-----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, OGi6+gRIrcpM+rB6wq2xh3Bq+sgvkeOdMPeaT+gWW4KT1R3G/rcDMFMFAD7jVIs0 AQ7LN7WSydeT4hRcpiam9g== 0000878657-99-000002.txt : 19990416 0000878657-99-000002.hdr.sgml : 19990416 ACCESSION NUMBER: 0000878657-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRAUVIN HIGH YIELD FUND L P II CENTRAL INDEX KEY: 0000832775 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 363580153 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-17556 FILM NUMBER: 99595037 BUSINESS ADDRESS: STREET 1: BRAUVIN REAL ESTATE FUNDS STREET 2: 30 N LASALLE ST STE 3100 CITY: CHICAGO STATE: IL ZIP: 60602 BUSINESS PHONE: 3124430922 MAIL ADDRESS: STREET 1: BRAUVIN REAL ESTATE FUNDS STREET 2: 30 N LASALLE ST STE 3100 CITY: CHICAGO STATE: IL ZIP: 60602 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 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 0-17556 Brauvin High Yield Fund L.P. II (Exact name of registrant as specified in its charter) Delaware 36-358013 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30 North LaSalle Street, Chicago, Illinois 60602 (Address of principal executive offices) (Zip Code) (312) 759-7660 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Interests (Title of class) 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 . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ X ] The aggregate sales price of the limited partnership interests of the registrant (the "Units") to unaffiliated investors of the registrant during the initial offering period was $38,923,000. This does not reflect market value. This is the price at which the Units were sold to the public during the initial offering period. There is no current market for the Units nor have any Units been sold within the last 60 days prior to this filing except for Units sold to or by the registrant pursuant to the registrant's distribution reinvestment plan as described in the prospectus of the registrant dated June 17, 1988, as supplemented (the "Prospectus"). Portions of the Prospectus of the registrant dated June 17, 1988, as supplemented July 12, 1988, March 1, 1989, April 28, 1989, and June 7, 1989 and filed pursuant to Rule 424(b) and Rule 424(c)under the Securities Act of 1933, as amended, are incorporated by reference into Parts II, III and IV of this Annual Report on Form 10-K. BRAUVIN HIGH YIELD FUND L.P. II 1998 FORM 10-K ANNUAL REPORT INDEX PART I Page Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . .6 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 23 Item 4. Submission of Matters to a Vote of Security Holders . . . . . 29 PART II Item 5. Market for the Registrant's Units and Related Security Holder Matters . . . . . . . . . . . . . . . . . . . 30 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . 31 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 33 Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . 45 Item 8. Consolidated Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . .. . . 45 PART III Item 10. Directors and Executive Officers of the Partnership . . . . . 46 Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . 48 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . 50 Item 13. Certain Relationships and Related Transactions. . . . . . . . 50 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . 51 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 BRAUVIN HIGH YIELD FUND II (a Delaware limited partnership) PART I Item 1.Business. Brauvin High Yield Fund L.P. II (the "Partnership") is a Delaware limited partnership formed in May 1988 for the purpose of acquiring debt-free ownership of existing, free-standing, income-producing retail, office or industrial real estate properties predominantly all of which would involve "triple-net" leases. It was anticipated at the time the Partnership first offered its Units (as defined below) that a majority of these properties would be leased to operators of national franchise fast food and sit-down restaurants, automotive service businesses and convenience stores, as well as banks and savings and loan branches. The leases would provide for a base minimum annual rent and increases in rent such as through participation in gross sales above a stated level, fixed increases on specific dates or indexation of rent to indices such as the Consumer Price Index. The Partnership sold $38,923,000 of limited partnership interests (the "Units") commencing June 17, 1988, pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933, as amended, to the public at a price of $1,000 per Unit (the "Offering"). The Offering closed on September 30, 1989. The investors in the Partnership (the "Limited Partners") share in the benefits of ownership of the Partnership's real property investments according to the number of Units each owns. An additional $4,059,178 of Units have been purchased by Limited Partners investing their distributions of Operating Cash Flow in the Partnership's distribution reinvestment plan (the "Plan") through December 31, 1998. These Units were purchased from the Units reserved for the Plan after termination of the Offering. These Units were issued at the Offering price per Unit, less any amounts per Unit of the Offering price that have been returned to participants. Of the Units issued under the Plan as of December 31, 1998, $2,886,915 have been repurchased by the Partnership from investors liquidating their investment and have been retired. The principal investment objectives of the Partnership are: (i) distribution of current cash flow from the Partnership's cash flow attributable to rental income; (ii) capital appreciation; (iii) preservation and protection of capital; (iv) the potential for increased income and protection against inflation through escalation in the base rent or participation and growth in the sales of the lessees of the Partnership's properties; (v) the partial shelter of cash distributions for Taxable Class Limited Partners; and (vi) the production of "passive" income to offset "passive" losses from other investments. Some tax shelter of cash distributions by the Partnership will be available to Taxable Class Limited Partners through depreciation of the underlying properties. Taxable Class Limited Partners will benefit from the special allocation of all depreciation to the Units which they acquired from the Partnership because their reduced taxable income each year will result in a reduction in taxes due, although no "spill-over" losses are expected. Taxable income generated by property operations will likely be considered passive income for federal income tax purposes because Section 469(c)(2) of the Internal Revenue Code states that a passive activity includes "any rental activity" and, therefore, is available to offset losses Taxable Class Limited Partners may have realized in other passive investments. It was originally contemplated that the Partnership would dispose of its properties approximately six to nine years after their acquisition with a view towards liquidation of the Partnership within that period. In accordance therewith, the Partnership entered into an agreement and plan of merger dated as of June 14, 1996, as amended March 24, 1997, June 30, 1997, September 30, 1997, December 31, 1997, March 31, 1998 and June 30, 1998 (the "Merger Agreement"). The Partnership proposed to merge with and into Brauvin Real Estate Funds, L.L.C., a Delaware limited liability company affiliated with certain of the General Partners (the "Purchaser") through a merger (the "Merger") of its Units. Although the Merger will not be consummated, the following text describes the transaction. Promptly upon consummation of the Merger, the Partnership would have ceased to exist and the Purchaser, as the surviving entity, would succeed to all of the assets and liabilities of the Partnership. The Limited Partners holding a majority of the Units voted to approve the Merger on November 8, 1996. The Limited Partners also voted to approve 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"). However, as described below, on August 12, 1998, the District Court in the Christman litigation (as defined below) granted plaintiffs motion for partial summary judgement, holding that the Partnership Agreement did not allow the Limited Partners to vote in favor or against the Transaction. The redemption price to be paid to the Limited Partners in connection with the Merger was based on the fair market value of the properties of the Partnership (the "Assets"). Cushman & Wakefield Valuation Advisory Services ("Cushman & Wakefield"), an independent appraiser, the largest real estate valuation and consulting organization in the United States, was engaged by the Partnership to prepare an appraisal of Assets, to satisfy the Partnership's requirements under the Employee Retirement Income Security Act of 1974, as amended. Cushman & Wakefield determined the fair market value of the Assets at April 1, 1996 to be $30,183,300, or $748.09 per Unit. Subsequently, the Partnership purchased a 26% interest in Brauvin Bay County Venture. Based on the terms of the Merger Agreement, the fair market value of the Assets will be increased by the amount of the investment in Brauvin Bay County Venture, and correspondingly, the Partnership's cash holdings were reduced by the same amount and, therefore, the total redemption amount would remain unchanged. The redemption price of $779.22 per Unit also included all remaining cash of the Partnership, less net earnings of the Partnership from and after August 1, 1996 through December 31, 1996, less the Partnership's actual costs incurred and accrued through the effective time at the filing of the certificate of merger, including reasonable reserves in connection with: (i) the proxy solicitation; (ii) the Transaction (as detailed in the Merger Agreement); and (iii) the winding up of the Partnership, including preparation of the final audit, tax return and K-1s (collectively, the "Transaction Costs") and less all other Partnership obligations. Of the original cash redemption amount, approximately $31.13 was distributed to the Limited Partners in the December 31, 1997 distribution. The General Partners were not to receive any payment in exchange for the redemption of their general partnership interests nor would they have received any fees from the Partnership in connection with the Transaction. The Managing General Partner and his son, James L. Brault, an executive officer of the Corporate General Partner, were to have a minority ownership interest in the Purchaser. The Merger was not completed primarily due to certain litigation, as described below, that was still pending at December 31, 1998. The General Partners believe that these lawsuits are without merit and, therefore, continue to vigorously defend against them. However, because of the August 12, 1998 rulings of the District Court in the Christman Litigation, as described in Item 3, it is not possible for the Merger to be consummated. The terms of the transactions between the Partnership and affiliates of the General Partners are set forth in Item 13 below. Reference is hereby made for a description of such terms and transactions. The restated limited partnership agreement of the Partnership (the "Agreement") provides that the Partnership shall terminate December 31, 2025, unless sooner terminated pursuant to its terms. The Partnership has no employees. As the result of a property sale by Brauvin High Yield Venture a return of capital distribution was made to Limited Partners on May 8, 1998 in the amount of approximately $743,000. Additionally, on August 15, 1998, a return of capital distribution was made to Limited Partners in the amount of approximately $611,500 from the sale of the Ponderosa located in Sweden, New York. Market Conditions/Competition The Partnership has utilized its proceeds available for investment towards the acquisition of properties. Since the leases at certain of the Partnership's properties entitle the Partnership to participate in gross receipts of lessees above fixed minimum amounts, the success of the Partnership will depend in part on the ability of those lessees to compete with similar businesses in their respective vicinities. Item 2. Properties. The Partnership is landlord only and does not participate in the operations of any of the properties discussed herein. All properties are occupied and all lease payments to the Partnership are current with the exception of the former Hardee's restaurant located in Albion, Michigan; the Ponderosa restaurants in Joliet, Illinois, Bloomington, Illinois, Pendleton Pike, Indiana and Tipp City, Ohio are unoccupied but continue to pay rent to the Partnership per the terms of the leases. All properties were paid for in cash, without any financing. The General Partners believe that the Partnership's properties are adequately insured. The following is a summary of the real estate and improvements, of each of the Ponderosa restaurants, the two Taco Bell restaurants, the Scandinavian Health Spa, the three Children's World Learning Centers, the three Avis Lubes, the Hardee's restaurant, the Blockbuster Video store, the three Chi-Chi's restaurants, the St. Johns, Michigan property and the Albion, Michigan property. No property had a cost basis in excess of 10% of the gross proceeds of the Offering or had rental income in excess of 10% of the total rental income of the Partnership. Ponderosas: Rockford, Illinois Unit 112 is located at 3725 East State Street. The building, built in 1969, consists of 5,930 square feet situated on a 31,476 square foot parcel. The building was constructed utilizing wood siding over concrete block. In June 1997, Ponderosa closed and vacated this restaurant. Ponderosa, in accordance with the lease, continued to pay rent and certain occupancy costs for this property. In September 1997, Ponderosa and the Partnership agreed to sub-lease this property to a local tenant. Ponderosa continues to remain responsible to the Partnership for all rent and certain occupancy expenses through the original lease term. During the third quarter of 1998, the Partnership recorded an impairment of $64,000 related to an other than temporary decline in the value of real estate for the Ponderosa located in Rockford, Illinois. This allowance has been recorded as a reduction of the property's cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). Bloomington, Illinois Unit 128 is located at 1329 East Empire Street. The building, built in 1970, consists of 4,608 square feet situated on a 60,725 square foot parcel. The building was constructed utilizing wood siding over concrete block. Ponderosa closed this facility on May 26, 1997, but continues to pay rent to the Partnership per the terms of lease. During the third quarter of 1998, the Partnership recorded an impairment of $141,000 related to an other than temporary decline in the value of real estate for the Ponderosa located in Bloomington, Illinois. This allowance has been recorded as a reduction of the property's cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). Orchard Park, New York Unit 728 is located at 3019 Union Road. The building, built in 1980, consists of 5,600 square feet situated on a 75,000 square foot parcel. The building was constructed utilizing wood siding over concrete block. In July 1995, Metromedia, the parent of Ponderosa, closed the Orchard Park, New York restaurant. In exchange for the closed Ponderosa, the Partnership agreed to accept the building and land underlying a Tony Roma's restaurant. The Tony Roma property is located at 3780 Towne Crossing Boulevard in Mesquite, Texas. The building, built in 1984, consists of 5,600 square feet situated on a 49,810 square foot parcel of land. The Tony Roma's restaurant provides additional base rent of approximately $2,000 per year plus percentage rents and future rent escalations upon exercise of lease renewals. Oneonta, New York Unit 740 is located at 333 Chestnut. The building, built in 1979, consists of 5,250 square feet situated on a 61,600 square foot parcel. The building was constructed utilizing wood siding over concrete block and facebrick. During the third quarter of 1998, the Partnership recorded an impairment of $89,000 related to an other than temporary decline in the value of real estate for the Ponderosa located in Oneonta, New York. This allowance has been recorded as a reduction of the property's cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). The tenant has given the Partnership notice of its intent to purchase the property under the tenant's existing purchase options contained within the lease. The purchase price of the property will be based on the appraised value of the asset. Middletown, New York Unit 779 is located at 163 Dolson Avenue. The building, built in 1980, consists of 6,120 square feet situated on a 71,708 square foot parcel. The building was constructed utilizing stained wood veneer and flagstone. The tenant has given the Partnership notice of its intent to purchase the property under the tenant's existing purchase options contained within the lease. The purchase price of the property will be based on the appraised value of the asset. Joliet, Illinois Unit 129 is located at 2200 West Jefferson Street. The building, built in 1970, consists of 4,500 square feet situated on a 57,000 square parcel. The building was constructed utilizing brick and wood siding. This Ponderosa was received in exchange for Ponderosa Unit 1055 in Apopka, Florida, an original purchase of the Partnership, in December 1994. In June 1995, Metromedia, the parent of Ponderosa, closed the Joliet, Illinois Ponderosa with the intent of converting the site into a Bennigan's restaurant. Subsequently, Metromedia changed its position and with the approval of the Partnership has subleased this space to Texas Steakhouse, Inc. In 1998, Texas Steakhouse closed this facility, but Ponderosa is still responsible to the Partnership under the terms of the original lease. During the third quarter of 1998, the Partnership recorded an impairment of $90,000 related to an other than temporary decline in the value of real estate for the Ponderosa located in Joliet, Illinois. This allowance has been recorded as a reduction of the property's cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). Franklin, Ohio Unit 1071 is located at 3320 Village Drive. The building, built in 1987, consists of 4,550 square feet situated on a 9,242 square foot parcel. The building was constructed utilizing wood siding over concrete block. During the third quarter of 1998, the Partnership recorded an impairment of $7,000 related to an other than temporary decline in the value of real estate for the Ponderosa located in Franklin, Ohio. This allowance has been recorded as a reduction of the property's cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). Herkimer, New York Unit 665 is located at the corner of State and King Streets. The building, built in 1979 and remodeled in 1988, consists of 5,817 square feet situated on a 44,932 square foot parcel. The building was constructed using wood siding over concrete block and face brick. Sweden, New York Unit 876 is located at 6460 Brockport-Spencerport Road. The building, built in 1981 and remodeled in 1987, consists of 5,400 square feet situated on a 47,500 square foot parcel. The building was constructed using wood paneling over concrete block. During the first quarter of 1998, the Partnership recorded an impairment of $130,000 related to an other than temporary decline in the value of real estate for the Ponderosa located in Sweden, New York. This allowance has been recorded as a reduction of the property's cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). On October 31, 1996, the Partnership's property was damaged by a fire. As a result of this casualty, Ponderosa terminated its lease at this property as of December 31, 1996. The Partnership is contesting this lease termination. Subsequent to the lease termination, no rents have been received for this property. The Partnership has received $199,452 in initial insurance proceeds to repair the fire damaged property. In addition, the Partnership received, in the first quarter of 1999, $50,000 in additional insurance proceeds. In April 1998, Ponderosa unit 876 was sold by the Partnership. This closed property was sold to an unaffiliated third party for approximately $425,000. In addition, as a result of the sale, the Partnership transferred the undisbursed insurance proceeds of $199,452 from its reserve account to its general cash account. The sale resulted in a loss to the Partnership of approximately $130,000, which was recognized as a provision for impairment during the first quarter of 1998. The Partnership is continuing to pursue its lawsuit against the former tenant for lost rents. Appleton, Wisconsin Unit 182 is located at 130 South Bluemond Road. The building, built in 1969 and renovated in 1986, is a one-story, 5,400 square foot building constructed with stucco and painted concrete block with wood trim over wood frame on an approximately 54,450 square foot site. During the third quarter of 1998, the Partnership recorded an impairment of $202,000 related to an other than temporary decline in the value of real estate for the Ponderosa located in Appleton, Wisconsin. This allowance has been recorded as a reduction of the property's cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). The tenant has given the Partnership notice of its intent to purchase the property under the tenants existing purchase options contained within the lease. The purchase price of the property will be based on the appraised value of the asset. Dublin, Ohio Unit 347 is located at 1671 East Dublin-Granville Road. The building, built in 1973 and renovated in 1987, is a one-story, 5,360 square foot building constructed with wood siding over wood frame on an approximately 47,000 square foot site. In June 1997, Ponderosa closed and vacated this restaurant. Ponderosa, in accordance with the lease, continued to pay rent and certain occupancy costs for this property. In October 1997, Ponderosa and the Partnership agreed to sub-lease this property to a local tenant. Ponderosa continues to remain responsible to the Partnership for all rent and certain occupancy expenses through the original lease term. Penfield, New York Unit 755 is located at 1610 Penfield Road. The building, built in 1981 and renovated in 1987, is a one-story, 5,400 square foot building constructed with vinyl siding over wood frame on an approximately 54,900 square foot site. Pendleton Pike, Indiana Unit 816 is located at 8502 Pendleton Pike. The building, built in 1984 and renovated in 1987, is a one-story, 5,400 square foot building constructed with a prefab stucco facade with an atrium front and wood panels on the sides of the building on an approximately 95,000 square foot site. During the third quarter of 1998, the Partnership recorded an impairment of $127,000 related to an other than temporary decline in the value of real estate for the Ponderosa located in Pendelton Pike, Indiana. This allowance has been recorded as a reduction of the property's cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). During the first quarter of 1999, Ponderosa closed this facility, but remains current on all of its lease obligations. Eureka, Missouri Unit 857 is located at 80 Hilltop Village Center. The building, built in 1981 and renovated in 1986, is a one-story, 5,360 square foot building constructed with wood over wood frame on an approximately 71,400 square foot site. The tenant has given the Partnership notice of its intent to purchase the property under the tenant's existing purchase options contained within the lease. The purchase price of the property will be based on the appraised value of the asset. Joint Venture Ponderosas: The Partnership has a 99% interest in a Joint Venture with an affiliated public real estate limited partnership that acquired the following six Ponderosas: Louisville, Kentucky Unit 110 is located at 4801 Dixie Highway. The building, built in 1969, consists of 5,100 square feet situated on a 62,496 square foot parcel. The building was constructed utilizing wood siding over concrete block with flagstone. Cuyahoga Falls, Ohio Unit 268 is located at 1641 State Road. The building, built in 1973, consists of 5,587 square feet situated on a 40,228 square foot parcel. The building was constructed utilizing wood siding over concrete block. In September 1997, Ponderosa and the Partnership agreed to sub- lease this property to a local franchisee. Ponderosa continues to remain responsible to the Partnership for all rent and certain occupancy expenses through the original lease term. During the third quarter of 1998, the Partnership recorded an impairment of $8,000 related to an other than temporary decline in the value of real estate for the Ponderosa located in Cuyahoga Falls, Ohio. This allowance has been recorded as a reduction of the property's cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). Tipp City, Ohio Unit 785 is located at 135 South Garber. The building, built in 1980, consists of 6,080 square feet situated on a 53,100 square foot parcel. The building was constructed utilizing wood siding over concrete block. Ponderosa closed this facility on June 1, 1997, but continues to pay rent to the Partnership per the terms of lease. In April of 1999, the property was subleased to an operator of a sports bar concept through the remaining term of the original lease. The original tenant remains fully liable under the terms of the original lease through maturity. In April 1999, the Partnership agreed to a sublease of this facility to Bullie's Sports Bar & Grill, Inc. During the third quarter of 1998, the Partnership recorded an impairment of $130,000 related to an other than temporary decline in the value of real estate for the Ponderosa located in Tipp City, Ohio. This allowance has been recorded as a reduction of the property's cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). Mansfield, Ohio Unit 850 is located at 1075 Ashland Road. The building, built in 1980, consists of 5,600 square feet situated on a 104,500 square foot parcel. The building was constructed utilizing wood siding over concrete block and flagstone. In January 1998, the joint venture sold this closed property to an unaffiliated third party for approximately $750,000. This sale resulted in a loss to the joint venture partnership of approximately $112,000. Tampa, Florida Unit 1060 is located at 4420 West Gandy. The building, built in 1986, consists of 5,777 square feet situated on a 50,094 square foot parcel. The building was constructed utilizing wood siding over concrete block. During the third quarter of 1998, the Partnership recorded an impairment of $58,000 related to an other than temporary decline in the value of real estate for the Ponderosa located in Tampa, Florida. This allowance has been recorded as a reduction of the property's cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). Mooresville, Indiana Unit 1057 is located at 499 South Indiana Street. The building, built in 1981, consists of 6,770 square feet situated on a 63,525 square foot parcel. The building was constructed utilizing wood siding over concrete block. During the third quarter of 1998, the Partnership recorded an impairment of $68,000 related to an other than temporary decline in the value of real estate for the Ponderosa located in Mooresville, Indiana. This allowance has been recorded as a reduction of the property's cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). Taco Bell: Lansing, Michigan Unit 1848 is located at 4238 West Saginaw on the outskirts of Lansing, Michigan. The building, built in 1979, consists of 1,566 square feet situated on a 21,186 square foot parcel. The building was constructed utilizing painted brick on a concrete foundation. Scandinavian Health Spa The Partnership has a 51% interest in a joint venture with an affiliated public real estate limited partnership that purchased the Scandinavian Health Spa. The Scandinavian Health Spa is a 36,556 square foot health club located on a three-acre parcel in Glendale, Arizona, a suburb of Phoenix. The Health Spa is a two-story health and fitness workout facility located within the 195,000 square foot Glendale Galleria Shopping Center. Children's World Learning Centers: Livonia, Michigan The Children's World Learning Center is located at 38880 West Six Mile Road in Livonia, Michigan, approximately 12 miles west of downtown Detroit. The 6,095 square foot, single-story building was built in 1984 utilizing concrete block and has a pitched roof with asphalt shingles. Farmington Hills, Michigan The Children's World Learning Center is located at 29047 13 Mile Road in Farmington Hills, Michigan, approximately 26 miles northwest of Detroit. The 6,175 square foot, single-story building was built in 1989 utilizing a wood frame and has a pitched roof with asphalt shingles. Waterford, Michigan The Children's World Learning Center is located at 3100 Dixie Highway in Waterford, Michigan, approximately 35 miles northwest of Detroit. The 6,175 square foot, single-story building was built in 1988 utilizing a wood frame and has a pitched roof with asphalt shingles. Avis Lubes: Orlando, Florida The Avis Lube is located at 2699 Delaney Street across the street from a 91,000 square foot shopping center anchored by Publix and Woolworths. The building, built in 1989, consists of 1,532 square feet situated on a 12,150 square foot parcel. The building was constructed using concrete block and has two oil change bays. Orlando, Florida The Avis Lube is located at 1625 South Conway Road across the street from a 123,000 square foot shopping center anchored by Publix and Eckard Drugs. The building, built in 1989, consists of 1,947 square feet situated on a 24,939 square foot parcel. The building was constructed using concrete block and has three oil change bays. The lessee of the two Orlando Avis Lubes defaulted on its payment obligations under the lease in 1991 and in January 1992 vacated the properties. The Partnership continued to receive rent payments from the lessee, which Avis Lube, Inc. guaranteed to the Partnership until the lease expired in June 1996. Avis Lube, Inc. subleased the properties until June 1996 to an unaffiliated sublessee, Florida Express Lubes, Inc. The Partnership signed new leases with the sublessee to operate the properties, as lessee, which commenced on June 1, 1996. The leases are for a 14 year term. Base annual rent at 2699 Delaney Street is $48,000 and at 1625 South Conway Road is $54,000. Rock Hill, Missouri The Avis Lube is located at 9725 Manchester Road, two miles west of the St. Louis, Missouri city limits. The building, built in 1988, consists of 2,940 square feet situated on a 21,143 square foot parcel. The building was constructed using brick veneer and has four oil change bays, two with service pit work access and two with ground level work access. The lessee of the Rock Hill, Missouri property defaulted on its payment obligations and vacated the property in April 1994. The Partnership had continued to receive rent payments from the guarantor, Avis Lube, Inc. Avis Lube, Inc. subleased the property through March 1996 to an unaffiliated sublessee, FOCO, Inc., an auto/oil repair operator. The Partnership signed a new lease with the sublessee to operate the property effective March 26, 1996. The lease is for 42 months and provides for annual base rent of $55,000. Hardee's: Newcastle, Oklahoma The restaurant is an outparcel of a 67,500 square foot shopping center located on the 400 & 500 block of N.W. 32nd. The 3,300 square foot, single-story building was built on a 35,200 square foot parcel in 1990 utilizing a wood frame with brick facing. This restaurant is currently being operated as a Carl's Jr. restaurant. St. Johns, Michigan The restaurant is an outparcel of a 70,000 square foot Wal-Mart department store located at the corner of U.S. 27 and Townsend Road. The 3,300 square foot, single-story building was built on a 47,200 square foot parcel in 1990 utilizing a wood frame with brick facing. During the fourth quarter of 1994, the Partnership executed a lease with a Dairy Queen franchisee. The lease is for a five year term and commenced February 1, 1995. Base rent is $2,500 per month with monthly percentage rent of 5% due after monthly sales exceed $37,500. The lease provides an option to renew for one five year period. During the third quarter of 1998, the Partnership recorded an impairment of $30,000 related to an other than temporary decline in the value of real estate for the Hardee's located in St. Johns, Michigan. This allowance has been recorded as a reduction of the property's cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). Albion, Michigan The restaurant is located at 118 E. Michigan Avenue. The 3,034 square foot, single-story building was built on a 32,670 square foot parcel in 1990 utilizing a wood frame with brick facing. The Partnership continues to actively market this property for a replacement tenant. During the third quarter of 1994, the Partnership recorded a provision for impairment of $500,000 related to an other than temporary decline in the value of real estate for the St. Johns, Michigan and Albion, Michigan properties. This allowance has been recorded as a reduction of the properties' cost, and allocated to the land and building based on the original acquisition cost allocation of 30% (land) and 70% (building). In 1996, the Partnership engaged Cushman & Wakefield Valuation Advisory Services ("Cushman & Wakefield") to prepare an appraisal of the Partnership's properties. As a result of this appraisal, the Partnership recorded an additional provision for impairment of $550,000 related to an other than temporary decline in real estate for the St. Johns, Michigan and Albion, Michigan properties during the fourth quarter of 1996. This allowance has been recorded as a reduction of the properties' cost, and allocated to the land and building based on the original acquisition cost allocation of 30% (land) and 70% (building). During the third quarter of 1998, the Partnership recorded an impairment of $162,000 related to an other than temporary decline in the value of real estate for the Hardee's located in Albion, Michigan. This allowance has been recorded as a reduction of the property's cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). Blockbuster Video: South Orange, New Jersey The video store is located at 57 South Orange Avenue in downtown South Orange. The 6,705 square foot brick building was completely renovated in 1990 and consists of a primary level, a mezzanine level plus a full basement for storage. Chi-Chi's: During 1995, Chi-Chi's, the sub-tenant under a master lease with Foodmaker, closed each of its three restaurants owned by the Partnership because they were not profitable. Under the terms of the three leases, Foodmaker, the master tenant and guarantor, is continuing to pay rent for the properties, while actively seeking subtenants. In February 1995, the Chi-Chi's restaurant in Clarksville, Tennessee closed. During the third quarter of 1995 the Chi-Chi's restaurants in Charlotte, North Carolina and Richmond, Virginia were closed. Foodmaker owns, operates and franchises Jack In The Box, a chain of fast-food restaurants located principally in the western and southwestern United States. Until January 27, 1994, Foodmaker also owned Chi-Chi's, a chain of full-service, casual Mexican restaurants located primarily in the Midwestern and Midatlantic United States. Richmond, Virginia Unit 353 is located at 9135 West Broad Street in Richmond and consists of a 7,270 square foot restaurant with a seating capacity of 280. The property was built in January 1990 and is situated on approximately one acre of land. In April 1996, a sub-tenant executed a second sub-lease with Chi- Chi's for the Richmond, Virginia property. This new sub-tenant (Sino-American of Richmond, Virginia) began occupying this facility in September 1997. Foodmaker continues as the guarantor under the terms of the second sub-lease. Charlotte, North Carolina Unit 373 is located at 2522 Sardis Road North at the intersection of Independence Boulevard. The property is situated on a 1.5 acre parcel and consists of a 7,270 square foot restaurant with a seating capacity for 280. The property opened in May 1990. In March 1996, a sub-tenant executed a second sub-lease with Chi- Chi's for the Charlotte, North Carolina property. This new sub- tenant (Carolina Country BBQ of Charlotte, North Carolina) occupied the facility in June 1996. Foodmaker continues to be the guarantor under terms of the second sub-lease. Clarksville, Tennessee Unit 366 is located in Governor's Square Shopping Center at 2815 Guthrie Road in Clarksville. The property consists of a 5,678 square foot restaurant with seating for 180 people and is situated on an approximately 50,000 square foot parcel of land. The property opened in May 1990. In October 1996, a sub-tenant executed a second sub-lease with Chi-Chi's for the Clarksville, Tennessee property. This new sub- tenant (Loco Lupe of Clarksville, Tennessee) opened to the public on February 17, 1997. Foodmaker continues as the guarantor under terms of the second sub-lease. In January 1998, Loco Lupe of Clarksville, Tennessee was closed. However, Chi-Chi's continues to pay rent to the Partnership per the terms of lease. Joint Venture Blockbuster: Callaway, Florida The Partnership owns a 26.0% interest in a joint venture with affiliated public real estate limited partnerships that acquired the land and building underlying a Blockbuster Video Store. The property is located at 123 N. Tydall Parkway on the major arterial in the Panama City, Florida area. The property contains a 6,466 square foot building located on a 40,075 square foot parcel of land. The following table summarizes the operations of the Partnership's properties. BRAUVIN HIGH YIELD FUND L.P. II SUMMARY OF OPERATING DATA DECEMBER 31, 1998
1998 PERCENT OF 1998 PERCENT OF LEASE PURCHASE ORIGINAL RENTAL RENTAL EXPIRATION RENEWAL PROPERTIES PRICE UNITS SOLD INCOME INCOME DATES OPTIONS 51% OF 1 SCANDINAVIAN HEALTH SPA $ 2,677,500 6.9% $ 364,755 9.8% 2009 4 FIVE YEAR OPTIONS 99% OF 6 PONDEROSA RESTAURANTS 5,628,150 14.5% 625,536 16.7% 2003 4 FIVE YEAR OPTIONS TACO BELL RESTAURANT-LANSING, MI 381,200 1.0% 68,589 1.8% 2003 NONE TACO BELL RESTAURANT- SCHOFIELD, WI (A) 246,300 0.6% -- -- -- NONE 14 PONDEROSA RESTAURANTS 12,269,992 31.5% 1,475,968 39.4% 2003-2004 2 FIVE YEAR OPTIONS 3 CHILDREN'S WORLD LEARNING CENTERS 2,368,922 6.1% 314,947 8.4% 2004-2009 2 FIVE YEAR OPTIONS 3 AVIS LUBE OIL CHANGE CENTERS 1,539,964 4.0% 157,000 4.2% 2010 2 TEN YEAR OPTIONS HARDEE'S RESTAURANT-ST. JOHNS, MI(B) 897,348 2.3% 30,000 .8% 2010 NONE HARDEE'S RESTAURANT - ALBION, MI PROPERTY (C) 883,477 2.3% -- -- -- NONE HARDEE'S RESTAURANT - NEWCASTLE, OK 479,025 1.2% 61,986 1.7% 2010 2 TEN YEAR OPTIONS BLOCKBUSTER VIDEO RENTAL 1,100,000 2.8% 154,223 4.1% 2010 2 TEN YEAR OPTIONS 3 CHI-CHI'S RESTAURANTS 3,369,000 8.6% 461,051 12.3% 2011 4 FIVE YEAR OPTIONS 26% OF 1 BLOCKBUSTER VIDEO STORE - CALLAWAY, FL 263,596 0.7% 28,405 0.8% 2006 3 FIVE YEAR OPTIONS $32,104,474 82.5% $3,742,460 100.0% NOTE - THE FORMAT OF THIS SCHEDULE DIFFERS FROM THE INCOME STATEMENT OF THE PARTNERSHIP. THIS SCHEDULE ALLOCATES THE PARTNERSHIP'S SHARE OF PURCHASE PRICE AND RENTAL INCOME FROM EACH JOINT VENTURE. (A) SOLD FEBRUARY 18, 1994 (B) RELEASED TO DAIRY QUEEN FRANCHISEE. LEASE COMMENCED FEBRUARY 1, 1995. (C) FOR LEASE
Risks of Ownership The possibility exists that the tenants of the Partnership's properties may be unable to fulfill their obligations pursuant to the terms of their leases, including making base rent or percentage rent payments to the Partnership. Such a default by the tenants or a premature termination of any one of the leases could have an adverse effect on the financial position of the Partnership. The Partnership may be unable to successfully locate a substitute tenant for the Albion, Michigan property due to the fact that the building had been designed or built primarily to house a specific operation. Thus, the Albion, Michigan property and other Partnership properties may not be readily marketable to a new tenant without substantial capital improvements or remodeling. Such improvements may require expenditure of Partnership funds otherwise available for distribution. In addition, because in excess of 45% of the Partnership's cash available for investment has been invested in properties operated as Ponderosa family restaurants, the Partnership is subject to some risk of loss should adverse events affect Ponderosa and in turn adversely affect the Ponderosa lessees' ability to pay rent to the Partnership. Item 3. Legal Proceedings. Two legal actions, as hereinafter described, were 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. On April 13, 1999, all the parties to the litigation reached an agreement to settle the litigation, subject to the approval by the United States District Court for the Northern District of Illinois. The settlement will not have a material financial impact on the Partnership. The terms of the settlement agreement, along with a Notice to the Class, will be forwarded to the Limited Partners in the second quarter of 1999. One additional legal action, which was dismissed on January 28, 1998, had also been brought against the General Partners and affiliates of such General Partners, as well as against the Partnership on a nominal basis in connection with the Merger. Each of these actions was brought by limited partners of the Partnership. With respect to the actions the Partnership and the General Partners and their named affiliates denied all allegations set forth in the complaints and vigorously defended against such claims. A. The Dismissed Florida Lawsuit On September 17, 1996, a lawsuit was filed in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida, styled Rebecca Scialpi and Helen Friedlander v. Jerome J. Brault, Brauvin Realty Advisors, Inc., Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors III, Inc., and Brauvin Realty Advisors IV, Inc., James L. Brault, and Brauvin Real Estate Funds, L.L.C. and Brauvin High Yield Fund L.P., Brauvin High Yield Fund L.P. II, Brauvin Income Plus L.P. III, and Brauvin Corporate Lease Program IV, L.P., Docket No. 96012807. The Plaintiffs, Scialpi and Friedlander, are Limited Partners in the Partnership. The Partnership and the other affiliated partnerships named in this lawsuit (the "Affiliated Partnerships") that were proposed to be a party to a merger or sale with the Purchaser, were each named as a "Nominal Defendant" in this lawsuit. Jerome J. Brault, the Managing General Partner of the Partnership, and Brauvin Realty Advisors II, Inc., the Corporate General Partner of the Partnership, as well as certain corporate general partners of the Affiliated Partnerships, were named as defendants in this lawsuit. James L. Brault, an officer of the Corporate General Partner and the son of Jerome J. Brault, was also named as a defendant. This lawsuit was dismissed for want of prosecution on January 28, 1998. B. The Illinois Christman Lawsuit On September 18, 1996, a class action lawsuit was filed in the United States District Court for the Northern District of Illinois, styled M. Barbara Christman, Joseph Forte, Janet M. Toolson, John Archbold, and Ben O. Carroll v. Brauvin Realty Advisors, Inc., Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors III, Inc., Brauvin Realty Advisors IV, Inc., Jerome J. Brault, Brauvin Real Estate Funds, L.L.C. and Brauvin High Yield Fund L.P., Brauvin High Yield Fund L.P. II, Brauvin Income Plus L.P. III, and Brauvin Corporate Lease Program IV L.P., Docket No. 96C6025. The Partnership and the Affiliated Partnerships are each named as a "Nominal Defendant" in the lawsuit. Jerome J. Brault and the Corporate General Partner of the Partnership, as well as the corporate general partners of the Affiliated Partnerships, are named as defendants. The plaintiffs filed an amended complaint on October 8, 1996, which alleges claims for breach of fiduciary duties, breaches of the Agreement, and violation of the Illinois Deceptive Trade Practices Act. The amended complaint seeks injunctive relief,as well as compensatory and punitive damages, relating to the Transaction. On October 2, 1996, the District Court certified plaintiffs' proposed class as all of the limited partners of the Partnership and of the Affiliated Partnerships, and appointed plaintiffs' counsel, The Mills Law Firm, as counsel for the class. On October 2, 1996, the District Court also conducted a hearing on plaintiffs' motion to preliminarily enjoin the special meetings of the limited partners and the Transaction. The District Court denied plaintiffs' motion for a preliminary injunction at the conclusion of the October 2, 1996 hearing. On September 27, 1996, counsel for plaintiffs, The Mills Law Firm, mailed a solicitation to all of the Limited Partners, requesting that they revoke their previously-mailed proxies in favor of the Merger. On October 11, 1996, the General Partners filed a counterclaim against plaintiffs and their counsel, The Mills Law Firm, alleging that plaintiffs and The Mills Law Firm violated the federal securities laws and proxy rules by sending their September 27, 1996 letter to the Limited Partners. The plaintiffs and The Mills Law Firm have moved to dismiss this counterclaim. The District Court has taken this motion under advisement and has yet to issue a ruling. On October 10 and 11, 1996, the District Court conducted an evidentiary hearing on the motion of the General Partners to invalidate revocations of proxies procured as a result of The Mills Law Firm's September 27, 1996 letter. In that evidentiary hearing, The Mills Law Firm admitted that it violated the proxy rules by sending its September 27, 1996 letter to the Limited Partners without filing such letter with the Commission in violation of the Commission's requirements. At the conclusion of the hearing on October 10 and 11, the District Court found that the General Partners have a likelihood of succeeding on the merits with respect to their claim that the September 27, 1996 letter sent to the Limited Partners by plaintiffs and The Mills Law Firm is false or misleading in several significant respects. Notwithstanding this finding, the District Court did not invalidate the revocations of proxies resulting from The Mills Law Firm's September 27, 1996 letter because it did not believe it possessed the authority to do so under present law. This ruling was appealed to the Seventh Circuit Court of Appeals. The Seventh Circuit Court of Appeals subsequently dismissed this appeal on the grounds that the appeal was rendered moot by the Limited Partners' approval November 8, 1996 of the Merger. On October 16, 1996 and on November 6, 1996, the parties filed cross-motions for partial summary judgement addressing the allegation in plaintiffs' amended complaint that the Agreement does not allow the Limited Partners to vote in favor of or against the Transaction by proxy. On August 12, 1998, the District Court granted plaintiff's motion for partial summary judgement, holding that the Agreement did not allow the Limited Partners to vote in favor or against the transaction by proxy. On April 2, 1997, the Court granted plaintiffs' leave to again amend their complaint. In their second amended complaint, plaintiffs have named the Partnership as a "Nominal Defendant." Plaintiffs have also added a new claim, alleging that the General Partners violated certain of the rules of the Securities and Exchange Commission (the "Commission") by making false and misleading statements in the Proxy. Plaintiffs also allege that the General Partners breached their fiduciary duties, breached various provisions of the Agreement, violated the Illinois Deceptive Trade Practice Act, and violated section 17-305 of the Delaware Revised Uniform Limited Partnership Act. The General Partners deny those allegations and will continue to vigorously defend against these claims. On April 2, 1997, plaintiffs again requested that the District Court enjoin the closing of the Transaction. After conducting a lengthy hearing on May 1, 1997, the District Court denied plaintiffs' motion to preliminarily enjoin the closing of the Transaction with the Purchaser. Plaintiffs filed a notice of appeal to the Seventh Circuit Court of Appeals from the District Court's May 1, 1997 order denying plaintiffs' motion to preliminarily enjoin the closing of the Transaction. This appeal was dismissed by the Seventh Circuit Court of Appeals on January 23, 1998, based on the appeal court's finding that the District Courts order of January 16, 1998 (as described below) rendered the appeal moot. On January 16, 1998, by agreement of the Partnership and the General Partners and pursuant to a motion of the General Partners, the District Court entered an order preventing the Partnership and the General Partners from completing the Merger, or otherwise disposing of all or substantially all of the Partnership's assets, until further order of the court. On January 28, 1998, the District Court entered an Order of Reference to Special Master, designating a Special Master and vesting the Special Master with authority to resolve certain aspects of the lawsuit subject to the District Court's review and confirmation. The Special Master has been empowered to determine how the assets of the Partnership should be sold or disposed of in a manner which allows the Limited Partners to maximize their financial return in the shortest practicable time frame. In addition, early in the second quarter of 1998, the Special Master retained a financial advisor (the "Financial Advisor"), at the expense of the Partnership to assist the Special Master. The Financial Advisor has been engaged to perform a valuation of the properties of the Partnership as well as a valuation of the Partnership itself. The cost to the Partnership for the services of the Financial Advisor was approximately $185,000. On August 4, 1998, the Special Master filed a Report and Recommendation with the District Court, expressing the Special Master's recommendation the Partnership's properties be disposed of in an auction conducted by the Financial Advisor under the direction of the Special Master. The District Court accepted this Report and Recommendation. On November 4, 1998, the Special Master filed an additional Report and Recommendation with the District Court, requesting that the Court withdraw its Order of Reference to Special Master on the grounds it would be impossible to effect the sale of the Partnerships in a manner that maximizes the financial return to Limited Partners in a short time frame, unless certain litigation issues are resolved. The District Court has accepted this Report and Recommendation. On January 21, 1999, plaintiffs filed another amended complaint, adding additional claims against the General Partners and seeking class certification under Federal Rule 23 as to the newly added claims, and as to all other claims in plaintiffs' complaint which had not been previously certified. The District Court granted plaintiffs' request for class certification as to all of the claims not previously certified, and certified all of the claims of the plaintiffs' complaint under Rule 23(b)(1), 23(b)(2)and 23(b)(3). In addition, pursuant to the General Partners' motion, the District Court dismissed as moot certain of plaintiffs' claims, including plaintiffs' claim that the General Partners violated certain of the rules of the Securities and Exchange Commission by allegedly making false and misleading statements in the Proxy. The District Court similarly dismissed as moot a counterclaim that had been made against class plaintiffs and their counsel for violating the federal securities laws. On April 13, 1999, all of the parties reached a Settlement Agreement encompassing all matters in the lawsuit. The Settlement Agreement is subject to the approval by the District Court, and the Limited Partners will be provided with a written notice concerning its terms. The settlement will not have a material financial impact on the Partnership. C. The Scialpi Illinois Lawsuit On June 20, 1997, another lawsuit was filed in the United States District Court for the Northern District of Illinois, styled Benjamin Siegel, Rebecca Scialpi, Helen Friedlander, and BHS & Associates, Inc. v. Jerome J. Brault, Brauvin Realty Advisors, Inc., Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors III, Inc., Brauvin Realty Advisors IV, Inc., James L. Brault, Brauvin Real Estate Funds LLC, Brauvin High Yield Fund L.P., Brauvin High Yield Fund II L.P., Brauvin Income Plus L.P. III, and Brauvin Corporate Lease Program IV, L.P. docket number 97 C 4450. The Partnership and the Affiliated Partnerships are each named as "Nominal Defendant" in the lawsuit, Jerome J. Brault and the Corporate General Partner of the Partnership, as well as the corporate general partners of the Affiliated Partnerships, have been named as defendants in this lawsuit. James L. Brault, an officer of the Corporate General Partner and the son of Jerome J. Brault, is also named as a defendant. Notably, the complaint was filed by two of the same parties, Scialpi and Friedlander, who were plaintiffs in the Florida lawsuit, which is described above. As also described above, Scialpi and Friedlander are Limited Partners in the Partnership, but have no relationship with the Affiliated Partnerships. On August 15, 1997, the plaintiffs filed an amended complaint dropping Benjamin Siegel as a plaintiff. The plaintiffs are also represented by the same lawyers that represented them in the Florida lawsuit. The complaint alleges a putative class action consisting of claims that certain Commission rules were violated by making false and misleading statements in the Proxy, the defendants breached their fiduciary duties and breached the Agreement. The complaint was consolidated with the Christman lawsuit, which is described above, pursuant to General Rule 2.31 of the United States District Court of the Northern District of Illinois. The General Partners deny these allegations and intend to vigorously defend these claims. There have been no material developments with respect to this lawsuit since it was filed on June 20, 1997; however, management believes that the terms of the April 13, 1999 settlement agreement described above will encompass this lawsuit. Item 4. Submission of Matters To a Vote of Security Holders. None. PART II Item 5. Market for the Registrant's Units and Related Security Holder Matters. At December 31, 1998, there were approximately 2,647 Limited Partners in the Partnership. There is no established public trading market for Units and it is not anticipated that there will be a public market for Units. Neither the Corporate General Partner nor the Partnership are obligated, but reserve the right, to redeem or repurchase the Units. Units may also be purchased by the Plan. Any Units so redeemed or repurchased shall be retired. Pursuant to the terms of the Agreement, there are restrictions on the ability of the Limited Partners to transfer their Units. In all cases, the General Partners must consent to the substitution of a Limited Partner. Cash distributions to Limited Partners for 1998, 1997 and 1996 were $2,572,158, $4,787,596 and $1,814,767, respectively. Prior to the commencement of the Partnership's proxy solicitation in August 1996, distributions were paid four times per year, within 60 days after the end of each calendar quarter. See Item 7. Pursuant to the terms of the Merger Agreement, net income after August 1, 1996 was to accrue to the Purchaser and, therefore, the net income through July 31, 1996 was to be distributed to the Limited Partners at the time of the closing of the Merger. Since the net income of the Partnership after August 1, 1996 was to accrue to the Purchaser, no distributions of net income were paid to the Limited Partners for the two months of August and September 1996 and the quarter ended December 31, 1996. Included in the December 31, 1997 distribution was any prior period earnings including amounts previously reserved for anticipated closing costs. Since the Transaction will not be completed the General Partners have decided to distribute part of the net earnings earned during this time period after August 1996 to the Limited Partners. Included in the February 15, 1999 distribution was approximately $184,000 related to this time period. The Partnership provided for a reserve in its initial offering to fund cash distributions in excess of operating cash flow. Such payments from the reserve represent a return of capital and represent less than 2% of cumulative distributions through February 15, 1998. Item 6. Selected Financial Data. BRAUVIN HIGH YIELD FUND L.P. II (a Delaware limited partnership) (not covered by Independent Auditors' Report) Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 Selected Income Statement Data: Rental Income (a) $4,070,823 $4,239,915 $4,130,302 Interest Income 116,702 161,260 93,923 Net Income 968,545 2,677,113 1,824,011 Net Income Per Unit (b) $ 23.41 $ 65.78 $ 45.23 Selected Balance Sheet Data: Cash and Cash Equivalents $1,585,830 $ 1,198,267 $2,413,914 Land and Buildings 32,260,654 35,401,164 35,401,164 Total Assets 28,471,346 31,464,133 33,290,582 Cash Distributions to Limited Partners (c) 2,552,358(d) 4,787,596 1,814,767 Cash Distributions to Limited Partners Per Unit (b) $ 63.26(d)$ 118.66 $ 45.00 (a) This includes $67,563, $67,561, and $67,561 of non-cash income related to the change in the deferred rent receivable balance for 1998, 1997 and 1996, respectively. (b) Net income per Unit and cash distributions to Limited Partners per Unit are based on the average Units outstanding during the year since they were of varying dollar amounts and percentages based upon the dates Limited Partners were admitted to the Partnership and additional Units were purchased through the Plan. (c) This includes $11,521, $10,278 and $9,060 paid to various states for income taxes on behalf of all Limited Partners for the years 1998, 1997 and 1996, respectively. (d) Not included in cash distributions to Limited Partners and the calculation was Return of Capital Distributions of $1,354,535 which is $33.57 per unit. The above selected financial data should be read in conjunction with the consolidated financial statements and the related notes appearing elsewhere in this annual report. Item 6. Selected Financial Data - continued. BRAUVIN HIGH YIELD FUND L.P. II (a Delaware limited partnership) (not covered by Independent Auditors' Report) Years Ended December 31, 1995 and 1994 1995 1994 Selected Income Statement Data: Rental Income (a) $4,192,243 $4,198,955 Interest Income 68,435 31,248 Net Income 3,039,738 2,564,375 Net Income Per Unit (b) $ 75.82 $ 64.69 Selected Balance Sheet Data: Cash and Cash Equivalents $1,374,779 $1,106,917 Land and Buildings 35,951,164 35,951,164 Total Assets 33,207,008 33,630,071 Cash Distributions to Limited Partners (c) 3,582,492 3,478,020 Cash Distributions to Limited Partners Per Unit (b) $ 89.36 $ 87.74 (a) This includes $67,561 and $73,122 of non-cash income related to the change in the deferred rent receivable balance for 1995 and 1994, respectively. (b) Net income per Unit and cash distributions to Limited Partners per Unit are based on the average Units outstanding during the year since they were of varying dollar amounts and percentages based upon the dates Limited Partners were admitted to the Partnership and additional Units were purchased through the Plan. (c) This includes $9,060 and $14,717 paid to various states for income taxes on behalf of all Limited Partners for the years 1995 and 1994, respectively. The above selected financial data should be read in conjunction with the consolidated financial statements and the related notes appearing elsewhere in this annual report. Item 7. 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. Discussions containing forward-looking statements may be found in this section and in the section entitled "Business." Without limiting the foregoing, words such as "anticipates," "expects," "intends," "plans" and similar expressions are intended to identify forward-looking statements. These statements are subject to a number of risks and uncertainties. Actual results could differ materially from those projected in the forward- looking statements. The Partnership undertakes no obligation to update these forward-looking statements to reflect future events or circumstances. Year 2000 The "Year 2000" problem concerns the inability of computer technology systems to correctly identify and process date sensitive information beyond December 31, 1999. Many computers automatically add the "19" prefix to the last two digits the computer reads for the year when date information is needed in computer software programs. Thus when a date beginning on January 1, 2000 is entered into a computer, the computer may interpret this date as the year "1900" rather than "2000". The Partnership's computer information technology systems consists of a network of personal computers linked to a server built using hardware and software from mainstream suppliers. The Partnership does not own any equipment that contains embedded microprocessors, which may also pose a potential Year 2000 problem. Additionally, the Partnership has no internally generated software coding to correct as all of the Partnership's software is purchased and licensed from external providers. These external providers have assured management that their systems are, or will be, Year 2000 compliant. The Partnership has two main software packages that contain date sensitive information, (i) accounting and (ii) investor relations. In 1997, the Partnership initiated and completed the conversion from its existing accounting software to a new software program that is Year 2000 compliant. In 1998, the investor relations software was also updated to a new software program that is Year 2000 compliant. Management has determined that the Year 2000 issue will not pose significant operational problems for its remaining computer software systems. All costs associated with these conversions are expensed as incurred, and are not material. Management does not believe that any further expenditures will be necessary for the Partnership to be Year 2000 compliant. However, additional personal computers may be purchased from time to time to replace existing machines. Also in 1997, management of the Partnership initiated formal communications with all of its significant third party vendors, service providers and financial institutions to determine the extent to which the Partnership is vulnerable to those third parties failure to remedy their own Year 2000 issue. There can be no guarantee that the systems of these third parties will be timely converted and would not have an adverse effect on the Partnership. The most reasonably likely worst case scenario for the Partnership with respect to the Year 2000 issue would be the inability of certain tenants to timely make their rental payments beginning in January 2000. This could result in the Partnership temporarily suffering a depletion of the Partnership's cash reserves as expenses will need to be paid while the cash flows from revenues are delayed. The Partnership has no formal Year 2000 contingency plan. Liquidity and Capital Resources The Partnership commenced an offering to the public on June 17, 1988 of 25,000 Units (subject to increase to 40,000 units). The offering was anticipated to close on June 16, 1989 but was extended and closed on September 30, 1989. A total of $38,923,000 of Units were subscribed and issued between June 17, 1988 and September 30, 1989, pursuant to the public offering. Until the proxy solicitation process began, the Plan raised $4,059,178 through December 31, 1998 from Limited Partners investing their distributions of Operating Cash Flow in additional Units. As of December 31, 1998, Units valued at $2,886,915 have been repurchased by the Partnership from Limited Partners liquidating their investment in the Partnership and have been retired. The Partnership purchased the land and buildings underlying seven Ponderosa restaurants in 1988, and owns a 99% equity interest in an affiliated joint venture formed in 1988 which purchased the land and buildings underlying six Ponderosa restaurants. In 1989, the Partnership purchased the land and buildings underlying two Taco Bell restaurants, formed a 51% equity interest in an affiliated joint venture which purchased a Scandinavian Health Spa and purchased the land and buildings underlying seven additional Ponderosa restaurants. In 1990, the Partnership purchased the land and buildings underlying three Children's World Learning Centers, three Hardee's restaurants, one Blockbuster video store and three Avis Lubes. The Partnership purchased three Chi-Chi's restaurants in 1991. On October 31, 1996, the Partnership purchased a 26% equity interest in a joint venture with affiliated public real estate limited partnerships (the "Bay County Venture"). The Bay County Venture purchased real property upon which a newly constructed Blockbuster Video store is operated. The property contains a 6,466 square foot building located on a 40,075 square foot parcel of land. The Partnership's acquisition process is now completed. In 1996, the Partnership engaged Cushman & Wakefield to prepare an appraisal of the Partnership's properties. As a result of this appraisal, the Partnership recorded an additional provision for impairment of $550,000 related to an other than temporary decline in real estate for the St. Johns, Michigan and Albion, Michigan properties during the fourth quarter of 1996. This allowance has been recorded as a reduction of the properties' cost, and allocated to the land and building based on the original acquisition cost allocation of 30% (land) and 70% (building). During the first quarter of 1998, the Partnership recorded an impairment of $130,000 related to an other than temporary decline in the value of real estate for the Ponderosa located in Sweden, New York. This allowance has been recorded as a reduction of the property's cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). During the fourth quarter of 1998, the Partnership recorded an impairment of $984,000 related to an other than temporary decline in the value of real estate for several Ponderosa properties in various locations. Additionally an impairment of $192,000 related to an other than temporary decline in the value of real estate was also recorded for the Hardee's properties located in Michigan. These allowances were recorded as a reduction of the properties' cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). As contemplated in the Prospectus, the distributions prior to full property specification exceeded the amount of Operating Cash Flow, as such term is defined in the Agreement, available for distribution. As described in Footnote 8 to the section of the Prospectus on pages 8 and 9 entitled "Estimated Use of Proceeds of Offering", the Partnership set aside 1% of the gross proceeds of the Offering in a reserve (the "Distribution Guaranty Reserve"). The Distribution Guaranty Reserve was structured so as to enable the Partnership to make quarterly distributions of Operating Cash Flow equal to at least 9.25% per annum on Adjusted Investment during the period from the Escrow Termination Date (February 28, 1989), as such term is defined in Section H.3 of the Agreement, through the earlier of: (i) the first anniversary of the Escrow Termination Date (February 28, 1990); or (ii) the expenditure of 95% of the proceeds available for investment in properties, which date was July 26, 1989. The General Partners guaranteed payment of any amounts in excess of the Distribution Guaranty Reserve and were entitled to receive any amounts of the Distribution Guaranty Reserve not used to fund distributions. The Partnership's acquisition process was not completed until March 1991 due to an unusually high number of properties being declined during the due diligence process because of the General Partners' unwillingness to lower the Partnership's investment standards. As a result, the Partnership had a substantial amount of cash invested in short-term investments, as opposed to properties, and during 1990 did not generate sufficient Operating Cash Flow to fully support the distributions to Limited Partners. In order to continue to maintain the 9.25% per annum distribution through December 31, 1990, the General Partners agreed to continue the Distribution Guaranty up to the net $140,000 of Distribution Guaranty Reserve previously paid to them. At December 31, 1998, 1997 and 1996, $140,000 was due from the original General Partners related to the Distribution Guaranty. Below is a table summarizing the four year historical data for distribution rates per unit: Distribution Date 1999 1998 (a) 1997 1996 1995 February 15 $24.9281 $ -- $20.1875 $22.3597 $22.3597 May 15 -- 21.9087 18.8614 22.3597 22.3597 August 15 -- 14.7020 22.8662 -- 22.3597 November 15 (b) -- 26.3634 56.6001 -- 22.3597 (a) The 1998 distributions were made on May 8, 1998, August 15, 1998, November 15, 1998, and February 15, 1999 respectively, and the amounts indicated above do not include return of capital distributions of approximately $18.4152, $15.1571, $0.00, and $0.00 per Unit, respectively. (b) The 1997 distributions were made on March 31, 1997, July 15, 1997, October 22,1997 and December 31, 1997. 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, 1998 to September 30, 1997 and October 1, 1997 to December 31, 1997 were made to the Limited Partners on March 31, 1997, July 15, 1997, October 22, 1997 and December 31, 1997, respectively in the amounts of approximately $814,500, $761,000, $922,600 and $2,283,600, respectively. In addition, distributions of approximately $5,900 were paid to various states for income taxes on behalf of all Limited Partners. Distributions of the Partnership's net earnings for the periods January 1, 1998 to March 31, 1998, April 1, 1998 to June 30, 1998, July 1, 1998 to September 30, 1998, and October 1, 1998 to December 31, 1998 were made to Limited Partners on May 8, 1998, August 15, 1998, November 15, 1998, and February 15, 1999, respectively, in the amounts of approximately $884,000, $593,200, $1,063,700, and $1,005,800. As the result of a property sale by Brauvin High Yield Venture a return of capital distribution was also made to Limited Partners on May 8, 1998 in the amount of approximately $743,000. Additionally on August 15, 1998, a return of capital distribution was made to Limited Partners in the approximate amount of $611,500 from the sale of the Ponderosa located in Sweden, New York. Per the terms of the Merger, the Partnership's net earnings from April 1996 through July 1996 were to be distributed to the Limited Partners in conjunction with the closing of the Merger. However, because of the lengthy delay and the uncertainty of the ultimate closing date, the General Partners decided to make a significant distribution on December 31, 1997 of the Partnership's earnings. Included in the December 31, 1997 distribution was any prior period earnings including amounts previously reserved for anticipated closing costs. Based on the August 12, 1998 ruling of the District Court in the Christman litigation, it is not possible for the Merger to be consummated. The reserves will be re-established by the Partnership as soon as a definitive sale process has been determined and the associated costs and reserves can be identified. Future increases in the Partnership's distributions will largely depend on increased sales at the Partnership's properties resulting in additional percentage rent and, to a lesser extent, on rental increases which will occur due to increases in receipts from certain leases based upon increases in the Consumer Price Index or scheduled increases of base rent. During the years ended December 31, 1998, 1997 and 1996 the General Partners and their affiliates earned management fees of $40,657, $41,080, and $42,653, respectively. In January 1998, the Partnership paid the General Partners approximately $19,800 as an Operating Cash Flow distribution for the year ended December 31, 1997. Although the Merger will not be consummated, the following text describes the Transaction. Pursuant to the terms of the Merger Agreement, the Limited Partners would have received approximately $779.22 per Unit in cash (of this original amount approximately $31.13 has already been distributed to the Limited Partners). Promptly upon consummation of the Merger, the Partnership would have ceased to exist and the Purchaser, as the surviving entity, would have succeeded to all of the assets and liabilities of the Partnership. The Partnership drafted a proxy statement, which required prior review and comment by the Securities and Exchange Commission, to solicit proxies for use at the Special Meeting originally to be held at the offices of the Partnership on September 24, 1996. As a result of the various legal issues, as described in Item 3, the Special Meeting was adjourned to November 8, 1996 at 9:30 a.m. The purpose of the Special Meeting was to vote upon the Merger and certain other matters as described in the Proxy. By approving the Merger, the Limited Partners also would have approved an amendment of the Agreement allowing the Partnership to sell or lease property to affiliates (this amendment, together with the Merger shall be referred to herein as the "Transaction"). The Delaware Revised Uniform Limited Partnership Act (the "Act") provides that a merger must also be approved by the general partners of a partnership, unless the limited partnership agreement provides otherwise. Because the Agreement did not address this matter, at the Special Meeting, Limited Partners holding a majority of the Units were asked to approve the adoption of an amendment to the Agreement to allow the majority vote of the Limited Partners to determine the outcome of the transaction with the Purchaser without the vote of the General Partners. Neither the Act nor the Agreement provides the Limited Partners not voting in favor of the Transaction with dissenters' appraisal rights. The redemption price to be paid to the Limited Partners in connection with the Merger was based on the fair market value of the properties of the Partnership (the "Assets"). Cushman & Wakefield, an independent appraiser, the largest real estate valuation and consulting organization in the United States, was engaged by the Partnership to prepare an appraisal of the Assets, to satisfy the Partnership's requirements under the Employee Retirement Income Security Act of 1974, as amended. Cushman & Wakefield determined the fair market value of the Assets to be $30,183,300, or $748.09 per Unit, at April 1, 1996. Subsequently, the Partnership purchased a 26% interest in Brauvin Bay County Venture. Based on the terms of the Merger Agreement, the fair market value of the Assets will be increased by the amount of the investment in Brauvin Bay County Venture, and correspondingly, the Partnership's cash holdings were reduced by the same amount and therefore the total redemption amount would remain unchanged. The redemption price of $779.22 per Unit also included all remaining cash of the Partnership, less net earnings of the Partnership from and after August 1, 1996 through December 31, 1996, less the Partnership's actual costs incurred and accrued through the effective time at the filing of the certificate of merger, including reasonable reserves in connection with: (i) the proxy solicitation; (ii) the Transaction (as detailed in the Merger Agreement); and (iii) the winding up of the Partnership, including preparation of the final audit, tax return and K-1s (collectively, the "Transaction Costs") and less all other Partnership obligations. Of the total redemption price stated above, approximately $31.13 was distributed to Limited Partners in the December 31, 1997 distribution. Cushman & Wakefield subsequently provided an opinion as to the fairness of the Transaction to the Limited Partners from a financial point of view. In its opinion, Cushman & Wakefield advised that the price per Unit reflected in the Transaction was fair, from a financial point of view, to the Limited Partners. Cushman & Wakefield's determination that a price is "fair" does not mean that the price was the highest price which might be obtained in the marketplace, but rather that based on the appraised values of the Assets, the price reflected in the Transaction is believed by Cushman & Wakefield to be reasonable. Mr. Jerome J. Brault is the Managing General Partner of the Partnership and Brauvin Realty Advisors II, Inc. is the Corporate General Partner. On April 23, 1997, Mr. David M. Strosberg resigned as an Individual General Partner of the Partnership. Mr. Cezar M. Froelich resigned his position as an Individual General Partner effective as of September 17, 1996. The General Partners were not to receive any payment in exchange for the redemption of their general partnership interests nor were they to receive any fees from the Partnership in connection with the Transaction. The remaining General Partners do not believe that Mr. Strosberg's or Mr. Froelich's lack of involvement has had an adverse effect, and should not in the future have any adverse effect, on the operations of the Partnership. The Managing General Partner and his son, James L. Brault, an executive officer of the Corporate General Partner, were to have a minority ownership interest in the Purchaser. Therefore, the Messrs. Brault had an indirect economic interest in consummating the Transaction that was in conflict with the economic interests of the Limited Partners. Messrs. Froelich and Strosberg have no affiliation with the Purchaser. Although the Special Meeting was held and an affirmative vote of the majority of the Limited Partners was received, the District Court in the Christman litigation ruled on August 12, 1998 in favor of the Plaintiff's motion for partial summary judgement, holding that the Agreement did not allow the Limited Partners to vote in favor or against the Transaction by proxy. As discussed in Item 3, all the parties to the litigation reached an agreement to settle the litigation, subject to the approval by the United States District Court for the Northern District of Illinois. The 1998 and 1997 distributions were lower than prior distributions because the Partnership incurred significant valuation fees and legal costs to defend against the lawsuit. In addition, the remaining term of the Partnership's properties' leases continue to shrink. This fact is causing the Partnership to potentially face the risks and costs of lease rollover. This heightened degree of risk may also have an adverse effect on the ultimate value of the Assets. Further, the Partnership's most significant tenant, Ponderosa, has recently closed and vacated six of the Partnership's properties. (The Partnership owned three of them directly and had a majority joint venture interest in the other three.) The General Partners are working to remedy this vacancy situation. As of December 31, 1998, two of the closed properties have been sublet to local concept operators. However, one of the closed properties incurred significant fire damage and Ponderosa terminated its lease. The Partnership has commenced a lawsuit against the tenant to recover lost rent and damages related to the fire. In addition, these recent developments could materially affect the Assets' long term prospects. Unfortunately, these recent developments are some of the exact risks and costs the Partnership was seeking to avoid with the successful completion of the Merger. In January 1998, one of the closed joint venture Ponderosa restaurants located in Mansfield, Ohio was sold to an unaffiliated third party. In April 1998, the fire damaged property located in Sweden, New York was sold by the Partnership to an unaffiliated third party. On January 16, 1998, by agreement of the Partnership and the General Partners and pursuant to a motion of the General Partners, the District Court entered an order preventing the Partnership and the General Partners from completing the Merger, or otherwise disposing of all or substantially all of the Partnership's assets, until further order of the court. On January 28, 1998, the District Court entered an Order of Reference to Special Master, designating a Special Master and vesting the Special Master with authority to resolve certain aspects of the lawsuit subject to the District Court's review and confirmation. The Special Master has been empowered to determine how the assets of the Partnership should be sold or disposed of in a manner which allows the Limited Partners to maximize their financial return in the shortest practicable time frame. In addition, early in the second quarter of 1998, the Special Master retained a financial advisor (the "Financial Advisor"), at the expense of the Partnership, to assist the Special Master. The Financial Advisor was engaged to perform a valuation of the properties of the Partnership as well as a valuation of the Partnership itself. The cost to the Partnership for the services of the Financial Advisor was approximately $185,000. On August 4, 1998, the Special Master filed a Report and Recommendation with the District Court expressing the Special Master's recommendation that the Partnership's properties be disposed of in an auction conducted by the Financial Advisor under the direction of the Special Master. The District Court accepted this Report and Recommendation. On November 4, 1998, the Special Master filed an additional Report and Recommendation with the District Court, requesting that the Court withdraw its Order of Reference to Special Master on the grounds it would be impossible to effect the sale of the Partnership's properties in a manner that maximizes the financial return to Limited Partners in a short time frame, unless certain litigation issues are resolved. The District Court has accepted this Report and Recommendation. On January 21, 1999, plaintiffs filed another amended complaint, adding additional claims against the General Partners and seeking class certification under Federal Rule 23 as to the newly added claims, and as to all other claims in plaintiffs' complaint which had not been previously certified. The District Court granted plaintiffs' request for class certification as to all of the claims not previously certified, and certified all of the claims of the plaintiffs' complaint under Rule 23(b)(1), 23(b)(2)and 23(b)(3). In addition, pursuant to the General Partners' motion, the District Court dismissed as moot certain of plaintiffs' claims, including plaintiffs' claim that the General Partners violated certain of the rules of the Securities and Exchange Commission by allegedly making false and misleading statements in the Proxy. The District Court similarly dismissed as moot a counterclaim that had been made against class plaintiffs and their counsel for violating the federal securities laws. On April 13, 1999, all of the parties reached a Settlement Agreement encompassing all matters in the lawsuit. The Settlement Agreement is subject to the approval by the District Court, and the Limited Partners will be provided with a written notice concerning its terms. Results of Operations - Years ended December 31, 1998 and 1997 Results of operations for the year ended December 31, 1998 reflected net income of $968,545 compared to net income of $2,677,113 for the year ended December 31, 1997, a decrease of $1,708,568. The decrease in net income is primarily due to the $1,306,000 provision for an other than temporary decline in the value of the partnerships properties. Total income for the year ended December 31, 1998 was $4,191,659 compared to $4,410,859 for the year ended December 31, 1997, a decrease of $219,200. The decrease in total income was a result of a 1997 one-time settlement of outstanding issues with a major tenant of the Partnership which increased rental income. Further, rental income also declined as a result of the 1998 property sales. Additionally, total income declined as a result of decreased interest income which is a result of decreased funds invested during 1998. Total expenses for the year ended December 31, 1998 were $2,842,462 compared to $1,459,974 for the year ended December 31, 1997, an increase of approximately $1,382,500. The increase in total expenses was primarily due to the provision for impairment for an other than temporary decline in the value of real estate of approximately $1,306,000, which was recorded in 1998. Depreciation expense in 1998 was $667,467 compared to $708,742 in 1997, a decrease of $41,275, due primarily to the provision for impairment for an other than temporary decline in the value of real estate and the two 1998 property sales. In addition, total expenses increased as a result of an increase in valuation fees of $184,500 in 1998. Partially offsetting these increases in expenses was a decrease in Transaction costs of approximately $56,324 in 1998 as compared to 1997. Results of Operations - Years ended December 31, 1997 and 1996 Results of operations for the year ended December 31, 1997 reflected net income of $2,677,113 compared to net income of $1,824,011 for the year ended December 31, 1996, an increase of approximately $853,100. Total income for the year ended December 31, 1997 was $4,410,859 as compared to $4,227,229 for the year ended December 31, 1996, an increase of approximately $183,600. The increase in total income was primarily due to a one time settlement of outstanding issues with a major tenant of the Partnership which increased rental income. Additionally, total income increased a result of an increase in interest income, which was the result of higher cash balances during 1997. Total expenses for the year ended December 31, 1997 were $1,459,974 as compared to $2,106,603 for the year ended December 31, 1996, a decrease of approximately $646,600. The decrease in total expenses was primarily due to the provision for impairment on other than a temporary decline in the value of the real estate of approximately $550,000 which was recorded in 1996. Additional expenses decreasing in 1997 were transaction costs of approximately $108,000 and a decrease in valuation fees of approximately $90,800. Partially offsetting the decrease in these expenses was an increase in general and administrative expenses of approximately $118,100, which was primarily the result of the Partnership recognizing certain receivables as uncollectible. Results of Operations - Years ended December 31, 1996 and 1995 Results of operations for the year ended December 31, 1996 reflected net income of $1,824,011 compared to $3,039,738 for the year ended December 31, 1995, a decrease of approximately $1,215,700. The decrease in net income resulted from an increase in expense as a result of the Transaction, the Partnership hiring an independent real estate company to conduct property valuations and a provision for impairment on other than a temporary decline in the value of the real estate. The increase in expenses was partially offset by an increase in interest income. Total expenses for the year ended December 31, 1996 were $2,106,603 as compared to $930,775 for the year ended December 31, 1995, a an increase of approximately $1,175,800. The increase in expenses was primarily the result of an increase in Transaction costs of $453,013 due to legal and other professional fees paid or accrued as a result of the Transaction and a provision for impairment on other than a temporary decline in the value of real estate of $550,000 for the St. Johns, Michigan and Albion, Michigan properties. Total expenses also increased in 1996 as compared to 1995 as a result of the Partnership hiring an independent real estate company to conduct property valuations to provide a valuation of the Units to satisfy the Partnership's requirements under the Employee Retirement Income Security Act of 1974, as amended. Impact of Inflation The Partnership anticipates that the operations of the Partnership will not be significantly impacted by inflation. To offset any potential adverse effects of inflation, the Partnership has entered into "triple-net" leases with tenants, making the tenants responsible for all operating expenses, insurance and real estate taxes. In addition, several of the leases require escalations of rent based upon increases in the Consumer Price Index, scheduled increases in base rents, or tenant sales. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The Partnership does not engage in any hedge transactions or derivative financial instruments, or have any interest sensitive obligations. Item 8. Consolidated Financial Statements and Supplementary Data. See Index to Consolidated Financial Statements and Schedule on Page F-1 of this Annual Report on Form 10-K for consolidated financial statements and financial statement schedule, where applicable. The supplemental financial information specified in Item 302 of Regulation S-K is not applicable. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. During the Partnership's two most recent fiscal years, there have been no changes in, or disagreements with, the accountants. PART III Item 10. Directors and Executive Officers of the Partnership. The General Partners of the Partnership are: Brauvin Realty Advisors II, Inc., an Illinois corporation Mr. Jerome J. Brault, individually Brauvin Realty Advisors II, Inc. (the "Corporate General Partner") was formed under the laws of the State of Illinois in 1988, with its issued and outstanding shares being owned by Messrs. Jerome J. Brault (beneficially)(44%), Cezar M. Froelich (44%) and David M. Strosberg (12%). The principal officers and directors of the Corporate General Partner are: Mr. Jerome J. Brault . . . . Chairman of the Board of Directors, President, Chief Executive Officer and Director Mr. James L. Brault . . . . Vice President and Secretary Mr. Thomas E. Murphy . . . . Treasurer and Chief Financial Officer The business experience during the past five years of the General Partners and the principal officers and directors of the Corporate General Partner are as follows: MR. JEROME J. BRAULT (age 65) chairman of the board of directors, president and chief executive officer of the Corporate General Partner, as well as a principal shareholder of the Corporate General Partner. He is a member and manager of Brauvin Real Estate Funds, L.L.C. He is a member of Brauvin Capital Trust L.L.C. Since 1979, he has been a shareholder, president and a director of Brauvin/Chicago, Ltd. He is an officer, director and one of the principal shareholders of various Brauvin entities which act as the general partners of six other publicly registered real estate programs. He is an officer, director and one of the principal shareholders of Brauvin Associates, Inc., Brauvin Management Company, Brauvin Advisory Services, Inc. and Brauvin Securities, Inc., Illinois companies engaged in the real estate and securities businesses. He is a director, president and chief executive officer of Brauvin Net Lease V, Inc. He is the chief executive officer of Brauvin Capital, Inc. Mr. Brault received a B.S. in Business from DePaul University, Chicago, Illinois in 1959. MR. JAMES L. BRAULT (age 38) is a vice president and secretary and is responsible for the overall operations of the Corporate General Partner and other affiliates of the Corporate General Partner. He is a manager of Brauvin Real Estate Funds, L.L.C., Brauvin Capital Trust, L.L.C. and BA/Brauvin L.L.C. He is an officer of various Brauvin entities which act as the general partners of six other publicly registered real estate programs. Mr. Brault is executive vice president and assistant secretary and is responsible for the overall operations of Brauvin Management Company. He is also an executive vice president and secretary of Brauvin Net Lease V, Inc. He is the president of Brauvin Capital Trust, Inc. Prior to joining the Brauvin organization in May 1989, he was a Vice President of the Commercial Real Estate Division of the First National Bank of Chicago ("First Chicago"), based in their Washington, D.C. office. Mr. Brault joined First Chicago in 1983 and his responsibilities included the origination and management of commercial real estate loans, as well as the direct management of a loan portfolio in excess of $150 million. Mr. Brault received a B.A. in Economics from Williams College, Williamstown, Massachusetts in 1983 and an M.B.A. in Finance and Investments from George Washington University, Washington, D.C. in 1987. Mr. Brault is the son of Mr. Jerome J. Brault. MR. THOMAS E. MURPHY (age 32) is the treasurer and chief financial officer of the Corporate General Partner and other affiliates of the Corporate General Partner. He is the chief financial officer of various Brauvin entities which act as the general partners of six other publicly registered real estate programs. Mr. Murphy is also the chief financial officer of Brauvin Associates, Inc., Brauvin Management Company, Brauvin Financial, Inc., Brauvin Securities, Inc. and Brauvin Net Lease V, Inc. He is the treasurer, chief financial officer and secretary of Brauvin Capital Trust, Inc. He is responsible for the Partnership's accounting and financial reporting to regulatory agencies. He joined the Brauvin organization in July 1994. Prior to joining the Brauvin organization he worked 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 received a B.S. degree in Accounting from Northern Illinois University in 1988. Mr. Murphy is a Certified Public Accountant and is a member of the Illinois Certified Public Accountants Society. Item 11. Executive Compensation. (a & b) The Partnership is required to pay certain fees, make distributions and allocate a share of the profits and losses of the Partnership to the Corporate General Partner and its affiliates as described under the caption "Compensation Table" on pages 10 to 12 of the Partnership's Prospectus, as supplemented, and the sections of the Agreement entitled "Distribution of Operating Cash Flow," "Allocation of Profits, Losses and Deductions," "Distribution of Net Sale or Refinancing Proceeds" and "Compensation of General Partners and Their Affiliates" on pages A-10 to A-15 of the Agreement, attached as Exhibit A to the Prospectus. The relationship of the Corporate General Partner (and its directors and officers) to its affiliates is set forth above in Item 10. Reference is also made to Note 2 of the Notes to the Consolidated Financial Statements filed with this annual report for a description of such distributions and allocations. The General Partners are entitled to receive Acquisition Fees for services rendered in connection with the selection, purchase, construction or development of any property by the Partnership whether designated as real estate commissions, acquisition fees, finders' fees, selection fees, development fees, construction fees, non-recurring management fees, consulting fees or any other similar fees or commissions, however designated and however treated for tax or accounting purposes. Aggregate Acquisition Fees payable to all persons in connection with the purchase of Partnership properties may not exceed such compensation as is customarily charged in arm's-length transactions by others rendering similar services as an ongoing public activity in the same geographic locale and for comparable properties. The aggregate Acquisition Fees to be paid to the General Partners and their affiliates shall not exceed 6% of the gross proceeds of the Offering. No amounts were paid in 1998 or 1997. An acquisition fee of $19,171 was paid in 1996 related to the purchase of the Bay County Venture. As described in Item 7, the General Partners were also entitled to receive any portion of the 1% of the gross proceeds of the Offering placed in the Distribution Guaranty Reserve not utilized to pay the Distribution Guaranty through the Distribution Guaranty Termination Date. The General Partners received approximately $140,000 in consideration for providing such guaranty to the Partnership through the Distribution Guaranty Termination date of July 28, 1989. However, in order to continue to maintain the 9.25% per annum distribution through December 31, 1990, the General Partners agreed to continue the Distribution Guaranty up to the net $140,000 of Distribution Guaranty previously paid to them. At December 31, 1998, 1997, and 1996, $140,000 was due from the General Partners related to the Distribution Guaranty. An affiliate of the General Partners provides leasing and re-leasing services to the Partnership in connection with the management of Partnership properties. The maximum property management fee payable to the General Partners or their affiliates shall be equal to 1% of the gross revenues of each Partnership property or interest therein, however, the receipt of such property management fee by the General Partners or their affiliates is subordinated to the receipt by the Limited Partners of a 9% non-cumulative, non-compounded annual return on Adjusted Investment. An affiliate of the General Partners received $40,477, $37,668 and $42,653 in 1998, 1997 and 1996, respectively, for providing such services to the Partnership. (c, d, e & f) Not applicable. (g) The Partnership has no employees and pays no employee or director compensation. (h & i) Not applicable. (j) Compensation Committee Interlocks and Insider Participation. Since the Partnership has no employees, it did not have a compensation committee and is not responsible for the payment of any compensation. (k) Not applicable. (l) Not applicable. The following is a summary of all fees, commissions and other expenses paid or payable to the General Partners or their affiliates for the years ended December 31,1998, 1997 and 1996: 1998 1997 1996 Selling commissions $ -- $ -- $12,307 Management fees 40,657 41,080 42,653 Reimbursable operating expenses 161,072 172,954 135,590 Legal fees -- 239 3,993 Acquisition fees -- -- 19,171 Transaction costs -- -- 14,873 As of December 31, 1998, and 1997 the Partnership has made all payments to affiliates except for $3,592 and $3,412, respectively related to management fees. Item 12. Security Ownership of Certain Beneficial Owners and Management. (a) No person or group is known by the Partnership to own beneficially more than 5% of the outstanding Units of the Partnership. (b) None of the officers and directors of the Corporate General Partner purchased Units. (c) Other than as described in the Proxy, the Partnership is not aware of any arrangements which may result in a change in control of the Partnership. No officer or director of the Corporate General Partner possesses a right to acquire beneficial ownership of Units. The General Partners will share in the profits, losses and distributions of the Partnership as outlined in Item 11, "Executive Compensation." Item 13. Certain Relationships and Related Transactions. (a & b) The Partnership is entitled to engage in various transactions involving affiliates of the Corporate General Partner, as described in the sections of the Partnership's Prospectus, as supplemented, entitled "Compensation Table" and"Conflicts of Interest" at pages 10 to 15 and the section of the Agreement entitled "Rights, Duties and Obligations of General Partners" at pages A-17 to A-20 of the Agreement. The relationship of the Corporate General Partner to its affiliates is set forth in Item 10. Cezar M. Froelich, a former Individual General Partner and a shareholder of the Corporate General Partner, is a principal of the law firm of Shefsky & Froelich Ltd., which firm acted as securities and real estate counsel to the Partnership, the General Partners and certain of its affiliates. (c) The original General Partners owe the Partnership, at December 31, 1998, 1997 and 1996, approximately $140,000. (d) There have been no transactions with promoters. PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed as part of this report: (1) (2) Consolidated Financial Statements and Schedule indicated in Part II, Item 8 "Consolidated Financial Statements and Supplementary Data." (See Index to Consolidated Financial Statements and Schedule on page F-1 of Form 10-K). (3) Exhibits required by the Securities and Exchange Commission Regulation S-K Item 601: (21) Subsidiaries of the Registrant. (27) Financial Data Schedule. The following exhibits are incorporated by reference from the Registrant's Registration Statement (File No. 33-21928) on Form S-11 filed under the Securities Act of 1933: Exhibit No. Description 3.(a) Restated Limited Partnership Agreement 3.(b) Articles of Incorporation of Brauvin Realty Advisors II, Inc. 3.(c) By-Laws of Brauvin Realty Advisors II, Inc. 3.(d) Amendment to the Certificate of Limited Partnership of the Partnership 10.(a) Escrow Agreement (b) Form 8-K. None (c) An annual report for the fiscal year 1998 will be sent to the Limited Partners subsequent to this filing. The following exhibits are incorporated by references to the Registrant's fiscal year ended December 31, 1995 Form 10-K (File No. 0-17756): Exhibit No. Description (10)(b)(1) Management Agreement (19)(a) Amendment to Distribution Reinvestment Plan (28) Pages 8-15 of the Partnership's Prospectus dated June 17, 1988 as supplemented, and pages A-10 to A-15 and A-17 to A-20 of the Agreement. The following exhibits are incorporated by reference to the Registrant's definitive proxy statement dated August 23, 1997 (File No. 0-17557): Exhibit No. Description (10)(c) Merger Agreement. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BRAUVIN HIGH YIELD FUND L.P. II BY: Brauvin Realty Advisors II, Inc. Corporate General Partner By:/s/ Jerome J. Brault Jerome J. Brault Chairman of the Board of Directors, President and Chief Executive Officer By:/s/Thomas E. Murphy Thomas E. Murphy Chief Financial Officer and Treasurer By:/s/ James L. Brault James L. Brault Vice President and Secretary INDIVIDUAL GENERAL PARTNER By:/s/ Jerome J. Brault Jerome J. Brault DATED: April 15, 1999 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Page Independent Auditors' Report . . . . . . . . . . . . . . . . . .. F-2 Consolidated Financial Statements: Consolidated Balance Sheets, December 31, 1998 and 1997 . . F-3 Consolidated Statements of Operations, for the years ended December 31, 1998, 1997 and 1996 . . . . . . . . . . .F-4 Consolidated Statements of Partners' Capital, for the years ended December 31, 1998, 1997 and 1996 . . . . . . . . . . F-5 Consolidated Statements of Cash Flows, for the years ended December 31, 1998, 1997 and 1996 . . . . . . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . F-7 Schedule III -- Real Estate and Accumulated Depreciation, December 31, 1998. . . . . . . . . . . . . . . . . . . . . . . . F-29 All other schedules provided for in Item 14(a)(2) of Form 10-K are either not required, not applicable, or not material. INDEPENDENT AUDITORS' REPORT To the Partners Brauvin High Yield Fund L.P. II Chicago, Illinois We have audited the accompanying consolidated balance sheets of Brauvin High Yield Fund L.P. II (a limited partnership) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, partners' capital, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index to Consolidated Financial Statements and Schedule on page F-1. These consolidated financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Brauvin High Yield Fund L.P. II and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Chicago, Illinois February 16, 1999 (April 14, 1999 as to Note 8) CONSOLIDATED BALANCE SHEETS December 31, December 31, 1998 1997 ASSETS Investment in real estate (Note 6): Land $10,018,972 $10,961,124 Buildings 22,241,682 24,440,040 32,260,654 35,401,164 Less: Accumulated depreciation (6,364,451) (6,066,215) Net investment in real estate 25,896,203 29,334,949 Investment in Brauvin Bay County Venture (Note 7) 274,777 275,500 Cash and cash equivalents 1,585,830 1,198,267 Rent receivable 76,374 79,726 Deferred rent receivable 477,663 410,100 Due from General Partners (Note 5) 140,000 140,000 Other assets 20,499 25,591 Total Assets $28,471,346 $31,464,133 LIABILITIES AND PARTNERS' CAPITAL LIABILITIES: Accounts payable and accrued expenses $ 377,213 $ 165,430 Rent received in advance 35,784 50,768 Due to an affiliate 3,592 3,412 Undisbursed insurance proceeds -- 199,452 Tenant security deposits 85,903 87,992 Total Liabilities 502,492 507,054 MINORITY INTEREST: Brauvin High Yield Venture 18,726 31,007 Brauvin Funds Joint Venture 2,413,241 2,431,037 PARTNERS' CAPITAL: General Partners 346,855 342,441 Limited Partners 25,190,032 28,152,594 Total Partners' Capital 25,536,887 28,495,035 Total Liabilities and Partners' Capital $28,471,346 $31,464,133 See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 1998, 1997 and 1996 1998 1997 1996 INCOME Rental (Note 4) $4,070,823 $4,239,915 $4,130,302 Interest 116,702 161,260 93,923 Other 4,134 9,684 3,004 Total income 4,191,659 4,410,859 4,227,229 EXPENSES General and administrative 349,764 363,643 245,571 Management fees (Note 3) 40,657 41,080 42,653 Amortization of deferred organization costs and other assets 5,089 1,200 2,497 Depreciation 667,467 708,742 722,089 Transaction costs (Note 8) 288,985 345,309 453,013 Valuation fees 184,500 - 90,780 Provision for impairment(Note 6) 1,306,000 -- 550,000 Total expenses 2,842,462 1,459,974 2,106,603 Income before loss on sale of property and minority interest and equity interests' share of net income 1,349,197 2,950,885 2,120,626 Loss on sale of property (110,741) - -- Income before minority interest and equity interest share in net income 1,238,456 2,950,885 2,120,626 Minority interest share in net income: Brauvin High Yield Venture (1,424) (5,833) (5,828) Brauvin Funds Joint Venture (290,904) (286,426) (291,814) Equity interest in: Brauvin Bay County Venture's net income 22,417 18,487 1,027 Net income $ 968,545 $2,677,113 $1,824,011 Net income allocated to the General Partners $ 24,214 $ 23,012 $ -- Net income allocated to the Limited Partners $ 944,331 $2,654,101 $1,824,011 Net income per Unit outstanding (a) $ 23.41 $ 65.78 $ 45.23 (a) Net income per Unit is based on the average Units outstanding during the year since they were of varying dollar amounts and percentages based upon the dates Limited Partners were admitted to the Partnership and additional Units were purchased through the distribution reinvestment plan (the "Plan"). See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL For the years ended December 31, 1998, 1997 and 1996 General Limited Partners Partners * Total Balance, January 1,1996 $319,429 $30,261,083 $30,580,512 Contributions, net -- 30,965 30,965 Selling commissions and other offering costs -- (15,203) (15,203) Net income -- 1,824,011 1,824,011 Cash distributions -- (1,814,767) (1,814,767) Balance, December 31, 1996 319,429 30,286,089 30,605,518 Net income 23,012 2,654,101 2,677,113 Cash distributions -- (4,787,596) (4,787,596) Balance, December 31, 1997 342,441 28,152,594 28,495,035 Net income 24,214 944,331 968,545 Cash distributions (19,800) (2,552,358) (2,572,158) Return of capital distributions -- (1,354,535) (1,354,535) Balance, December 31, 1998 $ 346,855 $25,190,032 $25,536,887 * Total Units outstanding at December 31, 1998, 1997 and 1996 were 40,347, 40,347, and 40,347, respectively. Operating distributions to Limited Partners per Unit were $63.26, $118.66, and $45.00, for the years ended December 31, 1998, 1997 and 1996, respectively. Return of capital distributions to the Limited Partners were $33.57 for the year ended December 31, 1998. Distributions to Limited Partners per Unit are based on the average Units outstanding during the year since they were of varying dollar amounts and percentages based upon the dates Limited Partners were admitted to the Partnership and additional Units were purchased through the Plan. See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1998 1997 1996 Cash Flows From Operating Activities: Net income $968,545 $2,677,113 $1,824,011 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 672,556 709,942 724,586 Provision for impairment 1,306,000 -- 550,000 Loss on sale of property 110,741 -- -- Minority interest's share of income: Brauvin High Yield Venture 1,424 5,833 5,828 Brauvin Funds Joint Venture 290,904 286,426 291,814 Equity interest share of income from Brauvin Bay County Venture (22,417) (18,487) (1,027) Changes in: Rent receivable 3,352 (42,663) 19,912 Deferred rent receivable (67,563) (67,561) (67,561) Other assets 3 2,791 (654) Accounts payable and accrued expenses 211,783 106,197 (2,526) Rent received in advance (14,984) (91,828) 84,252 Due to affiliate 180 3,412 -- Tenant security deposits (2,089) 87,992 -- Net cash provided by operating activities 3,458,435 3,659,167 3,428,635 Cash Flows From Investing Activities: Proceeds from sale of property 1,354,538 -- -- Investment in Brauvin Bay County Venture -- -- (282,766) Change in undisbursed insurance proceeds (199,452) 199,452 -- Distributions from Brauvin Bay County Venture 23,140 26,780 -- Net cash provided by (used in) investing activities 1,178,226 226,232 (282,766) Cash Flows From Financing Activities: Sale of Units, net of liquidations, selling commissions and other offering costs -- -- 18,658 Return of capital to Limited Partners (1,354,535) -- -- Cash distributions to Limited Partners (2,552,358)(4,787,596) (1,814,767) Change in due from General Partners -- -- 10,175 Cash distribution to General Partners (19,800) -- -- Return of capital to minority interest Brauvin High Yield Venture (7,505) -- -- Cash distribution to minority interest: Brauvin High Yield Venture (6,200) (7,200) (7,200) Brauvin Funds Joint Venture (308,700) (306,250) (313,600) Net cash used in financing activities (4,249,098) (5,101,046) (2,106,734) Net increase (decrease)in cash and cash equivalents 387,563 (1,215,647) 1,039,135 Cash and cash equivalents at beginning of year 1,198,267 2,413,914 1,374,779 Cash and cash equivalents at end of year $1,585,830 $1,198,267 $2,413,914 See accompanying notes to consolidated financial statements (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION BRAUVIN HIGH YIELD FUND L.P. II (the "Partnership") is a Delaware limited partnership organized for the purpose of acquiring debt-free ownership of existing, free-standing, income-producing retail, office or industrial real estate properties predominantly all of which subject to "triple-net" leases. The General Partners of the Partnership are Brauvin Realty Advisors II, Inc. and Jerome J. Brault. Brauvin Realty Advisors II, Inc. is owned primarily by Messrs. Brault (beneficially) (44%) and Cezar M. Froelich (44%). Mr. Froelich resigned as a director of Brauvin Realty Advisors II, Inc. in December 1994 and as an Individual General Partner effective as of September 17, 1996. Brauvin Securities, Inc., an affiliate of the General Partners, is the selling agent of the Partnership. The Partnership was formed on May 3, 1988 and filed a Registration Statement on Form S-11 with the Securities and Exchange Commission which became effective on June 17, 1988. The minimum of $1,200,000 of limited partnership interests of the Partnership (the "Units") necessary for the Partnership to commence operations was achieved on July 26, 1988. The offering was anticipated to close on June 16, 1989 but was extended until and closed on September 30, 1989. A total of $38,923,000 of Units were subscribed for and issued between June 17, 1988 and September 30, 1989, pursuant to the Partnership's public offering. Through December 31, 1998, 1997 and 1996, the Partnership has sold $42,982,178, $42,982,178, and $42,982,178 of Units, respectively. These totals include $4,059,178 of Units, purchased by Limited Partners who utilized their distributions of Operating Cash Flow to purchase Units through the distribution reinvestment plan (the "Plan"). Units valued at $2,886,915 have been repurchased by the Partnership from Limited Partners liquidating their investment in the Partnership and have been retired as of December 31, 1998, 1997 and 1996. As of December 31, 1998, the Plan participants have acquired Units under the Plan which approximate 9% of the total Units outstanding. The Partnership has acquired the land and buildings underlying 14 Ponderosa restaurants, two Taco Bell restaurants, three Children's World Learning Centers, three Hardee's restaurants, one Blockbuster Video store, three Avis Lube Oil Change Centers and three Chi-Chi's restaurants. Also acquired were 99%, 51% and 26% equity interests in three joint ventures with affiliated entities, which ventures purchased the land and buildings underlying six Ponderosa restaurants, a Scandinavian Health Spa and a Blockbuster Video store, respectively. In 1995, the Partnership and Metromedia, the parent of Ponderosa Restaurants, exchanged one of the Ponderosa restaurants for a Tony Roma's restaurant. The Partnership's acquisition process is now completed. In February 1994, the Partnership sold Taco Bell Restaurant located in Schofield, Wisconsin. In January 1998, the Partnership sold Ponderosa unit 850 located in Mansfield, Ohio. In April 1998, the Partnership sold Ponderosa unit 876 located in Sweden, New York. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Management's Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Accounting Method The accompanying financial statements have been prepared using the accrual method of accounting. Rental Income Rental income is recognized on a straight line basis over the life of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are credited or charged, as applicable, to deferred rent receivable. Consolidation of Joint Ventures The Partnership owns a 99% equity interest in a joint venture, Brauvin High Yield Venture, which owns six Ponderosa restaurants, and a 51% equity interest in another joint venture, Brauvin Funds Joint Venture, which owns a Scandinavian Health Spa. The accompanying financial statements have consolidated 100% of the assets, liabilities, operations and partners' capital of these ventures. All significant intercompany accounts have been eliminated. Investment in Joint Venture The Partnership owns a 26% equity interest in a joint venture, Brauvin Bay County Venture, which owns one Blockbuster Video Store. The accompanying financial statements include the investment in Brauvin Bay County Venture using the equity method of accounting. Federal Income Taxes Under the provisions of the Internal Revenue Code, the Partnership's income and losses are reportable by the partners on their respective income tax returns. Accordingly, no provision is made for Federal income taxes in the financial statements. However, in certain instances, the Partnership has been required under applicable state law to remit directly to the tax authorities amounts representing withholding from distributions paid to partners. Investment in Real Estate The operating properties acquired by the Partnership are stated at cost including acquisition costs, net of an allowance for impairment. Depreciation expense is computed on a straight-line basis over approximately 35 years. The Partnership provides an allowance for impairment to reduce the cost basis of real estate to its estimated fair value when the real estate is judged to have suffered an impairment that is other than temporary. The Partnership has performed an analysis of its long-lived assets, and the Partnership's management determined that there were no events or changes in circumstances that indicated that the carrying amount of the assets may not be recoverable at December 31, 1998, 1997 and 1996, except as described in Note 6. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid debt instruments with an original maturity within three months of purchase. Estimated Fair Value of Financial Instruments Disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments." The estimated fair value amounts have been determined by using available market information and appropriate valuation methodologies. However, considerable judgement is necessarily required in interpreting market data to develop estimates of fair value. The fair value estimates presented herein are based on information available to management as of December 31, 1998 and 1997, but may not necessarily be indicative of the amounts that the Partnership could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amounts of the following items are a reasonable estimate of fair value: cash and cash equivalents; rent receivable; due from General Partners; accounts payable and accrued expenses; rent received in advance; due to an affiliate; undisbursed insurance proceeds; and tenant security deposits. (2) PARTNERSHIP AGREEMENT Distributions All Operating Cash Flow, as defined in the Partnership Agreement (the "Agreement"), shall be distributed: (a) first, to the Limited Partners until the Limited Partners receive an amount equal to their 10% Current Preferred Return, as such term is defined in the Agreement; and (b) thereafter, any remaining amounts will be distributed 97.5% to the Limited Partners and 2.5% to the General Partners. The net proceeds of a sale or refinancing of a Partnership property shall be distributed as follows: first, to the Limited Partners until the Limited Partners have received an amount equal to the 10% Cumulative Preferred Return, as such term is defined in the Agreement; second, to the Limited Partners until the Limited Partners have received an amount equal to the amount of their Adjusted Investment, as such term is defined in the Agreement; and third, 95% to the Limited Partners and 5% to the General Partners. Profits and Losses Net profits and losses from operations of the Partnership [computed without regard to any allowance for depreciation or cost recovery deductions under the Internal Revenue Code of 1986, as amended (the "Code")] for each taxable year of the Partnership shall be allocated between the Limited Partners and the General Partners in accordance with the ratio of aggregate distributions of Operating Cash Flow attributable to such tax year, although if no distributions are made in any year, net losses (computed without regard to any allowance for depreciation or cost recovery deductions under the Code) shall be allocated 99% to the Limited Partners and 1% to the General Partners. Notwithstanding the foregoing, all depreciation and cost recovery deductions allowed under the Code shall be allocated 2.5% to the General Partners and 97.5% to the Taxable Class Limited Partners, as defined in the Agreement. The net profit of the Partnership from any sale or other disposition of a Partnership property shall be allocated (with ordinary income being allocated first) as follows: (a) first, an amount equal to the aggregate deficit balances of the Partners' Capital Accounts, as such term is defined in the Agreement, shall be allocated to each Partner who or which has a deficit Capital Account balance in the same ratio as the deficit balance of such Partner's Capital Account bears to the aggregate of the deficit balances of all Partners' Capital Accounts; (b) second, to the Limited Partners until the Limited Partners have been allocated an amount of profits equal to their 10% Cumulative Preferred Return as of such date; (c) third, to the Limited Partners until the Limited Partners have been allocated an amount of profit equal to the amount of their Adjusted Investment; and (d) thereafter, 95% to the Limited Partners and 5% to the General Partners. The net loss of the Partnership from any sale or other disposition of a Partnership property shall be allocated as follows: (a) first, an amount equal to the aggregate positive balances in the Partners' Capital Accounts, to each Partner in the same ratio as the positive balance in such Partner's Capital Account bears to the aggregate of all Partners' positive Capital Account balances; and (b) thereafter, 95% to the Limited Partners and 5% to the General Partners. (3) TRANSACTIONS WITH RELATED PARTIES An affiliate of the General Partners manages the Partnership's real estate properties for an annual property management fee equal to up to 1% of gross revenues derived from the properties. The property management fee is subordinated, annually, to receipt by the Limited Partners of a 9% non-cumulative, non-compounded return on their Adjusted Investment. The original General Partners owe the Partnership $140,000 at December 31, 1998 and 1997, relating to the Distribution Guaranty Reserve. The Partnership pays affiliates of the General Partners selling commissions of 8-1/2% of the capital contributions received for Units sold by the affiliates. The Partnership pays an affiliate of the General Partners an acquisition fee in the amount of up to 6% of the gross proceeds of the Partnership's offering for the services rendered in connection with the process pertaining to the acquisition of a property. Acquisition fees related to the properties not ultimately purchased by the Partnership are expensed as incurred. An affiliate of one of the General Partners provided securities and real estate counsel to the Partnership. Fees, commissions and other expenses paid or payable to the General Partners or its affiliates for the years ended December 31, 1998, 1997 and 1996 were as follows: 1998 1997 1996 Selling commissions $ -- $ -- $12,307 Management fees 40,657 41,080 42,653 Reimbursable operating expenses 161,072 172,954 135,590 Legal fees -- 239 3,993 Acquisition fees -- -- 19,171 Transaction costs -- -- 14,873 As of December 31, 1998 and 1997, the Partnership has made all payments to affiliates except for $3,592 and $3,412, respectively related to management fees. (4) LEASES The Partnership's rental income is principally obtained from tenants through rental payments provided under triple-net noncancelable operating leases. The leases provide for a base minimum annual rent and increases in rent such as through participation in gross sales above a stated level. The following is a schedule of noncancelable future minimum rental payments due to the Partnership under operating leases as of December 31, 1998: Year ending December 31: 1999 $ 3,919,177 2000 3,852,350 2001 3,849,850 2002 3,849,850 2003 3,355,291 Thereafter 10,964,508 $29,791,026 Additional rent based on percentages of tenant sales increases was $127,236, $164,769, and $83,633 in 1998, 1997 and 1996, respectively. Approximately 56% of the Partnership's rental income is from properties operated as Ponderosa restaurants. The Partnership is subject to some risk of loss should adverse events affect those Ponderosa restaurants and in turn adversely affect the lessees' ability to pay rent to the Partnership. (5) WORKING CAPITAL RESERVES As contemplated in the Prospectus, the distributions prior to full property specification exceeded the amount of Operating Cash Flow, as such term is defined in the Agreement, available for distribution. The Partnership set aside 1% of the gross proceeds of its offering in a reserve (the "Distribution Guaranty Reserve"). The Distribution Guaranty Reserve was structured so as to enable the Partnership to make quarterly distributions of Operating Cash Flow equal to at least 9.25% per annum on Adjusted Investment during the period from the Escrow Termination Date (February 28, 1989), as such term is defined in Section H.3 of the Agreement, through the earlier of: (i) the first anniversary of the Escrow Termination Date (February 28, 1990); or (ii) the expenditure of 95% of the proceeds available for investment in properties, which date was July 26, 1989. The original General Partners guaranteed payment of any amounts in excess of the Distribution Guaranty Reserve and were entitled to receive any amounts of the Distribution Guaranty Reserve not used to fund distributions. The Partnership's acquisition process was not completed until March 1991 due to an unusually high number of properties being declined during the due diligence process because of the General Partners' unwillingness to lower the Partnership's investment standards. As a result, the Partnership had a substantial amount of cash invested in short-term investments, as opposed to properties and during 1990 did not generate sufficient Operating Cash Flow to fully support the distributions to Limited Partners. In order to continue to maintain the 9.25% per annum distribution through December 31, 1990, the original General Partners agreed to continue the Distribution Guaranty up to the net $140,000 of Distribution Guaranty previously paid to them. At December 31, 1998 and 1997, $140,000 was due from the original General Partners related to the Distribution Guaranty. (6) PROVISION FOR IMPAIRMENT In 1996, the Partnership engaged Cushman & Wakefield Valuation Advisory Services ("Cushman & Wakefield") to prepare an appraisal of the Partnership's properties. As a result of this appraisal, during the fourth quarter of 1996, the Partnership recorded an additional provision for impairment of $550,000 related to an other than temporary decline in the value of the real estate for the St. Johns, Michigan and Albion, Michigan properties. This allowance has been recorded as a reduction of the properties' cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). During the first quarter of 1998, the Partnership recorded an impairment of $130,000 related to an other than temporary decline in the value of the real estate for the Ponderosa located in Sweden, New York. This allowance has been recorded as a reduction of the property's cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). During the fourth quarter of 1998, the Partnership recorded an impairment of $984,000 related to an other than temporary decline in real estate for Ponderosa properties in various locations. An impairment of $192,000 related to an other than temporary decline in real estate was also recorded for Hardee's properties located in Michigan. These allowances were recorded as a reduction of the properties' cost, and allocated to the land and buildings based on the original acquisition cost allocation of 30% (land) and 70% (building). (7) INVESTMENT IN JOINT VENTURE The Partnership owns an equity interest in the Brauvin Bay County Venture and reports its investment on the equity method. The following are condensed financial statements for the Brauvin Bay County Venture: BRAUVIN BAY COUNTY VENTURE December 31, December 31, 1998 1997 Land and buildings, net $1,033,942 $1,051,588 Other assets 17,330 11,989 $1,051,272 $1,063,577 Liabilities $4,296 $ 13,820 Partners' capital 1,046,976 1,049,757 $1,051,272 $1,063,577 Period from October 31, 1996 Year Ended Year Ended (inception) to December 31, December 31, December 31, 1998 1997 1996 Rental and other income $110,782 $109,985 $18,502 Expenses: Depreciation 17,646 17,689 2,898 Management fees 1,079 1,178 191 Operating and administrative 5,838 20,014 11,463 24,563 38,881 14,552 Net income $ 86,219 $71,104 $ 3,950 (8) MERGER AND LITIGATION Merger Pursuant to the terms of an agreement and plan of merger dated as of June 14, 1996, as amended March 24, 1997, June 30, 1997, September 30, 1997, December 31, 1997, March 31, 1998 and June 30, 1998 (the "Merger Agreement"), the Partnership proposed to merge with and into Brauvin Real Estate Funds, L.L.C., a Delaware limited liability company affiliated with certain of the General Partners (the "Purchaser") through a merger (the "Merger") of its Units. Although the Merger will not be consummated, the following text describes the transaction. Promptly upon consummation of the Merger, the Partnership would have ceased to exist and the Purchaser, as the surviving entity, would succeed to all of the assets and liabilities of the Partnership. The Limited Partners holding a majority of the Units voted on the Merger on November 8, 1996. The Limited Partners voted on an amendment of the Agreement allowing the Partnership to sell or lease property to affiliates (this amendment, together with the Merger shall be referred to herein as the "Transaction"). The redemption price to be paid to the Limited Partners in connection with the Merger was based on the fair market value of the properties of the Partnership (the "Assets"). Cushman & Wakefield Valuation Advisory Services ("Cushman & Wakefield"), an independent appraiser, the largest real estate valuation and consulting organization in the United States, was engaged by the Partnership to prepare an appraisal of Assets, to satisfy the Partnership's requirements under the Employee Retirement Income Security Act of 1974, as amended. Cushman & Wakefield determined the fair market value of the Assets at April 1, 1996 to be $30,183,300, or $748.09 per Unit. Subsequently, the Partnership purchased a 26% interest in Brauvin Bay County Venture. Based on the terms of the Merger Agreement, the fair market value of the Assets will be increased by the amount of the investment in Brauvin Bay County Venture, and correspondingly, the Partnership's cash holdings were reduced by the same amount and, therefore, the total redemption amount would remain unchanged. The redemption price of $779.22 per Unit also included all remaining cash of the Partnership, less net earnings of the Partnership from and after August 1, 1996 through December 31, 1996, less the Partnership's actual costs incurred and accrued through the effective time at the filing of the certificate of merger, including reasonable reserves in connection with: (i) the proxy solicitation; (ii) the Transaction (as detailed in the Merger Agreement); and (iii) the winding up of the Partnership, including preparation of the final audit, tax return and K-1s (collectively, the "Transaction Costs") and less all other Partnership obligations. Of the original cash redemption amount, approximately $31.13 was distributed to the Limited Partners in the December 31, 1997 distribution. The General Partners were not to receive any payment in exchange for the redemption of their general partnership interests nor would they have received any fees from the Partnership in connection with the Transaction. The Managing General Partner and his son, James L. Brault, an executive officer of the Corporate General Partner, were to have a minority ownership interest in the Purchaser. The Merger was not completed primarily due to certain litigation, as described below, that was still pending at December 31, 1998. The General Partners believe that these lawsuits are without merit and, therefore, continue to vigorously defend against them. Because of the August 12, 1998 rulings of the District Court in the Christman Litigation, as described below, it is not possible for the Merger to be consummated. Distributions of the Partnership's net earnings for the periods January 1, 1997 to March 31, 1997, April 1, 1997 to June 30, 1997, July 1, 1997 to September 30, 1997 and October 1, 1997 to December 31, 1997 were made to the Limited Partners on March 31, 1997, July 15, 1997, October 22, 1997 and December 31, 1997, respectively, in the amounts of approximately $814,500, $761,000, $922,600 and $2,283,600, respectively. In addition, distributions of approximately $5,900 were paid to various states on behalf of all Limited Partners in 1997. Distributions of the Partnership's net earnings for the periods January 1, 1998 to March 31, 1998, April 1, 1998 to June 30, 1998, July 1, 1998 to September 30, 1998, and October 1, 1998 to December 31, 1998 were made to Limited Partners on May 8, 1998, August 15, 1998 November 15, 1998, and February 15, 1999, respectively in the amounts of approximately $884,000, $593,200, $1,063,700, and $1,005,800. As the result of a property sale by Brauvin High Yield Venture a return of capital distribution was also made to Limited Partners on May 8, 1998 in the amount of approximately $743,000. Additionally, on August 15, 1998, a return of capital distribution was made to Limited Partners in the approximate amount of $611,500 from the sale of the Ponderosa located in Sweden, New York. See Note 9. Litigation Two legal actions, as hereinafter described, were pending at December 31, 1998 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. On April 13, 1999, all the parties to the litigation reached an agreement to settle the litigation, subject to the approval by the United States District Court for the Northern District of Illinois. Management believes that the settlement will not have a material impact on the Partnership. The terms of the settlement agreement, along with a Notice to the Class, will be forwarded to the Limited Partners in the second quarter. One additional legal action, which was dismissed on January 28, 1998, had also been brought against the General Partners and affiliates of such General Partners, as well as against the Partnership on a nominal basis in connection with the Merger. Each of these actions was brought by Limited Partners of the Partnership. With respect to these actions, the Partnership, the General Partners and their named affiliates denied all allegations set forth in the complaints and vigorously defended against such claims. A. The Dismissed Florida Lawsuit On September 17, 1996, a lawsuit was filed in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida, styled Rebecca Scialpi and Helen Friedlander v. Jerome J. Brault, Brauvin Realty Advisors, Inc., Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors III, Inc., and Brauvin Realty Advisors IV, Inc., James L. Brault, and Brauvin Real Estate Funds, L.L.C. and Brauvin High Yield Fund L.P., Brauvin High Yield Fund L.P. II, Brauvin Income Plus L.P. III, and Brauvin Corporate Lease Program IV, L.P., Docket No. 96012807. The Plaintiffs, Scialpi and Friedlander, are Limited Partners in the Partnership. The Partnership and the other affiliated partnerships named in this lawsuit (the "Affiliated Partnerships") that were proposed to be a party to a merger or sale with the Purchaser, were each named as a "Nominal Defendant" in this lawsuit. Jerome J. Brault, the Managing General Partner of the Partnership, and Brauvin Realty Advisors II, Inc., the Corporate General Partner of the Partnership, as well as certain corporate general partners of the Affiliated Partnerships, were named as defendants in this lawsuit. James L. Brault, an officer of the Corporate General Partner and the son of Jerome J. Brault, was also named as a defendant. This lawsuit was dismissed for want of prosecution on January 28, 1998. B. The Illinois Christman Lawsuit On September 18, 1996, a class action lawsuit was filed in the United States District Court for the Northern District of Illinois, styled M. Barbara Christman, Joseph Forte, Janet M. Toolson, John Archbold, and Ben O. Carroll v. Brauvin Realty Advisors, Inc., Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors III, Inc., Brauvin Realty Advisors IV, Inc., Jerome J. Brault, Brauvin Real Estate Funds, L.L.C. and Brauvin High Yield Fund L.P., Brauvin High Yield Fund L.P. II, Brauvin Income Plus L.P. III, and Brauvin Corporate Lease Program IV L.P., Docket No. 96C6025. The Partnership and the Affiliated Partnerships are each named as a "Nominal Defendant" in the lawsuit. Jerome J. Brault and the Corporate General Partner of the Partnership, as well as the corporate general partners of the Affiliated Partnerships, are named as defendants. The plaintiffs filed an amended complaint on October 8, 1996, which alleges claims for breach of fiduciary duties, breaches of the Agreement, and violation of the Illinois Deceptive Trade Practices Act. The amended complaint seeks injunctive relief,as well as compensatory and punitive damages, relating to the Transaction. On October 2, 1996, the District Court certified plaintiffs' proposed class as all of the limited partners of the Partnership and of the Affiliated Partnerships, and appointed plaintiffs' counsel, The Mills Law Firm, as counsel for the class. On October 2, 1996, the District Court also conducted a hearing on plaintiffs' motion to preliminarily enjoin the special meetings of the limited partners and the Transaction. The District Court denied plaintiffs' motion for a preliminary injunction at the conclusion of the October 2, 1996 hearing. On September 27, 1996, counsel for plaintiffs, The Mills Law Firm, mailed a solicitation to all of the Limited Partners, requesting that they revoke their previously-mailed proxies in favor of the Merger. On October 11, 1996, the General Partners filed a counterclaim against plaintiffs and their counsel, The Mills Law Firm, alleging that plaintiffs and The Mills Law Firm violated the federal securities laws and proxy rules by sending their September 27, 1996 letter to the Limited Partners. The plaintiffs and The Mills Law Firm have moved to dismiss this counterclaim. The District Court has taken this motion under advisement and has yet to issue a ruling. On October 10 and 11, 1996, the District Court conducted an evidentiary hearing on the motion of the General Partners to invalidate revocations of proxies procured as a result of The Mills Law Firm's September 27, 1996 letter. In that evidentiary hearing, The Mills Law Firm admitted that it violated the proxy rules by sending its September 27, 1996 letter to the Limited Partners without filing such letter with the Commission in violation of the Commission's requirements. At the conclusion of the hearing on October 10 and 11, the District Court found that the General Partners have a likelihood of succeeding on the merits with respect to their claim that the September 27, 1996 letter sent to the Limited Partners by plaintiffs and The Mills Law Firm is false or misleading in several significant respects. Notwithstanding this finding, the District Court did not invalidate the revocations of proxies resulting from The Mills Law Firm's September 27, 1996 letter because it did not believe it possessed the authority to do so under present law. This ruling was appealed to the Seventh Circuit Court of Appeals. The Seventh Circuit Court of Appeals subsequently dismissed this appeal on the grounds that the appeal was rendered moot by the Limited Partners' approval November 8, 1996 of the Merger. On October 16, 1996 and on November 6, 1996, the parties filed cross-motions for partial summary judgement addressing the allegation in plaintiffs' amended complaint that the Agreement does not allow the Limited Partners to vote in favor of or against the Transaction by proxy. On August 12, 1998, the District Court granted plaintiffs' motion for partial summary judgment, holding that the agreement did not allow the Limited Partners to vote in favor or against the Transaction by proxy. On April 2, 1997, the Court granted plaintiffs' leave to again amend their complaint. In their second amended complaint, plaintiffs have named the Partnership as a "Nominal Defendant." Plaintiffs have also added a new claim, alleging that the General Partners violated certain of the rules of the Securities and Exchange Commission (the "Commission") by making false and misleading statements in the Proxy. Plaintiffs also allege that the General Partners breached their fiduciary duties, breached various provisions of the Agreement, violated the Illinois Deceptive Trade Practice Act, and violated section 17-305 of the Delaware Revised Uniform Limited Partnership Act. The General Partners deny those allegations and will continue to vigorously defend against these claims. On April 2, 1997, plaintiffs again requested that the District Court enjoin the closing of the Transaction. After conducting a lengthy hearing on May 1, 1997, the District Court denied plaintiffs' motion to preliminarily enjoin the closing of the Transaction with the Purchaser. Plaintiffs filed a notice of appeal to the Seventh Circuit Court of Appeals from the District Court's May 1, 1997 order denying plaintiffs' motion to preliminarily enjoin the closing of the Transaction. This appeal was dismissed by the Seventh Circuit Court of Appeals on January 23, 1998, based on the appeal court's finding that the District Courts order of January 16, 1998 (as described below) rendered the appeal moot. On January 16, 1998, by agreement of the Partnership and the General Partners and pursuant to a motion of the General Partners, the District Court entered an order preventing the Partnership and the General Partners from completing the Merger, or otherwise disposing of all or substantially all of the Partnership's assets, until further order of the court. On January 28, 1998, the District Court entered an Order of Reference to Special Master, designating a Special Master and vesting the Special Master with authority to resolve certain aspects of the lawsuit subject to the District Court's review and confirmation. The Special Master was empowered to determine how the assets of the Partnership should be sold or disposed of in a manner which allows the Limited Partners to maximize their financial return in the shortest practicable time frame. In addition, early in the second quarter of 1998, the Special Master retained a financial advisor ( the "Financial Advisor"), at the expense of the Partnership, to assist the Special Master. The Financial Advisor has been engaged to perform a valuation of the properties of the Partnership as well as a valuation of the Partnership itself. The cost to the Partnership for the services of the Financial Advisor was approximately $185,000. On August 4, 1998, the Special Master filed a Report and Recommendation with the District Court, expressing the Special Master's recommendation that the Partnership's properties be disposed of in an auction conducted by the Financial Advisor under the direction of the Special Master. The District Court accepted this Report and Recommendation. On November 4, 1998, the Special Master filed an additional Report and Recommendation with the District Court, requesting that the Court withdraw its Order of Reference to Special Master on the grounds it would be impossible to effect the sale of the Partnerships in a manner that maximizes the financial return to Limited Partners in a short time frame, unless certain litigation issues are resolved. The District Court has accepted this Report and Recommendation. On January 21, 1999, plaintiffs filed another amended complaint, adding additional claims against the General Partners and seeking class certification under Federal Rule 23 as to the newly added claims, and as to all other claims in plaintiffs' complaint which had not been previously certified. The District Court granted plaintiffs' request for class certification as to all of the claims not previously certified, and certified all of the claims of the plaintiffs' complaint under Rule 23(b)(1), 23(b)(2)and 23(b)(3). In addition, pursuant to the General Partners' motion, the District Court dismissed as moot certain of plaintiffs' claims, including plaintiffs' claim that the General Partners violated certain of the rules of the Securities and Exchange Commission by allegedly making false and misleading statements in the Proxy. The District Court similarly dismissed as moot a counterclaim that had been made against class plaintiffs and their counsel for violating the federal securities laws. On April 13, 1999, all of the parties reached a Settlement Agreement encompassing all matters in the lawsuit. The Settlement Agreement is subject to the approval by the District Court, and the Limited Partners will be provided with a written notice concerning its terms. The settlement will not have a material financial impact on the Partnership. C. The Scialpi Illinois Lawsuit On June 20, 1997, another lawsuit was filed in the United States District Court for the Northern District of Illinois, styled Benjamin Siegel, Rebecca Scialpi, Helen Friedlander, and BHS & Associates, Inc. v. Jerome J. Brault, Brauvin Realty Advisors, Inc., Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors III, Inc., Brauvin Realty Advisors IV, Inc., James L. Brault, Brauvin Real Estate Funds LLC, Brauvin High Yield Fund L.P., Brauvin High Yield Fund II L.P., Brauvin Income Plus L.P. III, and Brauvin Corporate Lease Program IV, L.P. docket number 97 C 4450. The Partnership and the Affiliated Partnerships are each named as "Nominal Defendant" in the lawsuit, Jerome J. Brault and the Corporate General Partner of the Partnership, as well as the corporate general partners of the Affiliated Partnerships, have been named as defendants in this lawsuit. James L. Brault, an officer of the Corporate General Partner and the son of Jerome J. Brault, is also named as a defendant. Notably, the complaint was filed by two of the same parties, Scialpi and Friedlander, who were plaintiffs in the Florida lawsuit, which is described above. As also described above, Scialpi and Friedlander are limited partners in the Partnership, but have no relationship with the Affiliated Partnerships. On August 15, 1997, the plaintiffs filed an amended complaint dropping Benjamin Siegel as a plaintiff. The plaintiffs are also represented by the same lawyers that represented them in the Florida lawsuit. The complaint alleges a putative class action consisting of claims that certain Commission rules were violated by making false and misleading statements in the Proxy, the defendants breached their fiduciary duties and breached the Agreement. The complaint was consolidated with the Christman lawsuit, which is described above, pursuant to General Rule 2.31 of the United States District Court of the Northern District of Illinois. The General Partners deny these allegations and intend to vigorously defend these claims. There have been no material developments with respect to this lawsuit since it was filed on June 20, 1997; however, management believes that the terms of the April 13, 1999 settlement agreement described above will encompass this lawsuit. SCHEDULE III BRAUVIN HIGH YIELD FUND L.P. II (a Delaware limited partnership) REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1998
Gross Amount at Which Carried Initial Cost at Close of Period Buildings Cost of Buildings and Subsequent and Accumulated Date Description Encumbrances (c) Land Improvements Improvements Land Improvements Total Depreciation (b) Acquired Ponderosas - BHYF II $0 $ 3,907,384 $9,117,233 $0 $3,420,437 $7,981,017 $11,401,454 $2,359,930 9/88-11/89 Ponderosas - BHYV 0 1,810,770 4,225,129 0 1,413,165 3,297,387 4,710,552 1,014,805 9/88 Taco Bell 0 128,236 299,218 0 128,236 299,218 427,454 85,091 1/89 Scandinavian Health Spa-BFJV 0 1,657,861 3,868,342 0 1,657,861 3,868,342 5,526,203 1,039,991 7/89 Children's World Learning Centers 0 771,140 1,799,327 0 771,140 1,799,327 2,570,467 436,175 1/90-9/90 Hardee's Restaurants 0 729,798 1,702,861 0 357,198 833,461 1,190,659 332,009 5/90-7/90 Avis Lubes 0 507,620 1,184,448 0 507,620 1,184,448 1,692,068 287,492 6/90-8/90 Blockbuster Video Store 0 354,644 827,501 0 354,644 827,501 1,182,145 198,223 9/90 Chi-Chi's Restaurants 0 1,408,671 2,150,981 0 1,408,671 2,150,981 3,559,652 610,735 3/91 $0 $11,276,124 $25,175,040 $0 $10,018,972 $22,241,682 $32,260,654 $6,364,451 NOTES: (a) The cost of this real estate is $34,616,656 for tax purposes (unaudited). The buildings are depreciated over approximately 35 years using the straight line method. The properties were constructed between 1969 and 1990. (b) The following schedule summarizes the changes in the Partnership's real estate and accumulated depreciation balances: Real estate 1998 1997 1996 Balance at beginning of year $35,401,164 $35,401,164 $35,951,164 Property Sales (1,834,510) Subtractions - land and buildings(d) (1,306,000) -- (550,000) Balance at end of year $32,260,654 $35,401,164 $35,401,164 Accumulated depreciation 1998 1997 1996 Balance at beginning of year $ 6,066,215 $ 5,357,473 $ 4,635,384 Property sales (369,231) Provision for depreciation 667,467 708,742 722,089 Balance at end of year $ 6,364,451 $ 6,066,215 $ 5,357,473 (c) Encumbrances - Brauvin High Yield Fund L.P. II did not borrow cash in order to purchase its properties. 100% of the land and buildings were paid for with funds contributed by the Limited Partners. (d) The 1996 amount reflects a provision for impairment of land of $165,000 and buildings of $385,000 related to the properties in St. Johns and Albion, Michigan. The 1998 amount reflects a provision for impairment of land of $391,800 and buildings of $914,200, related to Ponderosas, Brauvin High Yield Fund Ponderosas, and Hardee's.
EXHIBITS TO BRAUVIN HIGH YIELD FUND L.P. II FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1998 EXHIBIT INDEX BRAUVIN HIGH YIELD FUND L.P. II FORM 10-K For the fiscal year ended December 31, 1998 Exhibit (21) Subsidiaries of the Registrant Exhibit (27) Financial Data Schedule Exhibit 21 Name of Subsidiary State of Formation Brauvin High Yield Venture Illinois Brauvin Funds Joint Venture Illinois Brauvin Bay County Venture Illinois EX-27 2
5 12-MOS DEC-31-1998 DEC-31-1998 1,585,830 274,777 554,037 0 0 0 32,260,654 6,364,451 28,471,346 502,492 2,431,967 0 0 25,536,887 0 28,471,346 0 4,191,659 0 2,842,462 269,911 0 0 0 0 0 (110,741) 0 0 968,545 0 0 "SECURITIES" REPRESENTS INVESTMENT IN JOINT VENTURE "PP&E" REPRESENTS INVESTMENT IN REAL ESTATE [LAND AND BUILDING] "BONDS" REPRESENTS MINORITY INTEREST IN JOINT VENTURES "COMMON" REPRESENTS TOTAL PARTNERS CAPITAL "TOTAL REVENUES" REPRESENTS RENTAL, INTEREST, AND OTHER INCOME "TOTAL COSTS" REPRESENTS TOTAL EXPENSES "OTHER EXPENSES" REPRESENTS MINORITY INTEREST SHARE OF AND EQUITY INTEREST IN NET INCOME
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