basis requires significant assumptions by management,
including the estimate of liquidation costs and the resolution of
any contingent liabilities. There may be differences between the
assumptions and the actual results because events and circumstances
frequently do not occur as expected. Those differences, if any,
could result in a change in the net assets recorded in the
statement of net assets as of June 30, 2000.
Accounting Method
The accompanying financial statements have been prepared using
the accrual method of accounting.
Rental Income
Prior to the preparation of the financial statements on a
liquidation basis, rental income was 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 were credited or charged, as applicable, to deferred
rent receivable.
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
Prior to the preparation of the financial statements on a
liquidation basis, the operating properties acquired by the
Partnership were stated at cost including acquisition costs and net
of impairment. Depreciation expense was computed on a straight-line
basis over approximately 35 years.
The Partnership recorded an 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, 2000,
except as described in Notes 2,6, and 8.
Consolidation of Joint Ventures
The Partnership owns a 99% equity interest in a joint venture,
Brauvin High Yield Venture, which currently owns five 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
Prior to December 30, 1999, the Partnership owned a 26% equity
interest in a joint venture, Brauvin Bay County Venture, which
owned one Blockbuster Video Store. On December 30, 1999, the
Partnership sold its equity interest in this joint venture to an
affiliated entity. The accompanying financial statements include
the investment in Brauvin Bay County Venture using the equity
method of accounting.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt
instruments with an original maturity within three months of
purchase.
Restricted Cash
Per the terms of the settlement agreement (see Note 7) the
Partnership was required to establish a cash reserve that will be
restricted for the payment of the General Partners legal fees and
costs. The release of these funds to the General Partners is
subject to the certification by the Special Master that the General
Partners have been cooperative, did not breach their fiduciary
duties to the Limited Partners, did not breach the settlement
agreement or the Partnership Agreement and used their best efforts
to manage the affairs of the Partnership in such a manner as to
maximize the value and marketability of the Partnership's assets in
accordance with their obligations under the Partnership Agreement.
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, 2000 and
December 31, 1999, 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; and tenant
security deposits.
(2) ADJUSTMENT TO LIQUIDATION BASIS
On June 18, 1999, in accordance with the liquidation basis of
accounting, assets were adjusted to estimated net realizable value
and liabilities were adjusted to estimated settlement amounts,
including estimated costs associated with carrying out the
liquidation. The net adjustment required to convert from the going
concern (historical cost) basis to the liquidation basis of
accounting was a decrease in net assets of $4,669,600 which is
included in the June 30, 2000 statement of changes in net assets in
liquidation. Significant changes in the carrying value of assets
and liabilities are summarized as follows:
Increase in real estate held for sale (a) $3,598,037
Decrease in value of real estate (3,996,554)
Write-off deferred rents receivable (480,440)
Write-off prepaid offering costs (18,406)
Increase in deferred gain on sale
of real estate (3,598,037)
Estimated liquidation costs (174,200)
Total adjustment to liquidation basis $(4,669,600)
(a) Net of estimated closing costs.
On November 19, 1999, the United States District Court approved
a bid for the sale of the Partnership's Assets in an amount of
approximately $20,242,693. At the time that this offer was
approved the Partnership adjusted the real estate held for sale to
this contract price less all the estimated closing costs. This
offer was subsequently rescinded by the potential purchaser.
In January, 2000, the Partnership sold the Ponderosa unit 128
located in Bloomington, Illinois for $368,727 resulting in a
decrease in the real estate held for sale in the amount $386,801
and a loss on sale of property in the amount of $26,277. Also, in
January, 2000, the Partnership sold Chi Chi's unit 366 located in
Clarksville, Tennessee for $1,296,480 resulting in a decrease in
the real estate held for sale in the amount of $1,264,217, a gain
on the sale of property of $499,978, and a reduction in deferred
gain of $506,177.
In 2000, an affiliated entity proposed purchasing all of the
Partnership's Assets for approximately $18,398,000 (inclusive of
all the joint venture interests). In May 2000, the Special Master
approved this proposal and recommended that the United States
District Court for the Northern District of Illinois approve this
bid.
As of June 30, 2000, the Partnership adjusted its investment in
real estate to the offer that was presented to the Special Master
less all estimated closing costs. The effect of this adjustment
was a reduction in the real estate held for sale of $693,115, an
increase in the deferred gain on the sale of real estate of
$1,562,998 and the recording of a further adjustment to the
liquidation basis of accounting of $2,222,876.
Pursuant to the approval of the Special Master and the United
States Distrtict Court, on August 7, 2000, an affiliated entity
purchased all but two of the Partnership's properties. The two
remaing properties continue to be under contract to the affilated
purchaser. The proposed purchaser continues to conduct certain
environmental due diligence related to these two properties.
(3) 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.
(4) 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, 2000 and December 31, 1999, 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 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 its affiliates for the six months ended June
30, 2000 and 1999 were as follows:
2000 1999
Management fees $17,988 $ 20,728
Reimbursable operating
expenses 164,965 113,116
As of June 30, 2000 and December 31, 1999, the Partnership has
made all payments to affiliates except for $2,709 and $2,635,
respectively related to management fees.
(5) 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, 2000
and December 31, 1999, $140,000 was due from the original General
Partners related to the Distribution Guaranty.
(6) 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
impairment of $550,000 related to an other than temporary decline
in the value of the real estate for the St. Johns, Michigan and
Albion, Michigan properties. This impairment has been recorded as
a reduction of the properties' cost, and allocated to the land and
buildings based on the original acquisition cost allocation 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 the value of the real estate for the Ponderosa located in
Sweden, New York. This impairment has been recorded as a reduction
of the property's cost, and allocated to the land and buildings
based on the original acquisition cost allocation of 30% (land) and
70% (building).
During the fourth quarter of 1998, the Partnership recorded an
impairment of $984,000 related to an other than temporary decline
in real estate for Ponderosa properties in various locations. An
impairment of $192,000 related to an other than temporary decline
in real estate was also recorded for Hardee's properties located in
Michigan. These impairments were recorded as a reduction of the
properties' cost, and allocated to the land and buildings based on
the original acquisition cost allocation of 30% (land) and 70%
(building).
(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, 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 would remain 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 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 was not completed primarily due to certain litigation,
as described below. The General Partners believe that these
lawsuits were without merit and, therefore, continued to vigorously
defend against them.
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.
Because of the rulings of the District Court in the Christman
litigation, as described below, it is not possible for the Merger
to be consummated.
Litigation
Two legal actions, as hereinafter described, 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, have been settled. On April 13, 1999,
all the parties to the litigation reached an agreement to settle
the litigation, subject to the approval by the United States
District Court for the Northern District of Illinois. This
approval was obtained on June 18, 1999. The terms of the
settlement agreement, along with a Notice to the Class, were
forwarded to the Limited Partners in the second quarter of 1999.
One additional legal action, which was dismissed on January 28,
1998 had also been brought against the General Partners of the
Partnership and affiliates of such General Partners, as well as the
Partnership on a nominal basis in connection with the Merger. With
respect to these actions the Partnership and the General Partners
and their named affiliates denied all allegations set forth in the
complaints and vigorously defended against such claims.
(8) SALE OF PARTNERSHIP ASSETS
On November 19, 1999, the United States District Court approved
a bid for the sale of the Partnership's Assets in an amount of
approximately $20,243,693. At the time that this offer was
approved the Partnership adjusted the real estate held for sale to
this contract price less all the estimated closing costs. This
offer was subsequently rescinded by the potential purchaser.
In January, 2000, the Partnership sold the Ponderosa unit 128
located in Bloomington, Illinois for $368,727 resulting in a
decrease in the real estate held for sale in the amount $386,801
and a loss on sale of property in the amount of $26,277. Also, in
January, 2000, the Partnership sold Chi Chi's unit 366 located in
Clarksville, Tennessee for $1,296,480 resulting in a decrease in
the real estate held for sale in the amount of $1,264,217, a gain
on the sale of property of $499,978, and a reduction in deferred
gain of $506,177.
In 2000, an affiliated entity proposed purchasing all of the
Partnership's Assets for approximately $18,398,000 (inclusive of
all the joint venture interests). In May 2000, the Special Master
approved this proposal and recommended that the United States
District Court for the Northern District of Illinois approve this
bid.
As of June 30, 2000, the Partnership adjusted its investment in
real estate to the offer that was presented to the Special Master
less all estimated closing costs. The effect of this adjustment
was a reduction in the real estate held for sale of $693,115, an
increase in the deferred gain on the sale of real estate of
$1,562,998 and the recording of a further adjustment to the
liquidation basis of accounting of $2,222,876.
Pursuant to the approval of the Special Master and the United
States District Court, on August 7, 2000 an affiliated entity
purchased all but one of the Partnership's properties. The two
remaining properties continue to be under contract to the affiliated
purchaser. The proposed purchaser continues to conduct certain
environmental due diligence related to these two properties.
(9) INVESTMENT IN JOINT VENTURE
The Partnership owned an equity interest in the Brauvin Bay
County Venture, which it sold to an affiliated entity on December
30, 1999 for approximately $232,500 and reported its investment on
the equity method. The following are condensed financial statements
for the Brauvin Bay County Venture:
BRAUVIN BAY COUNTY VENTURE
For the period January 1, 1999 to June 18, 1999
Going Concern Basis
Rental and other income $ 54,625
Expenses:
Depreciation 8,823
Management fees 794
Operating and
administrative 1,550
11,167
Net income $ 43,458
(10) ENVIRONMENTAL REMEDIATION EXPENSE
In connection with the Merger (see Note 7), the Partnership has
undertaken environmental studies of potentially affected
properties. Three of the Partnership's properties have been
identified by the environmental study as having a potential
environmental issue. On all of the sites a remedial investigation
and feasibility study has been completed, and the results of that
study have been forwarded to the appropriate authorities. The
study indicates a range of viable remedial approaches, but
agreement has not yet been reached with the authorities on the
final remediation approach. The Partnership has accrued its best
estimate of the costs that will be incurred to complete the
environmental remediation at one of the properties. The other two
sites requires further review and at this time the Partnership is
unable to estimate the potential costs to complete the
environmental remediation.
<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.
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
The "Year 2000" problem concerns the inability of computer
technology systems to correctly identify and process date sensitive
information beyond December 31, 1999. Many computers
automatically add the "19" prefix to the last two digits the
computer reads for the year when date information is needed in
computer software programs. Thus when a date beginning on January
1, 2000 is entered into a computer, the computer may interpret this
date as the year "1900" rather than "2000".
The computer information technology systems which support the
Partnership consists of a network of personal computers linked to
a server built using hardware and software from mainstream
suppliers. These systems do not have equipment that contain
embedded microprocessors, which may also pose a potential Year 2000
problem. Additionally, there is no internally generated software
coding to correct as all of the software is purchased and licensed
from external providers.
The Partnership utilizes two main software packages that contain
date sensitive information, (i) accounting and (ii) investor
relations. In 1997, a program was initiated and completed to
convert from the existing accounting software to a new software
program that is Year 2000 compliant. In 1998, the investor
relations software was also updated to a new software program that
is Year 2000 compliant. Management has determined that the Year
2000 issue will not pose significant operational problems for its
remaining computer software systems. All costs associated with
these conversions were expensed by the Partnership as incurred, and
were not material. Management does not believe that any further
expenditures will be necessary for the systems to be Year 2000
compliant. However, additional personal computers may be purchased
from time to time to replace existing machines.
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 issue. 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.
The most reasonably likely worst case scenario for the
Partnership with respect to the Year 2000 issue would be the
inability of certain tenants to timely make their rental payments
beginning in January 2000. This could result in the Partnership
temporarily suffering a depletion of the Partnership's cash
reserves as expenses will need to be paid while the cash flows from
revenues are delayed. The Partnership has no formal Year 2000
contingency plan.
The Partnership has not experienced any material adverse impact
on its operations or its relationships with tenants, vendors or
others.
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, 2000 from Limited Partners investing
their distributions of Operating Cash Flow in additional Units. As
of June 30, 2000, 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 cost
allocation 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 the value of 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 cost allocation of 30% (land) and 70%
(building).
During the fourth quarter of 1998, the Partnership recorded an
impairment of $984,000 related to an other than temporary decline
in the value of real estate for several Ponderosa properties in
various locations. Additionally an impairment of $192,000 related
to an other than temporary decline in the value of real estate was
also recorded for the Hardee's properties located in Michigan.
These allowances were recorded as a reduction of the properties'
cost, and allocated to the land and buildings based on the original
acquisition cost allocation of 30% (land) and 70% (building).
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. As described in Footnote 8 to the section of the
Prospectus on pages 8 and 9 entitled "Estimated Use of Proceeds of
Offering", the Partnership set aside 1% of the gross proceeds of
the 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 Reserve previously paid to them. At June 30, 2000,
$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 2000(a) 1999(b) 1998 (c) 1997(d) 1996
February 15 $19.8772 $24.9821 $ -- $20.1875 $22.3597
May 15 18.0928 22.4924 21.9087 18.8614 22.3597
August 15 -- 19.5858 14.7020 22.8662 --
November 15 -- 21.3147 26.3634 56.6001 --
(a) The February 15, 2000 distribution does not include a return of
capital of approximately $5.6014 per Unit. The May 15, 2000
distribution does not include a return of capital of
approximately $41.3160 per Unit.
(b) The May 1999 distribution was made on May 17, 1999. In addition
the August 15, 1999 amount does not include a return of capital
distribution of approximately $5.2048 per Unit, and the November
15, 1999 amount does not include a return of capital
distribution of approximately $85.3273 per Unit.
(c) The 1998 distributions were made on May 8, 1998, August 15, 1998,
November 15, 1998, and February 15, 1999 respectively, and the
amounts indicated above do not include return of capital
distributions of approximately $18.4152, $15.1571, $0.00, and
$0.00 per Unit, respectively.
(d) The 1997 distributions were made on March 31, 1997, July 15,
1997, October 22,1997 and December 31, 1997.
As a 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.
As a result of the January, 2000, property sales, a return of
capital distribution was made to Limited Partners in the approximate
amount of $1,667,000.
Per the terms of the cash out Merger, the Partnership's net
earnings from April 1996 through July 1996 were to be distributed
to the 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.
Future increases in the Partnership's distributions will
largely depend on increased sales at the Partnership's properties
resulting in additional percentage rent and, to a lesser extent, on
rental increases which will occur due to increases in receipts from
certain leases based upon increases in the Consumer Price Index or
scheduled increases of base rent.
During the six months ended June 30, 2000 and 1999, the
General Partners and their affiliates earned management fees of
$17,988 and $20,728 respectively.
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 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 would remain 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 of 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 was
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 was 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.
On January 16, 1998, by agreement of the Partnership and the
General Partner and pursuant to a motion of the General Partner,
the District Court entered an order preventing the Partnership and
the General Partners from completing the Merger, or otherwise
disposing of all or substantially all of the Partnership's assets,
until further order from the Court.
On January 28, 1998, the District Court entered an Order of
Reference to Special Master, designating a Special Master and
vesting the Special Master with authority to resolve certain
aspects of the lawsuit subject to the District Court's review and
confirmation. The Special Master has been empowered to determine
how the assets of the Partnership should be sold or disposed of in
a manner which allows the 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 was engaged to perform a valuation of the
properties of the Partnership as well as a valuation of the
Affiliated Partnership's. The cost to the Partnership for the
services of the Financial Advisor was $185,000.
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. The District Court accepted
this Report and Recommendation. On November 4, 1998, the Special
Master filed an additional Report and Recommendation with the
District Court, requesting that the Court withdraw its Order of
Reference to Special Master on the grounds it would be impossible
to effect the sale of the Partnership's properties in a manner that
maximizes the financial return to Limited Partners in a short time
frame, unless certain litigation issues are resolved. The District
Court has accepted this Report and Recommendation.
Although the Special Meeting was held and an affirmative vote
of the majority of the Limited Partners was received, the District
Court in the Christman Litigation ruled on August 12, 1998 in favor
of the plaintiffs motion for summary judgement, holding that the
Agreement did not allow the Limited Partners to vote in favor or
against the Transaction by proxy.
Based on the August 12, 1998, ruling of the District Court in
the Christman litigation, it is not possible for the Merger to 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.
On April 13, 1999, all the parties to the litigation reached
an agreement to settle the litigation, subject to the approval of
the United States District Court for the Northern District of
Illinois. This approval was obtained on June 18, 1999. The terms
of the settlement agreement, along with a Notice to the Class, were
forwarded to the Limited Partners in the second quarter of 1999.
Pursuant to the settlement agreement, the Partnerships'
retained a third-party commercial real estate firm which, under the
supervision of an independent special master (the "Special Master")
and with the cooperation of the General Partners, marketed the
Partnerships' properties in order to maximize the return to the
Limited Partners (the "Sale Process"). The Sale Process was
designed to result in an orderly liquidation of the Partnership,
through a sale of substantially all of the assets of the
Partnership, a merger or exchange involving the Partnership, or
through another liquidating transaction which the Special Master
determined was best suited to maximize value for the Limited
Partners. Consummation of such sale, merger, exchange, or other
transaction will be followed by the orderly distribution of net
liquidation proceeds to the Limited Partners.
The General Partners have agreed, as part of the settlement
agreement, to use their best efforts to continue to manage the
affairs of the Partnership in accordance with their obligations
under the Partnership Agreement, to cooperate fully with the
Special Master and to waive certain brokerage and other fees. In
consideration of this, the General Partners will be released from
the claims of the class action lawsuit and indemnified for the
legal expenses they incurred related to the two lawsuits. Part of
this indemnification and release will be contingent on the issuance
of a certification by the Special Master stating that the General
Partners fully cooperated with him and complied with certain other
conditions.
The 2000 and 1999 distributions were lower than prior
distributions because the Partnership incurred significant
valuation fees and legal costs to defend against the lawsuit. In
addition, the remaining term of 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.
On November 19, 1999, the United States District Court
approved a bid for the sale of the Partnership's Assets in an
amount of approximately $20,242,693. At the time that this offer
was approved the Partnership adjusted the real estate held for sale
to this contract price less all the estimated closing costs. This
offer was subsequently rescinded by the potential purchaser.
In January, 2000, the Partnership sold the Ponderosa unit 128
located in Bloomington, Illinois for $368,727 resulting in a
decrease in the real estate held for sale in the amount $386,801
and a loss on sale of property in the amount of $26,277. Also, in
January, 2000, the Partnership sold Chi Chi's unit 366 located in
Clarksville, Tennessee for $1,296,480 resulting in a decrease in
the real estate held for sale in the amount of $1,264,217, a gain
on the sale of property of $506,177, and a reduction in deferred
gain of $499,978.
In 2000, an affiliated entity proposed purchasing all of the
Partnership's Assets for approximately $18,398,000 (inclusive of
all the joint venture interests). In May 2000, the Special Master
approved this proposal and recommended that the United States
District Court for the Northern District of Illinois approve this
bid.
As of June 30, 2000, the Partnership adjusted its investment
in real estate to the offer that was presented to the Special
Master less all estimated closing costs. The effect of this
adjustment was a reduction in the real estate held for sale of
$693,115, an increase in the deferred gain on the sale of real
estate of $1,562,998 and the recording of a further adjustment to
the liquidation basis of accounting of $2,222,876.
Pursuant to the approval of the Special Master and the United
States District Court, on August 7, 2000, an affiliated entity
purchased all but two of the Partnership's properties. The two
remaining properties continue to be under contract to the affiliated
purchaser. The proposed purchaser continues to conduct certain
environmental due diligence related to these two properties.
Results of Operations - Six months ended June 30, 2000 (Liquidation
Basis) and the Period January 1, 1999 to June 18, 1999 (Going
Concern Basis)
(Rounded to 000's)
Results of operations for the six months ended June 30, 2000
reflected a net loss of $518,000 as compared to net income of
$1,283,000 for the period January 1, 1999 to June 18, 1999, a
decrease in net income of approximately $1,802,000. The decrease
in net income is primarily due to the adjustment recorded during
the six months ended June 30, 2000 to recognize real estate held
for sale to net realizable value. This recognition of a change in
net realizable value required an adjustment to liquidation basis
expense in the amount of $2,223,000.
Total income for the six months ended June 30, 2000 was
$1,757,000 as compared to $2,116,000 for the period January 1, 1999
to June 18, 1999. The decrease in total income was due primarily
to loss of rental income from the sale of six properties.
Total expenses for the six months ended June 30, 2000 were
$355,000 as compared to $721,000 for the period January 1, 1999 to
June 18, 1999 a decrease of $366,000. The decrease in expenses was
due primarily to a decrease in depreciation expense of $317,000,
which was a result of the liquidation basis of accounting. Also
transaction costs decreased approximately $118,000 and general and
administrative costs increased $63,000.
Results of Operations - Three months ended June 30, 2000
(Liquidation Basis) and the Period April 1, 1999 to June 18, 1999
(Going Concern Basis)
Results of operations for the three months ended June 30, 2000
reflected net income of $489,000 as compared to net income of
$603,000 for the period April 1 , 1999 to June 18, 1999, a decrease
of approximately $114,000.
Total income for the three months ended June 30, 2000 was
$857,000 as compared to $1,037,000 for the period April 1, 1999 to
June 18, 1999, a decrease of approximately $180,000. The decrease
was due primarily to a decrease in rental income caused by the sale
of two properties in the first quarter of 2000 and four properties
in October 1999.
Total expenses for the three months ended June 30, 2000 were
$214,000 as compared to $391,000 for the period April 1, 1999 to
June 18, 1999, a decrease of $177,000. The decrease was due to a
$156,000 decrease in depreciation expense. Upon the adoption of
the liquidation basis of accounting, real estate held for sale was
adjusted to net realizable value and no depreciation expense was
recorded. Also, transaction costs decreased by $80,000, offset by
an increase in general and administrative expense of $51,000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Partnership does not engage in any hedge transactions or
derivative financial instruments.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
Two legal actions, as hereinafter described,
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, have been settled. On April 13, 1999, all the
parties to the litigation reached an agreement to settle
the litigation, subject to the approval by the United
States District Court for the Northern District of
Illinois. This approval was obtained on June 18, 1999.
The terms of the settlement agreement, along with a
Notice to the Class, were forwarded to the Limited
Partners in the second quarter of 1999. One additional
legal action, which was dismissed on January 28, 1998 had
also been brought against the General Partners of the
Partnership and affiliates of such General Partners, as
well as the Partnership on a nominal basis in connection
with the Merger. With respect to these actions the
Partnership and the General Partners and their named
affiliates denied all allegations set forth in the
complaints and vigorously defended against such claims.
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, 2000
BY: /s/ Jerome J. Brault
Thomas E. Murphy
Chief Financial Officer and Treasurer
DATE: August 14, 2000
<PAGE>
