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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly year ended March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 0-19219
Brauvin Income Plus L.P. III
(Exact name of registrant as specified in its charter)
Delaware 36-3639043
(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 INCOME PLUS L.P. III
(a Delaware limited partnership)
INDEX
Page
PART I Financial Information
Item 1. Consolidated Financial Statements . . . . . . . . . 3
Consolidated Balance Sheets at March 31, 1998 and
December 31, 1997 . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1997. . . . . . . . 5
Consolidated Statements of Partners' Capital for
the periods January 1, 1997 to March 31, 1998 . . . 6
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997. . . . . . . . 7
Notes to Consolidated Financial Statements. . . . . 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 27
Item 3. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . . 36
PART II Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 37
Item 2. Changes in Securities . . . . . . . . . . . . . . . 42
Item 3. Defaults Upon Senior Securities . . . . . . . . . . 42
Item 4. Submissions of Matters to a Vote of Security Holders 42
Item 5. Other Information . . . . . . . . . . . . . . . . . 42
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 42
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . 43
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PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Except for the December 31, 1997 Consolidated Balance Sheet, the
following Consolidated Balance Sheet as of March 31, 1998,
Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1997, Consolidated Statements of Partners'
Capital for the periods January 1, 1997 to March 31, 1998 and
Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 for Brauvin Income Plus L.P. III (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 INCOME PLUS L.P. III
(a Delaware limited partnership)
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
ASSETS
Investment in real estate, at cost:
Land $ 7,710,142 $ 7,845,528
Buildings and improvements 10,463,264 10,463,264
18,173,406 18,308,792
Less: Accumulated depreciation (2,735,827) (2,639,582)
Net investment in real estate 15,437,579 15,669,210
Investment in Joint Ventures (Note 4):
Brauvin Gwinnett County Venture 149,372 149,824
Brauvin Bay County Venture 354,651 356,478
Cash and cash equivalents 1,104,501 463,110
Rent receivable 2,619 8,174
Deferred rent receivable 55,987 53,830
Prepaid offering costs 70,824 70,824
Total Assets $17,175,533 $16,771,450
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued expenses $ 113,816 $ 119,758
Rent received in advance 18,706 18,205
Tenant security deposits 51,626 52,203
Due to affiliate 1,984 1,983
Total Liabilities 186,132 192,149
Minority Interest in Brauvin
Brauvin Chili's Limited Partnership (651) (697)
PARTNERS' CAPITAL:
General Partners 104,329 110,896
Limited Partners 16,885,723 16,469,102
Total Partners' Capital 16,990,052 16,579,998
Total Liabilities and Partners'
Capital $17,175,533 $16,771,450
See accompanying notes to consolidated financial statements.
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BRAUVIN INCOME PLUS L.P. III
(a Delaware limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31,
1998 1997
INCOME:
Rental $563,595 $567,350
Interest 8,382 17,732
Other 107 180
Total income 572,084 585,262
EXPENSES:
General and administrative 46,843 46,059
Management fees (Note 3) 5,838 6,048
Transaction costs (Note 5) 22,762 11,727
Depreciation 96,245 93,245
Total expenses 171,688 157,079
Income before gain on the sale of
property and minority interest and
equity interest in joint ventures 400,396 428,183
Gain on the sale of property 14,614 --
Income before minority interest and
equity interest in joint ventures 415,010 428,183
Minority interest's share in Brauvin
Chili's Limited Partnership's net income (96) (115)
Equity interest in net income from:
Brauvin Bay County Venture 7,013 6,170
Brauvin Gwinnett County Venture 3,196 3,403
Net income $425,123 $437,641
Net income allocated to the
General Partners $ 8,502 $ 8,753
Net income allocated to the
Limited Partners $416,621 $428,888
Net income per Unit outstanding (a) $ 0.19 $ 0.19
(a)Net income per Unit was based on the average Units outstanding
during the period since they were of varying dollar amounts and
percentages based upon the dates Limited Partners were admitted to
the Partnership and additional Units were purchased through the
distribution reinvestment plan (the "Plan").
See accompanying notes to consolidated financial statements.
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BRAUVIN INCOME PLUS L.P. III
(a Delaware limited partnership)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the period January 1, 1997 to March 31, 1998
General Limited
Partners Partners* Total
Balance January 1, 1997 $78,152 $17,682,257 $17,760,409
Net income 32,744 1,604,453 1,637,197
Cash distributions -- (2,817,608) (2,817,608)
Balance, December 31, 1997 110,896 16,469,102 16,579,998
Net income 8,502 416,621 425,123
Cash distributions (15,069) -- (15,069)
Balance, March 31, 1998 $104,329 $16,885,723 $16,990,052
*Total Units sold at March 31, 1998 and December 31, 1997 were
2,230,375. Cash distributions to Limited Partners per Unit were
$1.26 for the year ended December 31, 1997. Cash distributions to
Limited Partners per Unit are based on the average Units
outstanding during the period since they were of varying dollar
amounts and percentages based upon the dates Limited Partners were
admitted to the Partnership and additional Units were purchased
through the Plan.
See accompanying notes to consolidated financial statements.
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BRAUVIN INCOME PLUS L.P. III
(a Delaware limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,
1998 1997
Cash flows from operating activities:
Net income $ 425,123 $ 437,641
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 96,245 93,245
Gain on the sale of property (14,614) --
Minority interest's share of income from
Brauvin Chili's Limited Partnership 96 115
Equity interest in net income from:
Brauvin Bay County Venture (7,013) (6,170)
Brauvin Gwinnett County Venture (3,196) (3,403)
Change in rent receivables 5,555 1,103
Change in deferred rent receivable (2,157) (2,157)
Change in other assets -- 2,690
Change in accounts payable
and accrued expenses (5,942) (4,070)
Change in rent received in advance 501 (25,255)
Change in due to affiliates 1 --
Change in tenant security deposits (577) --
Net cash provided by operating activities 494,022 493,739
Cash flows from investing activities:
Proceeds from the sale of property 150,000 --
Cash distribution from:
Brauvin Bay County Venture 8,840 8,500
Brauvin Gwinnett County Venture 3,648 4,160
Cash provided by investing activities 162,488 12,660
Cash flows from financing activities:
Cash distributions to General Partners (15,069) --
Cash distributions to Limited Partners -- (534,442)
Cash distribution to minority interest -
Brauvin Chili's Limited Partnership (50) (150)
Cash used in financing activities (15,119) (534,592)
Net increase (decrease) in cash and
cash equivalents 641,391 (28,193)
Cash and cash equivalents at beginning
of period 463,110 1,442,263
Cash and cash equivalents at
end of period $1,104,501 $1,414,070
See accompanying notes to consolidated financial statements.
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BRAUVIN INCOME PLUS L.P. III
(a Delaware limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
BRAUVIN INCOME PLUS L.P. III (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
subject to "triple-net" leases. The General Partners of the
Partnership are Brauvin Realty Advisors III, Inc. and Jerome J.
Brault. Brauvin Realty Advisors III, Inc. is owned by Messrs.
Brault (beneficially) (50%) and Cezar M. Froelich (50%). Mr.
Froelich resigned as a director of Brauvin Realty Advisors III,
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, was the selling agent for the
Partnership. The Partnership is managed by an affiliate of the
General Partners.
The Partnership was formed on July 31, 1989 and filed a
Registration Statement on Form S-11 with the Securities and
Exchange Commission which was declared effective on October 30,
1989. The sale of 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 January 15,
1990. The Partnership's offering was originally expected to close
on October 29, 1990 but the Partnership, with the receipt of the
necessary regulatory approval, extended the offering until it
closed on October 29, 1991. Through March 31, 1998 and December
31, 1997, the Partnership has sold $22,766,719 of Units. This
total include $1,459,119 of Units raised by Limited Partners who
utilized their distributions of Operating Cash Flow to purchase
additional Units through the distribution reinvestment plan (the
"Plan"). Units valued at $462,972 have been repurchased by the
Partnership from Limited Partners liquidating their investment in
the Partnership and have been retired as of March 31, 1998 and
December 31, 1997. As of March 31, 1998, the Plan participants
have acquired Units under the Plan which approximate 6% of the
total Units outstanding.
The Partnership has acquired the land and buildings underlying
five Ponderosa restaurants, two Chi-Chi's restaurants, one
International House of Pancakes restaurant, one Applebee's
restaurant, two Sports Unlimited stores, and three Steak n Shake
restaurants. The Partnership also acquired 99.5%, 6.4% and 34.0%
equity interests in three joint ventures with entities affiliated
with the Partnership. These ventures own the land underlying a
Chili's restaurant, a CompUSA store and a Blockbuster Video store,
respectively.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management's Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those 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.
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 consolidated 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.
Consolidation of Joint Venture
The Partnership owns a 99.5% equity interest in one joint
venture, Brauvin Chili's Limited Partnership, which owns one
Chili's restaurant. The accompanying financial statements have
consolidated 100% of the assets, liabilities, operations and
partners' capital of Brauvin Chili's Limited Partnership. All
significant intercompany accounts have been eliminated.
Investment in Joint Venture
The Partnership owns a 6.4% and a 34.0% equity interest in two
joint ventures, Brauvin Gwinnett County Venture, which owns one
CompUSA store, and Brauvin Bay County Venture, which owns one
Blockbuster Video store, respectively. The accompanying financial
statements include the investments in Brauvin Gwinnett County
Venture and Brauvin Bay County Venture using the equity method of
accounting.
Investment in Real Estate
The operating properties acquired by the Partnership are stated
at cost including acquisition costs. The Partnership's rental
properties are stated at cost including acquisition costs.
Depreciation is recorded on a straight-line basis over the
estimated economic lives of the properties which approximate 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). The Partnership has performed an analysis of its long-lived
assets, and the Partnership's management determined that there were
no events or changes in circumstances that indicated that the
carrying amount of the assets may not be recoverable at March 31,
1998 and December 31, 1997. Accordingly, no impairment loss has
been recorded in the accompanying financial statements for the
three months and year ended March 31, 1998 and December 31, 1997,
respectively.
Offering Costs
Offering costs represent costs incurred in selling Units, such
as the printing of the Prospectus and marketing materials.
Offering costs have been recorded as a reduction of Limited
Partners' Capital. Prepaid offering costs represent amounts in
excess of the defined percentages of the gross proceeds. Prior to
the commencement of the Partnership's proxy solicitation (see Note
5), gross proceeds were expected to increase due to the purchase of
additional Units through the Plan and the prepaid offering costs
would be transferred to offering costs and treated as a reduction
in Partners' Capital.
Cash and Cash Equivalents
Cash equivalents include all highly liquid debt instruments with
an original maturity within three months of purchase.
Estimated Fair Value of Financial Instruments
Disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments." The estimated fair value amounts
have been determined by using available market information and
appropriate valuation methodologies. However, considerable
judgement is necessarily required in interpreting market data to
develop estimates of fair value.
The fair value estimates presented herein are based on
information available to management as of March 31, 1998 and
December 31, 1997, but may not necessarily be indicative of the
amounts that the Partnership could realize in a current market
exchange. The use of different assumptions and/or estimation
methodologies may have a material effect on the estimated fair
value amounts.
The carrying amounts of the following items are a reasonable
estimate of fair value: cash and cash equivalents; rent receivable;
accounts payable and accrued expenses; rent received in advance;
and due to affiliate.
(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 a 9-1/4% non-cumulative, non-compounded, annual return on
Adjusted Investment, as such term is defined in the Agreement,
commencing on the last day of the calendar quarter in which the
Unit was purchased (the "Current Preferred Return"); and (b)
thereafter, any remaining amounts will be distributed 98% to the
Limited Partners (on a pro rata basis) and 2% to the General
Partners.
The net proceeds of a sale or refinancing of a Partnership
property shall be distributed as follows:
* first, pro rata to the Limited Partners until each Limited
Partner has received an amount equal to a 10.5% cumulative,
non-compounded, annual return of Adjusted Investment (the
"Cumulative Preferred Return");
* second, to the Limited Partners until each Limited Partner
has been paid an amount equal to his Adjusted Investment, as
defined in the Agreement, apportioned pro rata among the
Limited Partners based on the amount of the Adjusted
Investment; and
* thereafter, 95% to the Limited Partners (apportioned pro rata
based on Units) 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 to each Partner in the same ratio as the cash
distributions received by such Partner attributable to that period
bears to the total cash distributed by the Partnership. In the
event that there are no cash distributions, net profits and losses
from operations of the Partnership (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% to the General Partners and 98% 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 Capital Account balances of the Limited
Partners are equal to any unpaid Cumulative Preferred Return, as of
such date; (c) third, to the Limited Partners until the Capital
Account balances of the Limited Partners are equal to the sum of
the amount of their Adjusted Investment plus any unpaid Cumulative
Preferred Return; (d) fourth, to the General Partners until their
Capital Account balances are equal to any previously subordinated
fees; and (e) 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
Accounts balances; and (b) thereafter, 95% to the Limited Partners
and 5% to the General Partners.
(3) TRANSACTIONS WITH RELATED PARTIES
The Partnership pays an affiliate of the General Partners an
annual property management fee equal to up to 1% of gross revenues
derived from Partnership properties managed by such affiliate. The
property management fee is subordinated to receipt by the Limited
Partners of distributions of Operating Cash Flow in an amount equal
to the Current Preferred Return.
An affiliate of one of the General Partners provided securities
and real estate counsel to the Partnership.
The Partnership pays affiliates of the General Partners selling
commissions of 7-1/2% 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 5% of the gross proceeds of
the Partnership's offering for the services rendered in connection
with the process pertaining to the acquisition of a property.
Acquisition fees related to the properties not ultimately purchased
by the Partnership are expensed as incurred.
Fees, commissions and other expenses paid or payable to the
General Partners or their affiliates for the three months ended
March 31, 1998 and 1997 were as follows:
1998 1997
Management fees $ 5,838 $ 6,048
Reimbursable operating expenses 25,800 36,646
As of March 31, 1998 and December 31, 1997, the Partnership has
made all payments to affiliates except for $1,984 and $1,983,
respectively, related to management fees.
(4) INVESTMENT IN JOINT VENTURES
The Partnership owns equity interests in the Brauvin
Gwinnett County Venture and the Brauvin Bay County Venture and
reports its investments on the equity method. The following are
condensed financial statements for the Brauvin Gwinnett County
Venture and the Bay County Venture:
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BRAUVIN GWINNETT COUNTY VENTURE
March 31, December 31,
1998 1997
Land and buildings, net $2,274,425 $2,285,006
Other assets 56,947 75,185
$2,331,372 $2,360,191
Liabilities $ 3,134 $ 24,884
Partners' capital 2,328,238 2,335,307
$2,331,372 $2,360,191
Three months Ended March 31,
1998 1997
Rental and other income $68,938 $65,805
Expenses:
Depreciation 10,582 10,582
Management fees 446 875
Operating and
administrative 7,980 1,169
19,008 12,626
Net Income $49,930 $53,179
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BRAUVIN BAY COUNTY VENTURE
March 31, December 31,
1998 1997
Land and buildings, net $1,047,176 $1,051,588
Other assets 1,947 11,989
$1,049,123 $1,063,577
Liabilities $ 4,740 $ 13,820
Partners' capital 1,044,383 1,049,757
$1,049,123 $1,063,577
Three Months Ended March 31,
1998 1997
Rental and other income $27,357 $27,914
Expenses:
Depreciation 4,412 2,984
Management fees 291 292
Operating and administrative 2,027 6,493
6,730 9,769
Net Income $20,627 $18,145
(5) 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 and March 31, 1998 (the
"Merger Agreement") the Partnership proposes to merge with and into
the Brauvin Real Estate Funds L.L.C., a Delaware limited liability
company affiliated with certain of the General Partners (the
"Purchaser") through a merger (the "Merger") of its Units. In
connection with the Merger, the Limited Partners will receive
approximately $8.85 per Unit in cash. Promptly upon consummation
of the Merger, the Partnership will cease to exist and the
Purchaser, as the surviving entity, will succeed to all of the
assets and liabilities of the Partnership. The Limited Partners
holding a majority of the Units approved the Merger on November 8,
1996. By approving the Merger, the Limited Partners also approved
an amendment of the Agreement allowing the Partnership to sell or
lease property to affiliates (this amendment, together with the
Merger shall be referred to herein as the "Transaction").
The redemption price to be paid to the Limited Partners in
connection with the Merger is based on the fair market value of the
properties of the Partnership (the "Assets"). Cushman & Wakefield
Valuation Advisory Services ("Cushman & Wakefield"), an independent
appraiser, the largest real estate valuation and consulting
organization in the United States, was engaged by the Partnership
to prepare an appraisal of 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 $19,129,150, or $8.58 per Unit, on April
1, 1996. Subsequently, the Partnership purchased a 34% 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 $8.85 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 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 $0.27 was distributed to Limited Partners in the
December 31, 1997 distribution.
The General Partners will not receive any payment in exchange
for the redemption of their general partnership interests nor will
they receive any fees from the Partnership in connection with the
Transaction. The Managing General Partner and his son, James L.
Brault, an executive officer of the Corporate General Partner, will
have a minority ownership interest in the Purchaser.
The Merger has not been completed primarily due to certain
litigation, as described below, that is still pending. The
General Partners believe that these lawsuits are without merit and,
therefore, continue to vigorously defend against them.
Following receipt of Limited Partner approval, the Purchaser
commenced the finalization of Purchaser's financing and its due
diligence review of the Assets and the assets of the Affiliated
Partnerships (as defined below). The due diligence process has
revealed certain concerns relating to potential environmental
problems at one of the Affiliated Partnerships. The due diligence
review has also raised questions regarding the interpretation of
certain terms in the leases governing some of the Partnership's and
the Affiliated Partnerships' properties. A very significant tenant
is interpreting certain purchase options contained in its leases in
a way that would cause the value of the properties leased by such
tenant to be significantly below the Cushman & Wakefield appraised
value.
In accordance with the terms of the Merger Agreement, the
General Partners suspended all distributions to Limited Partners;
however, as a result of the unforeseen delays brought about by the
litigation and the due diligence issues highlighted above, the
General Partners felt it was appropriate that an earnings
distribution be made to the Limited Partners. Although the terms
of the Merger Agreement entered into by the Partnership and the
Purchaser provide that the Assets being acquired by the Purchaser
in connection with the Merger include all earnings of the
Partnership from and after August 1, 1996, the Purchaser has agreed
to allow the Partnership to make distributions to the Limited
Partners of net earnings for the period from and after January 1,
1997 until the Merger is consummated. In exchange, the Partnership
has agreed to extend the termination date of the Merger Agreement
to June 30, 1998. It is anticipated that the Merger Agreement will
be extended past June 30, 1998 in the hope that the pending
litigation will be resolved.
Distributions of the Partnership's net earnings for the periods
January 1, 1997 to March 31, 1997, and 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 $534,400, $533,000,
$470,600 and $1,263,500, respectively. In addition, distributions
of approximately $16,100 were paid to various states for income
taxes on behalf of all Limited Partners in 1997.
A cash distribution of the Partnership's net earnings for the
period January 1, 1998 to March 31, 1998 was made to Limited
Partners on May 8, 1998 in the amount of approximately $525,800.
Net earnings accruing after March 31, 1998 through the closing date
will be included with the final cash distribution to the Limited
Partners from the Merger. However, as detailed in "Litigation," by
agreement of the Partnership and the General Partners and pursuant
to a motion of the General Partners, the District Court entered an
order preventing the Partnership and the General Partners from
completing the Merger or otherwise disposing of all or
substantially all of the Partnership's assets until further order
of the Court.
In September 1997, one of the Partnership's properties located
in Elmhurst, Illinois sustained extensive fire damage. The
Partnership is currently negotiating with the insurance company and
the tenant on the disposition of the insurance proceeds and the
lease. The Partnership has received inquires from potential
purchasers regarding this damaged property and is currently
studying all its alternatives.
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. With respect to the pending actions the Partnership and
the General Partners and their named affiliates deny all
allegations set forth in the complaints and are vigorously
defending against such claims.
A. The Dismissed Florida Lawsuit
On September 17, 1996, a lawsuit was filed in the Circuit Court
of the Seventeenth Judicial Circuit in and for Broward County,
Florida, styled Rebecca Scialpi and Helen Friedlander v. Jerome J.
Brault, Brauvin Realty Advisors, Inc., Brauvin Realty Advisors II,
Inc., Brauvin Realty Advisors III, Inc., and Brauvin Realty
Advisors IV, Inc., James L. Brault, and Brauvin Real Estate Funds,
L.L.C. and Brauvin High Yield Fund L.P., Brauvin High Yield Fund
L.P. II, Brauvin Income Plus L.P. III, and Brauvin Corporate Lease
Program IV, L.P., Docket No. 96012807. The Partnership and the
other affiliated partnerships named in this lawsuit (the
"Affiliated Partnerships") that are proposed to be a party to a
merger or sale with the Purchaser, were each named as a "Nominal
Defendant" in this lawsuit. The named plaintiffs were not Limited
Partners in the Partnership. Rather, the named plaintiffs are
limited partners in Brauvin High Yield Fund L.P. II, one of the
Affiliated Partnerships. Jerome J. Brault, the Managing General
Partner of the Partnership, and Brauvin Realty Advisors III, 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 Commission (as defined below)
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. These cross-motions for partial summary
judgement were taken under advisement by the District Court, and
the District Court has yet to issue a ruling.
On April 2, 1997, the Court granted plaintiffs' leave to again
amend their complaint. In their second amended complaint,
plaintiffs named the Partnership as a "Nominal Defendant."
Plaintiffs also added a new claim, alleging that the General
Partners violated certain of the rules of the 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 appellate court's finding that the District
Court's order of January 16, 1998 rendered the appeal moot.
On January 16, 1998, by agreement of the Partnership and the
General 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. Further, the Financial Advisor is to recommend
a strategy and procedure that will allow for the efficient and
expedient disposition of the Partnership's properties. The General
Partners anticipate that the Financial Advisor will make its
recommendations to the Special Master in the second quarter of
1998. The cost to the Partnership for the services of the
Financial Advisor is $110,000 plus reasonable expenses.
C. The Scialpi Illinois Lawsuit
On June 20, 1997, another lawsuit was filed in the United States
District Court for the Northern District of Illinois, styled
Benjamin Siegel, Rebecca Scialpi, Helen Friedlander, and BHS &
Associates, Inc. v. Jerome J. Brault, Brauvin Realty Advisors,
Inc., Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors
III, Inc., Brauvin Realty Advisors IV, Inc., James L. Brault,
Brauvin Real Estate Funds LLC, Brauvin High Yield Fund L.P.,
Brauvin High Yield Fund II L.P., Brauvin Income Plus L.P. III, and
Brauvin Corporate Lease Program IV, L.P., Docket number 97 C 4450.
The Partnership and the Affiliated Partnerships are each named as
"Nominal Defendant" in the lawsuit. Jerome J. Brault and the
Corporate General Partner of the Partnership, as well as the
corporate general partners of the Affiliated Partnerships, have
been named as defendants in this lawsuit. James L. Brault, an
officer of the Corporate General Partner and the son of Jerome J.
Brault, is also named as a defendant.
Notably, the complaint was filed by two of the same parties,
Scialpi and Friedlander, who were plaintiffs in the Florida
lawsuit, which is described above. As also described above,
Scialpi and Friedlander are not limited partners in the
Partnership, but are limited partners in one of the Affiliated
Partnerships, Brauvin High Yield Fund L.P. II. On August 15, 1997,
the plaintiffs filed an amended complaint dropping Benjamin Siegel
as a plaintiff. The plaintiffs are also represented by the same
lawyers that represented them in the Florida lawsuit.
The complaint alleges a putative class action consisting of
claims that certain Commission rules were violated by making false
and misleading statements in the Proxy, the defendants breached
their fiduciary duties and breached the Agreement. The complaint
was consolidated with the Christman lawsuit, which is described
above, pursuant to General Rule 2.31 of the United States District
Court of the Northern District of Illinois. The General Partners
deny these allegations and intend to vigorously defend these
claims. There have been no material developments with respect to
this lawsuit since it was filed on June 20, 1997.
(6) PROPERTY SALE
On March 18, 1998, the Partnership sold approximately .332 acres
of land on which a Steak n Shake restaurant is situated to an
unaffiliated third party for approximately $150,000, resulting in
a gain of approximately $14,600.
<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. Theses 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 October
30, 1989 of 2,500,000 Units. The offering was anticipated to close
on October 29, 1990 but was extended by the General Partners with
the necessary regulatory approval to October 29, 1991. The
Offering was conditioned upon the sale of $1,200,000, which was
achieved on January 15, 1990. The Offering closed on October 29,
1991 with the Partnership raising a cumulative total of
$21,307,600. Until the proxy solicitation process began, the
Partnership continued to raise additional funds through the Plan.
The Plan raised $1,459,119 through March 31, 1998 from Limited
Partners investing their distributions of Operating Cash Flow in
additional Units. As of March 31, 1998, Units valued at $462,972
have been repurchased by the Partnership from Limited Partners
liquidating their investment in the Partnership and have been
retired.
The Partnership purchased the land, buildings and improvements
underlying five Ponderosa restaurants on January 19, 1990, February
16, 1990, March 19, 1990, April 24, 1990 and June 4, 1990,
respectively. In addition, the Partnership closed on the land,
buildings and improvements underlying two Chi-Chi's restaurants;
the first closed on March 12, 1991 and the second closed on March
27, 1991. The land, buildings and improvements underlying an IHOP
restaurant were purchased on April 26, 1991, an Applebee's
restaurant on June 5, 1991 (which was expanded in 1992), two Sports
Unlimited sporting goods stores on September 17, 1991, a Chili's
restaurant on February 7, 1992 and three Steak n Shake restaurants
on April 16, 1992.
On February 7, 1992, the Partnership purchased a 99.5% equity
interest in a joint venture with an affiliate, Brauvin Chili's
Limited Partnership, which owns one Chili's restaurant.
On November 9, 1993, the Partnership purchased a 6.4% interest
in a joint venture with affiliated public real estate limited
partnerships (the "Venture"). The Venture acquired the land and
building underlying a 25,000 square foot CompUSA computer
superstore from an unaffiliated seller.
On October 31, 1996, the Partnership purchased a 34% joint
venture equity interest in a joint venture with affiliated public
real estate limited partnerships, the Brauvin Bay County Venture.
The Bay County Venture purchased real property upon which is
operated a newly constructed Blockbuster video store. The property
contains a 6,466 square foot building located on a 40,075 square
foot parcel of land.
These operating properties are expected to generate cash flow
for the Partnership after deducting certain operating and general
and administrative expenses from their rental income. The
Partnership has no funds available to purchase additional property,
excluding those raised through the Plan.
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 $.2358 $.2396 $.2313 $.2313
May 15 .2390 .2313 .2313
August 15 .2190 -- .2313
November 15 .5665 -- .2313
(a) The 1998 distribution was made on May 8, 1998.
(b) The 1997 distributions were made on March 31, 1997, July 15,
1997, October 22, 1997 and December 31, 1997.
Per the terms of the 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. This distribution will not change the effective sales
price being received by the Partnership through the Merger; it will
only adjust the timing of the payout dollar for dollar based on
these earnings being distributed now. Included in the December 31,
1997 distribution was any prior period earnings including amounts
previously reserved for anticipated closing costs. These reserves
will be re-established by the Partnership as soon as a definitive
closing date is scheduled.
During the three months ended March 31, 1998 and the year
ended December 31, 1997, the General Partners and their affiliates
earned management fees of $5,838 and $23,647, respectively, and
received $15,069 and $0, respectively, in Operating Cash Flow
distributions.
Should the Merger not occur, future increases in the
Partnership's distributions will largely depend on increased sales
at the Partnership's properties resulting in additional percentage
rent and, to a lesser extent, on rental increases, which will occur
due to increases in receipts from certain leases based upon
increases in the Consumer Price Index or scheduled increases of
base rent.
Pursuant to the terms of the Merger Agreement, the Limited
Partners will receive approximately $8.85 per Unit in cash, of this
amount approximately $.27 has already been distributed to the
Limited Partners in the December 31, 1997 distribution. Promptly
upon consummation of the Merger, the Partnership will cease to
exist and the Purchaser, as the surviving entity will succeed to
all of the assets and liabilities of the Partnership. The Limited
Partners holding a majority of the Units approved the Merger on
November 8, 1996.
The Partnership drafted a proxy statement, which required
prior review and comment by the Commission, to solicit proxies for
use at the Special Meeting originally to be held at the offices of
the Partnership on September 24, 1996. As a result of various
pending legal issues, as described in "Legal Proceedings", the
Special Meeting was adjourned to November 8, 1996 at 10:00 a.m.
The purpose of the Special Meeting was to vote upon the Merger and
certain other matters as described in the Proxy.
By approving the Merger, the Limited Partners also approved an
amendment of the Agreement allowing the Partnership to sell or
lease property to affiliates (this amendment, together with the
Merger shall be referred to herein as the "Transaction"). The
Delaware Revised Uniform Limited Partnership Act (the "Act")
provides that a merger must also be approved by the general
partners of a partnership, unless the limited partnership agreement
provides otherwise. Because the Agreement did not address this
matter, at the Special Meeting, Limited Partners holding a majority
of the Units were also 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 is based on the fair market value of the
properties of the Partnership (the "Assets"). Cushman & Wakefield
Valuation Advisory Services ("Cushman & Wakefield"), an independent
appraiser, the largest real estate valuation and consulting
organization in the United States, was engaged by the Partnership
to prepare an appraisal of the Assets, to satisfy the Partnership's
requirements under the Employee Retirement Income Security Act of
1974, as amended. Cushman & Wakefield determined the fair market
value of the Assets to be $19,129,150, or $8.58 per Unit, on April
1, 1996. Subsequently, the Partnership purchased a 34% 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 $8.85 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 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 $0.27 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 properties, the price reflected in the Transaction is believed
by Cushman & Wakefield to be reasonable.
Mr. Jerome J. Brault is the Managing General Partner and
Brauvin Realty Advisors III, Inc. is the Corporate General Partner.
Mr. Cezar M. Froelich resigned his position as an Individual
General Partner of the Partnership effective as of September 17,
1996. The General Partners will not receive any payment in
exchange for the redemption of their general partnership interests
nor will they receive any fees from the Partnership in connection
with the Transaction. The remaining General Partners do not
believe that Mr. Froelich's lack of future involvement will have
any adverse effect on the Partnership.
The Managing General Partner and his son, James L. Brault, an
executive officer of the Corporate General Partner, will have a
minority ownership interest in the Purchaser. Therefore, the
Messrs. Brault have an indirect economic interest in consummating
the Transaction that is in conflict with the economic interests of
the Limited Partners. Mr. Froelich has no affiliation with the
Purchaser.
Although the Special Meeting was held and the necessary
approvals received, the Merger has not been completed primarily due
to the lawsuits that are still pending (see Part II, Item 1). The
General Partners believe that these lawsuits are without merit and,
therefore, continue to vigorously defend against them.
Following receipt of Limited Partner approval, the Purchaser
commenced the finalization of Purchaser's financing and its due
diligence review of the Assets and the assets of the Affiliated
Partnerships. The due diligence process revealed certain concerns
relating to potential environmental problems at one of the
Affiliated Partnerships. The due diligence review has also raised
questions regarding the interpretation of certain terms in the
leases governing some of the Partnership's and the Affiliated
Partnerships' properties. A very significant tenant is
interpreting certain purchase options contained in its leases in a
way that would cause the value of the properties leased by such
tenant to be significantly below the Cushman & Wakefield appraised
value.
In accordance with the terms of the Merger Agreement, the
General Partners suspended all distributions to Limited Partners;
however, as a result of the unforeseen delays brought about by the
litigation and the due diligence issues highlighted above, the
General Partners felt it was appropriate that an earnings
distribution be made to the Limited Partners. Although the terms
of the Merger Agreement entered into by the Partnership and the
Purchaser provides that the assets being acquired by the Purchaser
in connection with the Merger include all earnings of the
Partnership from and after August 1, 1996, the Purchaser has agreed
to allow the Partnership to make distributions to the Limited
Partners of net earnings for the period from and after January 1,
1997 until the merger is consummated. In exchange, the Partnership
has agreed to extend the termination date of the Merger Agreement
to June 30, 1998 to allow the Purchaser time to complete its due
diligence. It is anticipated that the Merger Agreement will be
extended past June 30, 1998 in the hope that the pending litigation
will be resolved.
The litigation has now been pending for approximately 20
months. The suits continue to command the time, attention and
resources of the Partnership. The General Partners believe the
litigation is unfounded and without merit. The delay and expense
of this action continues to frustrate the will and majority vote of
the Limited Partners. Unfortunately, the General Partners are
unable to predict when this matter will be resolved, however, the
delay is having an adverse effect on the Partnership today as well
as on future prospects.
For example, the 1997 distributions were based on the net
earnings of the Partnership for the year ended December 31, 1997.
These distributions were lower than they otherwise would be because
the Partnership has incurred significant legal costs to defend
against the lawsuits. The General Partners anticipate that these
costs will continue as long as the litigation is pending. In
addition, the remaining term on the Partnership's properties'
leases continue to shrink. This fact is causing the Partnership to
potentially face the risks and costs of lease rollover. This
heightened degree of risk may also have an adverse effect on the
ultimate value of the Assets. Further, the Partnership's most
significant tenant, Ponderosa, has recently closed and vacated six
of the Affiliated Partnerships' properties. However, subsequent to
their closings, two properties have been reopened and subleased to
two unrelated local concept restaurant operators and two have been
sold to unaffiliated third parties. Fortunately, none of the
Partnership's properties has been closed, with the exception of the
Elmhurst property (as described below). However, this is the type
of risk the Partnership was seeking to avoid with the successful
completion of the Merger.
In September 1997, one of the Partnership's properties located
in Elmhurst, Illinois sustained extensive fire damage. The
Partnership is currently negotiating with the insurance company and
the tenant on the disposition of the insurance proceeds and the
lease. The Partnership has received inquires from potential
purchasers regarding this damaged property and is currently
studying all its alternatives.
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. Further, the Financial Advisor is to recommend
a strategy and procedure that will allow for the efficient and
expedient disposition of the Partnership's properties. The General
Partners anticipate that the Financial Advisor will make its
recommendations to the Special Master in the second quarter of
1998. The cost to the Partnership for the services of the
Financial Advisor is $110,000 plus reasonable expenses.
Distributions of the Partnership's net earnings for the
periods January 1, 1997 to March 31, 1997, April 1, 1997 to June
30, 1997, July 1, 1997 to September 30, 1997 and October 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 $534,400, $533,000,
$470,600 and $1,263,500, respectively. In addition, distributions
of approximately $16,100 were paid to various states for income
taxes on behalf of all Limited Partners during 1997.
A cash distribution of the Partnership's net earnings for the
period January 1, 1998 to March 31, 1998 was made to Limited
Partners on May 8, 1998 in the amount of approximately $525,800.
Net earnings accruing after March 31, 1998 through the closing date
will be included with the final cash distribution to the Limited
Partners from the Merger. However, as detailed in "Litigation," by
agreement of the Partnership and the General Partners and pursuant
to a motion of the General Partners, the District Court entered an
order preventing the Partnership and the General Partners from
completing the Merger or otherwise disposing of all or
substantially all of the Partnership's assets until further order
of the Court.
Results of Operations - Three months ended March 31, 1998 and 1997
Results of operations for the three months ended March 31,
1998 reflected net income of $425,123 compared to $437,641 for the
three months ended March 31, 1997, a decrease of approximately
$12,500.
Total income for the three months ended March 31, 1998 was
$572,084 as compared to $585,262 for the three months ended March
31, 1997, an decrease of approximately $13,200. The decrease in
total income was mainly due to an decrease in interest income as a
result of decreased cash balances held in 1998 when compared to
1997.
Total expenses for the three months ended March 31, 1998 were
$171,688 as compared to $157,079 for the three months ended March
31, 1997, an increase of approximately $14,600. The increase in
expenses was due to a increase in Transaction costs.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk.
The Partnership does not engage in any hedge transactions or
derivative financial instruments.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
Two legal actions, as hereinafter described, are pending against
the General Partners and affiliates of such General Partners, as
well as against the Partnership on a nominal basis in connection
with the Merger. One additional legal action, which was dismissed
on January 28, 1998, had also been brought against the General
Partners and affiliates of such General Partners, as well as
against the Partnership on a nominal basis in connection with the
Merger. With respect to the pending actions the Partnership and
the General Partners and their named affiliates deny all
allegations set forth in the complaints and are vigorously
defending against such claims.
A. The Dismissed Florida Lawsuit
On September 17, 1996, a lawsuit was filed in the Circuit Court
of the Seventeenth Judicial Circuit in and for Broward County,
Florida, styled Rebecca Scialpi and Helen Friedlander v. Jerome J.
Brault, Brauvin Realty Advisors, Inc., Brauvin Realty Advisors II,
Inc., Brauvin Realty Advisors III, Inc., and Brauvin Realty
Advisors IV, Inc., James L. Brault, and Brauvin Real Estate Funds,
L.L.C. and Brauvin High Yield Fund L.P., Brauvin High Yield Fund
L.P. II, Brauvin Income Plus L.P. III, and Brauvin Corporate Lease
Program IV, L.P., Docket No. 96012807. The Partnership and the
other affiliated partnerships named in this lawsuit (the
"Affiliated Partnerships") that are proposed to be a party to a
merger or sale with the Purchaser, were each named as a "Nominal
Defendant" in this lawsuit. The named plaintiffs were not Limited
Partners in the Partnership. Rather, the named plaintiffs are
limited partners in Brauvin High Yield Fund L.P. II, one of the
Affiliated Partnerships. Jerome J. Brault, the Managing General
Partner of the Partnership, and Brauvin Realty Advisors III, 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 Commission (as defined below)
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. These cross-motions for partial summary
judgement were taken under advisement by the District Court, and
the District Court has yet to issue a ruling.
On April 2, 1997, the Court granted plaintiffs' leave to again
amend their complaint. In their second amended complaint,
plaintiffs named the Partnership as a "Nominal Defendant."
Plaintiffs also added a new claim, alleging that the General
Partners violated certain of the rules of the 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 appellate court's finding that the District
Court's order of January 16, 1998 rendered the appeal moot.
On January 16, 1998, by agreement of the Partnership and the
General 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. Further, the Financial Advisor is to recommend
a strategy and procedure that will allow for the efficient and
expedient disposition of the Partnership's properties. The General
Partners anticipate that the Financial Advisor will make its
recommendations to the Special Master in the second quarter of
1998. The cost to the Partnership for the services of the
Financial Advisor is $110,000 plus reasonable expenses.
C. The Scialpi Illinois Lawsuit
On June 20, 1997, another lawsuit was filed in the United States
District Court for the Northern District of Illinois, styled
Benjamin Siegel, Rebecca Scialpi, Helen Friedlander, and BHS &
Associates, Inc. v. Jerome J. Brault, Brauvin Realty Advisors,
Inc., Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors
III, Inc., Brauvin Realty Advisors IV, Inc., James L. Brault,
Brauvin Real Estate Funds LLC, Brauvin High Yield Fund L.P.,
Brauvin High Yield Fund II L.P., Brauvin Income Plus L.P. III, and
Brauvin Corporate Lease Program IV, L.P., Docket number 97 C 4450.
The Partnership and the Affiliated Partnerships are each named as
"Nominal Defendant" in the lawsuit. Jerome J. Brault and the
Corporate General Partner of the Partnership, as well as the
corporate general partners of the Affiliated Partnerships, have
been named as defendants in this lawsuit. James L. Brault, an
officer of the Corporate General Partner and the son of Jerome J.
Brault, is also named as a defendant.
Notably, the complaint was filed by two of the same parties,
Scialpi and Friedlander, who were plaintiffs in the Florida
lawsuit, which is described above. As also described above,
Scialpi and Friedlander are not limited partners in the
Partnership, but are limited partners in one of the Affiliated
Partnerships, Brauvin High Yield Fund L.P. II. On August 15, 1997,
the plaintiffs filed an amended complaint dropping Benjamin Siegel
as a plaintiff. The plaintiffs are also represented by the same
lawyers that represented them in the Florida lawsuit.
The complaint alleges a putative class action consisting of
claims that certain Commission rules were violated by making false
and misleading statements in the Proxy, the defendants breached
their fiduciary duties and breached the Agreement. The complaint
was consolidated with the Christman lawsuit, which is described
above, pursuant to General Rule 2.31 of the United States District
Court of the Northern District of Illinois. The General Partners
deny these allegations and intend to vigorously defend these
claims. There have been no material developments with respect to
this lawsuit since it was filed on June 20, 1997.
ITEM 2. Changes in Securities.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
On May 15, 1998, B. Allen Aynessazian resigned as Chief Financial
Officer from the Corporate General Partner. Mr. Aynessazian is
returning to Giordano's Enterprises, a privately held restaurant
concern where he worked from 1989 until 1996, prior to joining
the Bruavin organization.
Mr. Aynessazian is being succeeded by Mr. Thomas E. Murphy, age 31.
Mr. Murphy will be the Partnership's Principal Accounting Officer.
He is responsible for the daily operations of the Partnership
accounting and financial reporting to regulatory agencies. Mr.
Murphy received a B.S. degree from Northern Illinois University
in 1988. Prior to joining the Brauvin organization he was in the
accounting department of Zell/Merrill Lynch and First Capital Real
Estate Funds where he was responsible for the preparation of the
accounting and financial reporting for several real estate limited
partnerships and corporations. Mr. Murphy is a Certified Public
Accountant and is a member of the Illinois Certified Public
Accountants Society.
ITEM 6. Exhibits and Reports On Form 8-K.
Exhibit 27. Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
l934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BY: Brauvin Realty Advisors III, Inc.
Corporate General Partner of
Brauvin Income Plus L.P. III
BY: /s/ Jerome J. Brault
Jerome J. Brault
Chairman of the Board of Directors,
President and Chief Executive Officer
DATE: May 15, 1998
BY: /s/ B. Allen Aynessazian
B. Allen Aynessazian
Chief Financial Officer and Treasurer
DATE: May 15, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,104,501
<SECURITIES> 504,023 <F1>
<RECEIVABLES> 58,606
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 18,173,406 <F2>
<DEPRECIATION> 2,735,827
<TOTAL-ASSETS> 17,175,533
<CURRENT-LIABILITIES> 186,132
<BONDS> (651) <F3>
0
0
<COMMON> 16,990,052 <F4>
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 17,175,533
<SALES> 0
<TOTAL-REVENUES> 572,084 <F5>
<CGS> 0
<TOTAL-COSTS> 171,688 <F6>
<OTHER-EXPENSES> (10,113) <F7>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 14,614
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 425,123
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> "SECURITIES" REPRESENTS INVESTMENT IN JOINT VENTURE
<F2> "PP&E" REPRESENTS INVESTMENT IN REAL ESTATE [LAND AND
BUILDING]
<F3> "BONDS" REPRESENTS MINORITY INTEREST IN JOINT VENTURE
<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 AND JOINT
VENTURES' NET INCOME/LOSS
</FN>
</TABLE>
