-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BmauVtYhDwxWdmdKh1g9adgxsUDURF7uKnj8mAkmhVRcgvaKm8Yejm9rIuH48Mi8 l0sdKpRD6TZi5DTNiTdksg== 0000736908-97-000017.txt : 19971117 0000736908-97-000017.hdr.sgml : 19971117 ACCESSION NUMBER: 0000736908-97-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRAUVIN INCOME PLUS L P III CENTRAL INDEX KEY: 0000850142 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE OPERATORS (NO DEVELOPERS) & LESSORS [6510] IRS NUMBER: 363639043 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19219 FILM NUMBER: 97721563 BUSINESS ADDRESS: STREET 1: 150 SOUTH WACKER DRIVE STE 3200 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3124430922 FORMER COMPANY: FORMER CONFORMED NAME: BRAUVIN HIGH INCOME FUND LP III DATE OF NAME CHANGE: 19890921 10-Q 1 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 period ended September 30, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 0-19219 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.) 150 South Wacker Drive, Chicago, Illinois 60606 (Address of principal executive offices) (Zip Code) (312) 443-0922 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . 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 September 30, 1997 and December 31, 1996 . . . . . . . . . . . . . . . 4 Consolidated Statements of Operations for the nine months ended September 30, 1997 and 1996. . . . . . 5 Consolidated Statements of Operations for the three months ended September 30, 1997 and 1996. . . 6 Consolidated Statements of Partners' Capital for the periods January 1, 1996 to September 30, 1997 . 7 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996. . . . . . 8 Notes to Consolidated Financial Statements. . . . . 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 29 PART II Other Information Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 38 Item 2. Changes in Securities . . . . . . . . . . . . . . . 43 Item 3. Defaults Upon Senior Securities . . . . . . . . . . 43 Item 4. Submissions of Matters to a Vote of Security Holders 43 Item 5. Other Information . . . . . . . . . . . . . . . . . 43 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 43 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . 44 PART I - FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements. Except for the December 31, 1996 Consolidated Balance Sheet, the following Consolidated Balance Sheet as of September 30, 1997, Consolidated Statements of Operations for the nine months ended September 30, 1997 and 1996, Consolidated Statements of Operations for the three months ended September 30, 1997 and 1996, Consolidated Statements of Partners' Capital for the periods January 1, 1996 to September 30, 1997 and Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 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 1996 Annual Report on Form 10-K. BRAUVIN INCOME PLUS L.P. III (a Delaware limited partnership) CONSOLIDATED BALANCE SHEETS September 30, December 31, 1997 1996 ASSETS Investment in real estate, at cost: Land $7,845,528 $7,845,528 Buildings and improvements 10,463,264 10,463,264 18,308,792 18,308,792 Less: Accumulated depreciation (2,534,338) (2,254,604) Net investment in real estate 15,774,454 16,054,188 Investment in Joint Ventures (Note 4): Brauvin Gwinnett County Venture 150,418 151,818 Brauvin Bay County Venture 359,217 367,323 Cash and cash equivalents 1,679,504 1,442,263 Rent receivable 2,477 3,318 Deferred rent receivable 51,673 45,201 Prepaid offering costs 70,824 70,824 Other assets -- 2,690 Total Assets $18,088,567 $18,137,625 LIABILITIES AND PARTNERS' CAPITAL LIABILITIES: Accounts payable and accrued expenses $ 75,019 $ 41,591 Tenant security deposit 52,203 273,958 Due to affiliate 1,920 -- Rent received in advance 18,929 62,236 Total Liabilities 148,071 377,785 Minority Interest in Brauvin Chili's Limited Partnership (617) (569) PARTNERS' CAPITAL: General Partners 103,437 78,152 Limited Partners 17,837,676 17,682,257 Total Partners' Capital 17,941,113 17,760,409 Total Liabilities and Partners' Capital $18,088,567 $18,137,625 See accompanying notes to consolidated financial statements. BRAUVIN INCOME PLUS L.P. III (a Delaware limited partnership) CONSOLIDATED STATEMENTS OF OPERATIONS For the Nine Months Ended September 30, 1997 1996 INCOME: Rental $1,732,414 $1,672,755 Interest 54,198 30,774 Other 472 704 Total income 1,787,084 1,704,233 EXPENSES: General and administrative 130,094 120,858 Management fees 17,887 17,234 Transaction costs 123,320 187,303 Valuation fees -- 40,129 Depreciation 279,734 288,733 Total expenses 551,035 654,257 Income before minority interest and equity interest in joint ventures 1,236,049 1,049,976 Minority interest's share in Brauvin Chili's Limited Partnership's net income (387) (423) Equity interest in net income from: Brauvin Bay County Venture 18,414 -- Brauvin Gwinnett County Venture 10,185 10,157 Net income $ 1,264,261 $1,059,710 Net income allocated to the General Partners $ 25,285 $ 21,194 Net income allocated to the Limited Partners $ 1,238,976 $1,038,516 Net income per Unit outstanding (a) $ 0.56 $ 0.47 (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. BRAUVIN INCOME PLUS L.P. III (a Delaware limited partnership) CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended September 30, 1997 1996 INCOME: Rental $602,635 $573,949 Interest 18,929 12,051 Other 178 162 Total income 621,742 586,162 EXPENSES: General and administrative 26,640 41,959 Management fees 5,395 5,631 Transaction costs 52,334 177,435 Valuation fees -- 1,729 Depreciation 93,245 96,244 Total expenses 177,614 322,998 Income before minority interest and equity interest in joint ventures 444,128 263,164 Minority interest's share in Brauvin Chili's Limited Partnership's net income (140) (174) Equity interest in net income from: Brauvin Bay County Venture 6,779 -- Brauvin Gwinnett County Venture 3,434 3,526 Net income $454,201 $266,516 Net income allocated to the General Partners $ 9,084 $ 5,330 Net income allocated to the Limited Partners $445,117 $261,186 Net income per Unit outstanding (a) $ 0.20 $ 0.12 (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. BRAUVIN INCOME PLUS L.P. III (a Delaware limited partnership) CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL For the period January 1, 1996 to September 30, 1997 General Limited Partners Partners* Total Balance, January 1, 1996 $70,772 $17,314,980 $17,385,752 Contributions, net -- 32,715 32,715 Selling commissions and other offering costs -- (8,313) (8,313) Net income 28,422 1,392,697 1,421,119 Cash distributions (21,042) (1,049,822) (1,070,864) Balance, December 31, 1996 78,152 17,682,257 17,760,409 Net income 25,285 1,238,976 1,264,261 Cash distributions -- (1,083,557) (1,083,557) Balance, September 30, 1997 $103,437 $17,837,676 $17,941,113 * Total Units sold at September 30, 1997 and December 31, 1996 were 2,230,375. Cash distributions to Limited Partners per Unit were $0.49 and $0.47 for the nine months ended September 30, 1997 and the year ended December 31, 1996, respectively. Cash distributions to Limited Partners per Unit are based on the average Units outstanding during the 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. BRAUVIN INCOME PLUS L.P. III (a Delaware limited partnership) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 1997 1996 Cash flows from operating activities: Net income $1,264,261 $1,059,710 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 279,734 288,733 Minority interest's share of income from Brauvin Chili's Limited Partnership 387 423 Equity interest in net income from: Brauvin Bay County Venture (18,414) -- Brauvin Gwinnett County Venture (10,185) (10,157) Decrease in rent receivables 841 -- Increase in deferred rent receivable (6,472) (6,472) Decrease in due from affiliates -- 7,301 Decrease (increase) in other assets 2,690 (19,809) Increase in accounts payable and accrued expenses 33,428 92,775 Decrease in tenant security deposits (221,755) -- Increase in due to affiliate 1,920 -- (Decrease) increase in rent received in advance (43,307) 3,762 Net cash provided by operating activities 1,283,128 1,416,266 Cash flows from investing activities: Cash distribution from: Brauvin Bay County Venture 26,520 -- Brauvin Gwinnett County Venture 11,585 11,521 Cash provided by investing activities 38,105 11,521 Cash flows from financing activities: Sale of Units, net of liquidations and selling commissions -- 25,848 Cash distributions to General Partners -- (21,042) Cash distributions to Limited Partners (1,083,557) (1,049,588) Cash distribution to minority interest - Brauvin Chili's Limited Partnership (435) (410) Net cash used in financing activities (1,083,992) (1,045,192) Net increase in cash and cash equivalents 237,241 382,595 Cash and cash equivalents at beginning of period 1,442,263 1,069,555 Cash and cash equivalents at end of period $1,679,504 $1,452,150 See accompanying notes to consolidated financial statements. 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 September 30, 1997 and December 31, 1996, the Partnership has sold $22,766,719 of Units. This total includes $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 September 30, 1997 and December 31, 1996. As of September 30, 1997, 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. 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 June 30, 1997 and December 31, 1996. Accordingly, no impairment loss has been recorded in the accompanying financial statements for the nine months ended September 30, 1997 or the year ended December 31, 1996. Organization and Offering Costs Organization costs represent costs incurred in connection with the organization and formation of the Partnership. Organization costs were amortized over a period of five years using the straight-line method. 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 September 30, 1997, but may not necessarily be indicative of the amounts that the Partnership could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from amounts presented herein. The carrying amounts of the following items are a reasonable estimate of fair value: cash and cash equivalents; rent receivable; accounts payable and accrued expenses; tenant security deposits; due to affiliate; and rent received in advance. Reclassifications Certain reclassifications have been made to the 1996 financial statements to conform to classifications adopted in 1997. (2) PARTNERSHIP AGREEMENT Distributions All Operating Cash Flow, as defined in the Partnership Agreement (the "Agreement") shall be distributed: (a) first, to the Limited Partners until the Limited Partners receive an amount equal to 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 a former General Partner 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 its affiliates for the nine months ended September 30, 1997 and 1996 were as follows: 1997 1996 Selling commissions $ -- $6,867 Management fees 17,887 17,234 Reimbursable operating expenses 79,870 83,800 Legal fees 197 4,229 Acquisition fees -- 19,179 As of September 30, 1997, the Partnership has made all payments to affiliates except for $1,920 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: BRAUVIN GWINNETT COUNTY VENTURE September 30, 1997 December 31, 1996 Land and buildings, net $2,299,014 $2,330,758 Other assets 69,414 59,531 $2,368,428 $2,390,289 Liabilities $ 23,823 $ 23,820 Partners' capital 2,344,605 2,366,469 $2,368,428 $2,390,289 For the nine months ended September 30, 1997 1996 Rental income $205,483 $198,607 Expenses: Depreciation 31,744 34,314 Management fees 2,178 1,656 Operating and administrative 12,424 3,941 46,346 39,911 Net income $159,137 $158,696 BRAUVIN BAY COUNTY VENTURE September 30,1997 December 31, 1996 Land and buildings, net $1,057,470 $1,069,277 Other assets 1,532 13,531 $1,059,002 $1,082,808 Liabilities $ 1,191 $ 1,155 Partners' capital 1,057,811 1,081,653 $1,059,002 $1,082,808 For the nine months ended September 30, 1997 Rental and other income $82,628 Expenses: Depreciation 11,807 Management fees 879 Operating and administrative 15,783 28,469 Net income $54,159 (5) MERGER AND LITIGATION Merger Pursuant to the terms of the an agreement and plan of merger dated as of June 14, 1996, as amended March 24, 1997, June 30, 1997 and September 30, 1997(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 Service ("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. 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. 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 the Affiliated Partnerships. The due diligence review has also raised questions regarding the interpretation of certain terms in the leases governing some of the Partnership's and the Affiliated Partnerships' properties. A very significant tenant is interpreting certain purchase options contained in its leases in a way that would cause the value of the properties leased by such tenant to be significantly below the current appraised value. Members of management of the Partnership and the Affiliated Partnerships have been working with the Purchaser to assess these risks and to resolve them in a way that will allow the Merger and the related transactions to be consummated without any changes to the terms or the Merger price. The Purchaser is continuing to assess certain lease provisions, assess the costs and risks of the litigation discussed below, and finalize its financing in light of these developments. 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 December 31, 1997 to allow the Purchaser time to complete its due diligence. Notwithstanding the extension of the termination date, the Partnership and the Purchaser continue to work through the due diligence issues outlined above, with the intent of closing the merger as soon as possible. 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 were made to the Limited Partners on March 31, 1997 and July 15, 1997, respectively in the amounts of approximately $534,400 and $533,000, respectively. A distribution of the Partnership's net earnings for the period July 1, 1997 to September 30, 1997 was made to the Limited Partners on October 22, 1997 in the amount of approximately $470,600. Net earnings accruing after September 30, 1997 through the closing date will be included with the final cash distribution to the Limited Partners from the Merger. The lawsuit as described below has now been pending for approximately 14 months. The suit continues to command the time, attention and resources of the Partnership. The General Partners believe the lawsuit is unfounded and without merit. The delay and expense of this action continues to frustrate the will and majority vote of the Limited Partners. Unfortunately, the 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 are based on the net earnings of the Partnership for the nine months ended September 30, 1997. These distributions are lower than they otherwise would be because the Partnership has incurred significant legal costs to defend against the lawsuit. 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 seven of the Affiliated Partnerships' properties. Fortunately, none of the Partnership's properties has been closed. However, this is the type of risk the Partnership was seeking to avoid with the successful completion of the Merger. Litigation Three legal actions, as hereinafter described, were filed against the General Partners and affiliates of such General Partners, as well as against the Partnership on a nominal basis in connection with the Merger. Each of these actions was brought by limited partners of the Partnership. The Partnership and the General Partners and their named affiliates deny all allegations set forth in the complaints and are vigorously defending against such claims. A. The Florida Lawsuit On September 17, 1996, a lawsuit was filed in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida, styled Rebecca Scialpi and Helen Friedlander v. Jerome J. Brault, Brauvin Realty Advisors, Inc., Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors III, Inc., and Brauvin Realty Advisors IV, Inc., James L. Brault, and Brauvin Real Estate Funds, L.L.C. and Brauvin High Yield Fund L.P., Brauvin High Yield Fund 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, are each named as a "Nominal Defendant" in this lawsuit. The named plaintiffs are 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, have been named as defendants in this lawsuit. James L. Brault, an officer of the Corporate General Partner and the son of Jerome J. Brault, is also named as a defendant. Plaintiffs filed an amended complaint on October 8, 1996. The amended complaint alleges a purported class action consisting of claims for breach of fiduciary duties, fraud, breach of the Agreement, and civil racketeering. The amended complaint seeks injunctive relief, as well as compensatory and punitive damages, relating to the proposed Transactions with the Purchaser. The defendants have answered plaintiffs' amended complaint, and have denied each of the plaintiffs' allegations of wrongful conduct. On October 2, 1996, the plaintiffs in this action requested that the Circuit Court enjoin the special meetings of the limited partners and the proposed transactions with the Purchaser. This motion was denied by the Circuit Court on October 8, 1996, and the Florida appellate court denied plaintiffs' appeal of the Circuit Court's October 8, 1996 ruling. There have been no material developments with respect to this lawsuit since October 8, 1996. B. The Illinois Christman Lawsuit On September 18, 1996, a class action lawsuit was filed in the United States District Court for the Northern District of Illinois, styled M. Barbara Christman, Joseph Forte, Janet M. Toolson, John Archbold, and Ben O. Carroll v. Brauvin Realty Advisors, Inc., Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors III, Inc., Brauvin Realty Advisors IV, Inc., Jerome J. Brault, Brauvin Real Estate Funds, L.L.C. and Brauvin High Yield Fund L.P., Brauvin High Yield Fund L.P. II, Brauvin Income Plus L.P. III, and Brauvin Corporate Lease Program IV L.P., Docket No. 96C6025. The Partnership and the Affiliated Partnerships are each named as a "Nominal Defendant" in the lawsuit. Jerome J. Brault and the Corporate General Partner of the Partnership, as well as the corporate general partners of the Affiliated Partnerships, are named as defendants. The plaintiffs filed an amended complaint on October 8, 1996, which alleges claims for breach of fiduciary duties, breaches of the Agreement, and violation of the Illinois Deceptive Trade Practices Act. The amended complaint seeks injunctive relief, as well as compensatory and punitive damages, relating to the proposed Transaction with the Purchaser. On October 2, 1996, the District Court certified plaintiffs' proposed class as all of the limited partners of the Partnership and of the Affiliated Partnerships, and appointed plaintiffs' counsel, The Mills Law Firm, as counsel for the class. On October 2, 1996, the District Court also conducted a hearing on plaintiffs' motion to preliminarily enjoin the special meetings of the limited partners and the proposed Transaction with the Purchaser. The District Court denied plaintiffs' motion for a preliminary injunction at the conclusion of the October 2, 1996 hearing. On September 27, 1996, counsel for plaintiffs, The Mills Law Firm, mailed a solicitation to all of the Limited Partners, requesting that they revoke their previously-mailed proxies in favor of the Merger. On October 11, 1996, the 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 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 Court of Appeals subsequently dismissed this appeal on the grounds that the appeal was rendered moot by the Limited Partners' approval November 8, 1996 of the Merger. On October 16, 1996 and on November 6, 1996, the parties filed cross-motions for partial summary judgement addressing the allegation in plaintiffs' amended complaint that the Partnership Agreement does not allow the Limited Partners to vote in favor of or against the proposed Transaction with the Purchaser by proxy. These cross-motions for partial summary judgement were taken under advisement by the District Court, and the District Court has yet to issue a ruling. On April 2, 1997, the Court granted plaintiffs' leave to again amend their complaint. In their second amended complaint, plaintiffs have named the Partnership as a "Nominal Defendant." Plaintiffs have also added a new claim, alleging that the General Partners violated certain of the Commission's rules 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 with the Purchaser. After conducting a lengthy hearing on May 1, 1997, the District Court denied plaintiffs' motion to preliminarily enjoin the closing of the Transaction with the Purchaser. 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 with the Purchaser. This appeal is pending and the parties are currently engaging in discovery. 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 are plaintiffs in the Florida lawsuit, which is described above. As also indicated above, Scialpi and Friedlander are not limited partners of the Partnership, but are limited partners in one of the Affiliated Partnerships, Brauvin High Yield Fund L.P. II. On August 15, 1997 the plaintiffs filed an amended complaint dropping Benjamin Siegel as a plaintiff. The plaintiffs are also represented by the same lawyers that represent them in the Florida lawsuit. Neither the complaint nor the amended complaint has been served upon any of the defendants. The complaint alleges a putative class action consisting of claims that certain Commission rules were violated by making false and misleading statements in the Proxy, the defendants breached their fiduciary duties, and breached the Agreement. The complaint was consolidated with the Christman lawsuit, which is described above, pursuant to General Rule 2.31 of the United States District Court of the Northern District of Illinois, and is presently pending before Judge Gottschall. Pursuant to the Agreement and Delaware law, the Partnership will advance to the defendants their defense costs. The Corporate General Partner has agreed to repay the Partnership for the advances if it is ever determined that the parties were not entitled to receive the advances. No estimate can reasonably be made at this time of any potential liability from the litigation or the costs of defense. (6) SUBSEQUENT EVENT On October 22, 1997, the Partnership paid Limited Partners a distribution that totaled approximately $470,600. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. General Certain statements in this Quarterly Report that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing forward-looking statements may be found in this section. Without limiting the foregoing, words such as "anticipates," "expects,""intends,""plans" and similar expressions are intended to identify forward-looking statements. These statements are subject to a number of risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The Partnership undertakes no obligation to update these forward-looking statements to reflect future events or circumstances. Liquidity and Capital Resources The Partnership commenced an offering to the public on 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 as of September 30, 1997 and December 31, 1996 from Limited Partners investing their distributions of Operating Cash Flow in additional Units, which process was discontinued when the proxy solicitation process began. As of September 30, 1997 and December 31, 1996, 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 Brauvin 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 1997 (a) 1996 1995 1994 February 15 $.2396 $.2313 $.2313 $.2250 May 15 .2390 .2313 .2313 .2250 August 15 .2109 -- .2313 .2250 November 15 -- -- .2313 .2313 (a) The 1997 distributions were made on March 31, 1997, July 15, 1997 and October 22, 1997. 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. 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 of the Partnership. Such approval was also received. 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. 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. 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. The General Partners of the Partnership are Mr. Jerome J. Brault, the Managing General Partner, and Brauvin Realty Advisors III, Inc., 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 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 has revealed certain concerns relating to potential environmental problems at one of the the Affiliated Partnerships. The due diligence review has also raised questions regarding the interpretation of certain terms in the leases governing some of the Partnership's and the Affiliated Partnerships' properties. A very significant tenant is interpreting certain purchase options contained in its leases in a way that would cause the value of the properties leased by such tenant to be significantly below the current appraised value. Members of management of the Partnership and the Affiliated Partnerships have been working with the Purchaser to assess these risks and to resolve them in a way that will allow the Merger and the related transactions to be consummated without any changes to the terms or the Merger price. The Purchaser is continuing to assess certain lease provisions, assess the costs and risks of the litigation discussed below, and finalize its financing in light of these developments. 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 December 31, 1997 to allow the Purchaser time to complete its due diligence. Notwithstanding the extension of the termination date, the Partnership and the Purchaser continue to work through the due diligence issues outlined above, with the intent of closing the Merger as soon as possible. Net earnings accruing after September 30, 1997 through the closing date will be included with the final cash distribution to the Limited Partners from the Merger. 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 were made to the Limited Partners on March 31, 1997 and July 15, 1997, respectively in the amounts of approximately $534,400 and $533,000. A distribution of the Partnership's net earnings for the period July 1, 1997 to September 30, 1997 was made to the Limited Partners on October 22, 1997 in the amount of approximately $470,600. The litigation has now been pending for approximately 14 months. The suits continues 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 are based on the net earnings of the Partnership for the nine months ended September 30, 1997. These distributions are 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 seven of the Affiliated Partnerships' properties. Fortunately, none of the Partnership's properties has been closed. 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 tenant continues to fulfill its rental obligations. Further the Partnership has received inquires from potential purchasers regarding this damaged property. The Partnership is currently studying all its alternatives regarding this property. Results of Operation - Nine months ended September 30, 1997 and 1996 Results of operations for the nine months ended September 30, 1997 reflected net income of $1,264,261 compared to $1,059,710 for the nine months ended September 30, 1996, an increase of approximately $204,600. Total income for the nine months ended September 30, 1997 was $1,787,084 as compared to $1,704,233 for the nine months ended September 30, 1996, an increase of approximately $82,900. The increase in total income was due primarily to an increase in rental income as a result of increased percentage rents. Also adding to the increase in total income was an increase in interest income as a result of increased cash balances in 1997. Total expenses for the nine months ended September 30, 1997 was $551,035 as compared to $654,257 for the nine months ended September 30, 1996, a decrease of approximately $103,200. The decrease in expenses was primarily the result of a decrease in transaction costs and valuation fees. Partially offsetting this decrease in expenses was an increase in general and administrative expenses associated with the Partnership's attempt to resolve some of the due diligence issues and related items associated with the Merger, as discussed above. Results of Operations - Three months ended September 30, 1997 and 1996 Results of operations for the three months ended September 30, 1997 reflected net income of $454,201 compared to $266,516 for the three months ended September 30, 1996, an increase of approximately $187,700. Total income for the three months ended September 30, 1997 was $621,742 as compared to $586,162 for the three months ended September 30, 1996, an increase of approximately $35,600. The increase in total income was mainly due to an increase in rental income as a result of increased percentage rents. Also adding to the increase in total income was an increase in interest income as a result of increased cash balances in 1997. Total expenses for the three months ended September 30, 1997 was $177,614 as compared to $322,998 for the three months ended September 30, 1996, a decrease of approximately $145,400. The decrease in expenses was primarily the result of a decrease in transaction costs related to the Merger Agreement of approximately $125,100. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. Three legal actions, as hereinafter described, were filed against the General Partners of the Partnership and affiliates of such General Partners, as well as against the Partnership on a nominal basis in connection with the Merger. Each of these actions was brought by limited partners of the Partnership. The Partnership and the General Partners and their named affiliates deny all allegations set forth in the complaints and are vigorously defending against such claims. A. The Florida Lawsuit On September 17, 1996, a lawsuit was filed in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida, styled Rebecca Scialpi and Helen Friedlander v. Jerome J. Brault, Brauvin Realty Advisors, Inc., Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors III, Inc., and Brauvin Realty Advisors IV, Inc., James L. Brault, and Brauvin Real Estate Funds, L.L.C. and Brauvin High Yield Fund L.P., Brauvin High Yield Fund 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, are each named as a "Nominal Defendant" in this lawsuit. The named plaintiffs are 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, have been named as defendants in this lawsuit. James L. Brault, an officer of the Corporate General Partner and the son of Jerome J. Brault, is also named as a defendant. Plaintiffs filed an amended complaint on October 8, 1996. The amended complaint alleges a purported class action consisting of claims for breach of fiduciary duties, fraud, breach of the Agreement, and civil racketeering. The amended complaint seeks injunctive relief, as well as compensatory and punitive damages, relating to the proposed transactions with the Purchaser. The defendants have answered plaintiffs' amended complaint, and have denied each of the plaintiffs' allegations of wrongful conduct. On October 2, 1996, the plaintiffs in this action requested that the Circuit Court enjoin the special meetings of the limited partners and the proposed transactions with the Purchaser. This motion was denied by the Circuit Court on October 8, 1996, and the Florida appellate court denied plaintiffs' appeal of the Circuit Court's October 8, 1996 ruling. There have been no material developments with respect to this lawsuit since October 8, 1996. B. The Illinois Christman Lawsuit On September 18, 1996, a class action lawsuit was filed in the United States District Court for the Northern District of Illinois, styled M. Barbara Christman, Joseph Forte, Janet M. Toolson, John Archbold, and Ben O. Carroll v. Brauvin Realty Advisors, Inc., Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors III, Inc., Brauvin Realty Advisors IV, Inc., Jerome J. Brault, Brauvin Real Estate Funds, L.L.C. and Brauvin High Yield Fund L.P., Brauvin High Yield Fund L.P. II, Brauvin Income Plus L.P. III, and Brauvin Corporate Lease Program IV L.P., Docket No. 96C6025. The Partnership and the Affiliated Partnerships are each named as a "Nominal Defendant" in the lawsuit. Jerome J. Brault and the Corporate General Partner of the Partnership, as well as the corporate general partners of the Affiliated Partnerships, are named as defendants. The plaintiffs filed an amended complaint on October 8, 1996, which alleges claims for breach of fiduciary duties, breaches of the Agreement, and violation of the Illinois Deceptive Trade Practices Act. The amended complaint seeks injunctive relief, as well as compensatory and punitive damages, relating to the proposed transaction with the Purchaser. On October 2, 1996, the District Court certified plaintiffs' proposed class as all of the limited partners of the Partnership and of the Affiliated Partnerships, and appointed plaintiffs' counsel, The Mills Law Firm, as counsel for the class. On October 2, 1996, the District Court also conducted a hearing on plaintiffs' motion to preliminarily enjoin the special meetings of the limited partners and the proposed Transaction with the Purchaser. The District Court denied plaintiffs' motion for a preliminary injunction at the conclusion of the October 2, 1996 hearing. On September 27, 1996, counsel for plaintiffs, The Mills Law Firm, mailed a solicitation to all of the Limited Partners, requesting that they revoke their previously-mailed proxies in favor of the Merger. On October 11, 1996, the 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 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 Court of Appeals subsequently dismissed this appeal on the grounds that the appeal was rendered moot by the Limited Partners' approval November 8, 1996 of the Merger. On October 16, 1996 and on November 6, 1996, the parties filed cross-motions for partial summary judgement addressing the allegation in plaintiffs' amended complaint that the Partnership Agreement does not allow the Limited Partners to vote in favor of or against the proposed Transaction with the Purchaser by proxy. These cross-motions for partial summary judgement were taken under advisement by the District Court, and the District Court has yet to issue a ruling. On April 2, 1997, the Court granted plaintiffs' leave to again amend their complaint. In their second amended complaint, plaintiffs have named the Partnership as a "Nominal Defendant." Plaintiffs have also added a new claim, alleging that the General Partners violated certain of the Commission's rules 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 with the Purchaser. After conducting a lengthy hearing on May 1, 1997, the District Court denied plaintiffs' motion to preliminarily enjoin the closing of the Transaction with the Purchaser. 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 with the Purchaser. This appeal is pending and the parties are currently engaging in discovery. 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 are plaintiffs in the Florida lawsuit, which is described above. As also indicated above, Scialpi and Friedlander are not limited partners of the Partnership, but are limited partners in one of the Affiliated Partnerships, Brauvin High Yield Fund L.P. II. On August 15, 1997 the plaintiffs filed an amended complaint dropping Benjamin Siegel as a plaintiff. The plaintiffs are also represented by the same lawyers that represent them in the Florida lawsuit. Neither the complaint nor the amended complaint has been served upon any of the defendants. The complaint alleges a putative class action consisting of claims that certain Commission rules were violated by making false and misleading statements in the Proxy, the defendants breached their fiduciary duties, and breached the Agreement. The complaint was consolidated with the Christman lawsuit, which is described above, pursuant to General Rule 2.31 of the United States District Court of the Northern District of Illinois, and is presently pending before Judge Gottschall. Pursuant to the Agreement and Delaware law, the Partnership will advance to the defendants their defense costs. The Corporate General Partner has agreed to repay the Partnership for the advances if it is ever determined that the parties were not entitled to receive the advances. No estimate can reasonably be made at this time of any potential liability from the litigation or the costs of defense. ITEM 2. Changes in Securities. None. ITEM 3. Defaults Upon Senior Securities. None. ITEM 4. Submission of Matters to a Vote of Security Holders. None. ITEM 5. Other Information. None. ITEM 6. Exhibits and Reports On Form 8-K. Exhibit 27. Financial Data Schedule 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: November 14, 1997 BY: /s/ B. Allen Aynessazian B. Allen Aynessazian Chief Financial Officer and Treasurer DATE: November 14, 1997 EX-27 2
5 9-MOS DEC-31-1997 SEP-30-1997 1,679,504 509,635 54,150 0 0 0 18,308,792 2,534,338 18,088,567 148,071 0 0 0 17,941,113 0 18,088,567 0 1,787,084 0 551,035 (28,212) 0 0 0 0 0 0 0 0 1,264,261 0 0 "SECURITIES" REPRESENTS INVESTMENT IN JOINT VENTURE "PP&E" REPRESENTS INVESTMENT IN REAL ESTATE [LAND AND BUILDING] "COMMON" REPRESENTS TOTAL PARTNERS CAPITAL "TOTAL REVENUES" REPRESENTS RENTAL, INTEREST, AND OTHER INCOME "TOTAL COSTS" REPRESENTS TOTAL EXPENSES "OTHER EXPENSES" REPRESENTS MINORITY INTEREST AND JOINT VENTURES' NET INCOME/LOSS
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