UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly year ended March 31, 1999 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 0-19219 Brauvin Income Plus L.P. III (Exact name of registrant as specified in its charter) Delaware 36-3639043 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30 North LaSalle Street, Chicago, Illinois 60602 (Address of principal executive offices) (Zip Code) (312)759-7660 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . BRAUVIN INCOME PLUS L.P. III (a Delaware limited partnership) INDEX Page PART I Financial Information Item 1. Consolidated Financial Statements . . . . . . . . . 3 Consolidated Balance Sheets at March 31, 1999 and December 31, 1998 . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998. . . . . . . . . 5 Consolidated Statements of Partners' Capital for the periods January 1, 1998 to March 31, 1999 . . . 6 Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998. . . . . . . . . 7 Notes to Consolidated Financial Statements. . . . . 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 26 Item 3. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . 34 PART II Other Information Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 35 Item 2. Changes in Securities . . . . . . . . . . . . . . . 40 Item 3. Defaults Upon Senior Securities . . . . . . . . . . 40 Item 4. Submissions of Matters to a Vote of Security Holders 40 Item 5. Other Information . . . . . . . . . . . . . . . . . 40 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 40 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . 41 PART I - FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements Except for the December 31, 1998 Consolidated Balance Sheet, the following Consolidated Balance Sheet as of March 31, 1999, Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998, Consolidated Statements of Partners' Capital for the periods January 1, 1998 to March 31, 1999 and Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998 for Brauvin Income Plus L.P. III (the "Partnership") are unaudited and have not been examined by independent public accountants but reflect, in the opinion of the management, all adjustments necessary to present fairly the information required. All such adjustments are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Partnership's 1998 Annual Report on Form 10-K. BRAUVIN INCOME PLUS L.P. III (a Delaware limited partnership) CONSOLIDATED BALANCE SHEETS March 31, December 31, 1999 1998 ASSETS Investment in real estate, at cost: Land $ 7,397,633 $ 7,397,633 Buildings and improvements 10,065,524 10,065,524 17,463,157 17,463,157 Less: Accumulated depreciation (2,980,737) (2,888,332) Net investment in real estate 14,482,420 14,574,825 Investment in Joint Ventures (Note 4): Brauvin Gwinnett County Venture 145,640 147,518 Brauvin Bay County Venture 356,046 355,532 Cash and cash equivalents 882,681 849,223 Rent receivable 4,922 7,992 Deferred rent receivable 63,597 59,407 Other assets 1,280 -- Prepaid offering costs 70,824 70,824 Total Assets $16,007,410 $16,065,321 LIABILITIES AND PARTNERS' CAPITAL LIABILITIES: Accounts payable and accrued expenses $ 271,775 $ 245,228 Rent received in advance 58,918 9,881 Tenant security deposits 51,626 51,626 Due to affiliate 2,292 1,587 Total Liabilities 384,611 308,322 Minority Interest in Brauvin Chili's Limited Partnership (824) (768) PARTNERS' CAPITAL: General Partners 124,028 116,693 Limited Partners 15,499,595 15,641,074 Total Partners' Capital 15,623,623 15,757,767 Total Liabilities and Partners' Capital $16,007,410 $16,065,321 See accompanying notes to consolidated financial statements. BRAUVIN INCOME PLUS L.P. III (a Delaware limited partnership) CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, (Unaudited) 1999 1998 INCOME: Rental $547,625 $563,595 Interest 6,225 8,382 Other 6,822 107 Total income 560,672 572,084 EXPENSES: General and administrative 47,567 46,843 Management fees (Note 3) 6,100 5,838 Transaction costs (Note 5) 58,282 22,762 Depreciation 92,405 96,245 Total expenses 204,354 171,688 Income before gain on the sale of property and minority interest and equity interest in joint ventures 356,318 400,396 Gain on the sale of property -- 14,614 Income before minority interest and equity interest in joint ventures 356,318 415,010 Minority interest share in Brauvin Chili's Limited Partnership's net income (119) (96) Equity interest in net income from: Brauvin Bay County Venture 7,314 7,013 Brauvin Gwinnett County Venture 3,242 3,196 Net income $366,755 $425,123 Net income allocated to the General Partners $ 7,335 $ 8,502 Net income allocated to the Limited Partners $359,420 $416,621 Net income per Unit outstanding (a) $ 0.16 $ 0.19 (a) Net income per Unit was based on the average Units outstanding during the period since they were of varying dollar amounts and percentages based upon the dates Limited Partners were admitted to the Partnership and additional Units were purchased through the distribution reinvestment plan (the "Plan"). See accompanying notes to consolidated financial statements. BRAUVIN INCOME PLUS L.P. III (a Delaware limited partnership) CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL For the period January 1, 1998 to March 31, 1999 (Unaudited) General Limited Partners Partners* Total Balance, January 1, 1998 $110,896 $16,469,102 $16,579,998 Net income 23,748 1,163,640 1,187,388 Return of capital distribution -- (439,619) (439,619) Cash distributions (17,951) (1,552,049) (1,570,000) Balance, December 31, 1998 116,693 15,641,074 15,757,767 Net income 7,335 359,420 366,755 Cash distributions -- (500,899) (500,899) Balance, March 31, 1999 $124,028 $15,499,595 $15,623,623 * Total Units sold at March 31, 1999 and December 31, 1998 were 2,230,375. Cash distributions to Limited Partners per Unit were $0.22 and $0.69 for the three months ended March 31, 1999 and the year ended December 31, 1998, respectively. In addition, a return of capital distribution of approximately $0.20 per Unit was made during the year ended December 31, 1998. See accompanying notes to consolidated financial statements. BRAUVIN INCOME PLUS L.P. III (a Delaware limited partnership) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, (Unaudited) 1999 1998 Cash flows from operating activities: Net income $ 366,755 $ 425,123 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 92,405 96,245 Gain on the sale of property -- (14,614) Minority interest's share of income from Brauvin Chili's Limited Partnership 119 96 Equity interest in net income from: Brauvin Bay County Venture (7,314) (7,013) Brauvin Gwinnett County Venture (3,242) (3,196) Changes in: Rent receivables 3,070 5,555 Deferred rent receivable (4,190) (2,157) Other assets (1,280) -- Accounts payable and accrued expenses 26,547 (5,942) Rent received in advance 49,037 501 Due to affiliates 705 1 Tenant security deposits -- (577) Net cash provided by operating activities 522,612 494,022 Cash flows from investing activities: Proceeds from the sale of property -- 150,000 Cash distribution from: Brauvin Bay County Venture 6,800 8,840 Brauvin Gwinnett County Venture 5,120 3,648 Cash provided by investing activities 11,920 162,488 Cash flows from financing activities: Cash distributions to General Partners -- (15,069) Cash distributions to Limited Partners (500,899) -- Cash distribution to minority interest - Brauvin Chili's Limited Partnership (175) (50) Cash used in financing activities (501,074) (15,119) Net increase in cash and cash equivalents 33,458 641,391 Cash and cash equivalents at beginning of period 849,223 463,110 Cash and cash equivalents at end of period $882,681 $1,104,501 See accompanying notes to consolidated financial statements. BRAUVIN INCOME PLUS L.P. III (a Delaware limited partnership) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION BRAUVIN INCOME PLUS L.P. III (the "Partnership") is a Delaware limited partnership organized for the purpose of acquiring debt-free ownership of existing, free-standing, income-producing retail, office or industrial real estate properties predominantly subject to "triple-net" leases. The General Partners of the Partnership are Brauvin Realty Advisors III, Inc. and Jerome J. Brault. Brauvin Realty Advisors III, Inc. is owned by Messrs. Brault (beneficially) (50%) and Cezar M. Froelich (50%). Mr. Froelich resigned as a director of Brauvin Realty Advisors III, Inc. in December 1994 and as an Individual General Partner effective as of September 17, 1996. Brauvin Securities, Inc., an affiliate of the General Partners, was the selling agent for the Partnership. The Partnership is managed by an affiliate of the General Partners. The Partnership was formed on July 31, 1989 and filed a Registration Statement on Form S-11 with the Securities and Exchange Commission which was declared effective on October 30, 1989. The sale of the minimum of $1,200,000 of limited partnership interests of the Partnership (the "Units") necessary for the Partnership to commence operations was achieved on January 15, 1990. The Partnership's offering was originally expected to close on October 29, 1990 but the Partnership, with the receipt of the necessary regulatory approval, extended the offering until it closed on October 29, 1991. Through March 31, 1998 and December 31, 1997, the Partnership has sold $22,766,719 of Units. This total include $1,459,119 of Units raised by Limited Partners who utilized their distributions of Operating Cash Flow to purchase additional Units through the distribution reinvestment plan (the "Plan"). Units valued at $462,972 have been repurchased by the Partnership from Limited Partners liquidating their investment in the Partnership and have been retired as of March 31, 1999 and December 31, 1998. As of March 31, 1999, the Plan participants have acquired Units under the Plan which approximate 6% of the total Units outstanding. The Partnership has acquired the land and buildings underlying five Ponderosa restaurants (one of which was sold in 1998, see Note 6), two Chi-Chi's restaurants, one International House of Pancakes restaurant, one Applebee's restaurant, two Sports Unlimited stores, and three Steak n Shake restaurants. The Partnership also acquired 99.5%, 6.4% and 34.0% equity interests in three joint ventures with entities affiliated with the Partnership. These ventures own the land underlying a Chili's restaurant, a CompUSA store and a Blockbuster Video store, respectively. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Management's Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounting Method The accompanying financial statements have been prepared using the accrual method of accounting. Rental Income Rental income is recognized on a straight-line basis over the life of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are credited or charged as applicable to deferred rent receivable. Federal Income Taxes Under the provisions of the Internal Revenue Code, the Partnership's income and losses are reportable by the partners on their respective income tax returns. Accordingly, no provision is made for Federal income taxes in the consolidated financial statements. However, in certain instances, the Partnership has been required under applicable state law to remit directly to the tax authorities amounts representing withholding from distributions paid to partners. Consolidation of Joint Venture The Partnership owns a 99.5% equity interest in one joint venture, Brauvin Chili's Limited Partnership, which owns one Chili's restaurant. The accompanying financial statements have consolidated 100% of the assets, liabilities, operations and partners' capital of Brauvin Chili's Limited Partnership. All significant intercompany accounts have been eliminated. Investment in Joint Venture The Partnership owns a 6.4% and a 34.0% equity interest in two joint ventures, Brauvin Gwinnett County Venture, which owns one CompUSA store, and Brauvin Bay County Venture, which owns one Blockbuster Video store, respectively. The accompanying financial statements include the investments in Brauvin Gwinnett County Venture and Brauvin Bay County Venture using the equity method of accounting. Investment in Real Estate The Partnership's rental properties are stated at cost including acquisition costs. Depreciation is recorded on a straight-line basis over the estimated economic lives of the properties which approximate 35 years. The Partnership has performed an analysis of its long-lived assets, and the Partnership's management determined that there were no events or changes in circumstances that indicated that the carrying amount of the assets may not be recoverable at March 31, 1999 and December 31, 1998. Accordingly, no impairment loss has been recorded in the accompanying financial statements for the three months ended March 31, 1999 and the year ended December 31, 1998. Offering Costs Offering costs represent costs incurred in selling Units, such as the printing of the Prospectus and marketing materials. Offering costs have been recorded as a reduction of Limited Partners' Capital. Prepaid offering costs represent amounts in excess of the defined percentages of the gross proceeds. Prior to the commencement of the Partnership's proxy solicitation (see Note 5), gross proceeds were expected to increase due to the purchase of additional Units through the Plan and the prepaid offering costs would be transferred to offering costs and treated as a reduction in Partners' Capital. Cash and Cash Equivalents Cash equivalents include all highly liquid debt instruments with an original maturity within three months of purchase. Estimated Fair Value of Financial Instruments Disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments." The estimated fair value amounts have been determined by using available market information and appropriate valuation methodologies. However, considerable judgement is necessarily required in interpreting market data to develop estimates of fair value. The fair value estimates presented herein are based on information available to management as of March 31, 1999 and December 31, 1998, 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; other assets; accounts payable and accrued expenses; rent received in advance; and due to affiliate. (2) PARTNERSHIP AGREEMENT Distributions All Operating Cash Flow, as defined in the Partnership Agreement (the "Agreement") shall be distributed: (a) first, to the Limited Partners until the Limited Partners receive an amount equal to a 9-1/4% non-cumulative, non-compounded, annual return on Adjusted Investment, as such term is defined in the Agreement, commencing on the last day of the calendar quarter in which the Unit was purchased (the "Current Preferred Return"); and (b) thereafter, any remaining amounts will be distributed 98% to the Limited Partners (on a pro rata basis) and 2% to the General Partners. The net proceeds of a sale or refinancing of a Partnership property shall be distributed as follows: * first, pro rata to the Limited Partners until each Limited Partner has received an amount equal to a 10.5% cumulative, non-compounded, annual return of Adjusted Investment (the "Cumulative Preferred Return"); * second, to the Limited Partners until each Limited Partner has been paid an amount equal to his Adjusted Investment, as defined in the Agreement, apportioned pro rata among the Limited Partners based on the amount of the Adjusted Investment; and * thereafter, 95% to the Limited Partners (apportioned pro rata based on Units) and 5% to the General Partners. Profits and Losses Net profits and losses from operations of the Partnership [computed without regard to any allowance for depreciation or cost recovery deductions under the Internal Revenue Code of 1986, as amended (the "Code")] for each taxable year of the Partnership shall be allocated to each Partner in the same ratio as the cash distributions received by such Partner attributable to that period bears to the total cash distributed by the Partnership. In the event that there are no cash distributions, net profits and losses from operations of the Partnership (computed without regard to any allowance for depreciation or cost recovery deductions under the Code) shall be allocated 99% to the Limited Partners and 1% to the General Partners. Notwithstanding the foregoing, all depreciation and cost recovery deductions allowed under the Code shall be allocated 2% to the General Partners and 98% to the Taxable Class Limited Partners, as defined in the Agreement. The net profit of the Partnership from any sale or other disposition of a Partnership property shall be allocated (with ordinary income being allocated first) as follows: (a) first, an amount equal to the aggregate deficit balances of the Partners' Capital Accounts, as such term is defined in the Agreement, shall be allocated to each Partner who or which has a deficit Capital Account balance in the same ratio as the deficit balance of such Partner's Capital Account bears to the aggregate of the deficit balances of all Partners' Capital Accounts; (b) second, to the Limited Partners until the Capital Account balances of the Limited Partners are equal to any unpaid Cumulative Preferred Return, as of such date; (c) third, to the Limited Partners until the Capital Account balances of the Limited Partners are equal to the sum of the amount of their Adjusted Investment plus any unpaid Cumulative Preferred Return; (d) fourth, to the General Partners until their Capital Account balances are equal to any previously subordinated fees; and (e) thereafter, 95% to the Limited Partners and 5% to the General Partners. The net loss of the Partnership from any sale or other disposition of a Partnership property shall be allocated as follows: (a) first, an amount equal to the aggregate positive balances in the Partners' Capital Accounts, to each Partner in the same ratio as the positive balance in such Partner's Capital Account bears to the aggregate of all Partners' positive Capital Accounts balances; and (b) thereafter, 95% to the Limited Partners and 5% to the General Partners. (3) TRANSACTIONS WITH RELATED PARTIES The Partnership pays an affiliate of the General Partners an annual property management fee equal to up to 1% of gross revenues derived from Partnership properties managed by such affiliate. The property management fee is subordinated to receipt by the Limited Partners of distributions of Operating Cash Flow in an amount equal to the Current Preferred Return. An affiliate of one of the General Partners provided securities and real estate counsel to the Partnership. The Partnership pays affiliates of the General Partners selling commissions of 7-1/2% of the capital contributions received for Units sold by the affiliates. The Partnership pays an affiliate of the General Partners an acquisition fee in the amount of up to 5% of the gross proceeds of the Partnership's offering for the services rendered in connection with the process pertaining to the acquisition of a property. Acquisition fees related to the properties not ultimately purchased by the Partnership are expensed as incurred. Fees, commissions and other expenses paid or payable to the General Partners or its affiliates for the three months ended March 31, 1999 and 1998 were as follows: 1999 1998 Management fees $ 6,100 $ 5,838 Reimbursable operating expenses 29,832 25,800 As of March 31, 1999 and December 31, 1998, the Partnership has made all payments to affiliates except for $2,292 and $1,587, respectively, related to management fees. (4) INVESTMENT IN JOINT VENTURES The Partnership owns equity interests in the Brauvin Gwinnett County Venture and the Brauvin Bay County Venture and reports its investments on the equity method. The following are condensed financial statements for the Brauvin Gwinnett County Venture and the Bay County Venture: BRAUVIN GWINNETT COUNTY VENTURE March 31, 1999 December 31, 1998 Land and buildings, net $2,227,816 $2,239,254 Other assets 66,026 85,048 $2,293,842 $2,324,302 Liabilities $ 23,914 $ 25,029 Partners' capital 2,269,928 2,299,273 $2,293,842 $2,324,302 Three months Ended March 31, 1999 1998 Rental and other income $68,066 $68,938 Expenses: Depreciation 11,438 10,582 Management fees 658 446 Operating and administrative 5,315 7,980 17,411 19,008 Net income $50,655 $49,930 BRAUVIN BAY COUNTY VENTURE March 31, December 31, 1999 1998 Land and buildings, net $1,029,530 $1,033,942 Other assets 30,423 17,330 $1,059,953 $1,051,272 Liabilities $ 11,465 $ 4,296 Partners' capital 1,048,488 1,046,976 $1,059,953 $1,051,272 Three months Ended March 31, 1999 1998 Rental and other income $27,313 $27,357 Expenses: Depreciation 4,412 4,412 Management fees 501 291 Operating and administrative 887 2,027 5,800 6,730 Net income $21,513 $20,627 (5) MERGER AND LITIGATION Merger Pursuant to the terms of an agreement and plan of merger dated as of June 14, 1996, as amended March 24,1997, June 30, 1997, September 30, 1997, December 31, 1997, 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 units voted in favor of the Merger on November 8, 1996. A majority of the Limited Partners also voted in favor of an amendment of the Agreement allowing the Partnership to sell or lease property to affiliates (this amendment, together with the Merger shall be referred 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 the Assets, to satisfy the Partnership's requirements under the Employee Retirement Income Security Act of 1974, as amended. Cushman & Wakefield determined the fair market value of the Assets to be $19,129,150, or $8.58 per Unit, on April 1, 1996. Subsequently, the Partnership purchased a 34% interest in Brauvin Bay County Venture. Based on the terms of the Merger Agreement, the fair market value of the Assets was to be increased by the amount of the investment in Brauvin Bay County Venture, and correspondingly, the Partnership's cash holdings were to be reduced by the same amount and, therefore, the total redemption amount would remain unchanged. The redemption price of $8.85 per Unit also included all remaining cash of the Partnership, less net earnings of the Partnership from and after August 1, 1996 through December 31, 1996, less the Partnership's actual costs incurred and accrued through the effective time of the filing of the certificate of merger, including reasonable reserves in connection with: (i) the proxy solicitation; (ii) the Transaction (as detailed in the Merger Agreement); and (iii) the winding up of the Partnership, including preparation of the final audit, tax return and K-1s (collectively, the "Transaction Costs") and less all other Partnership obligations. Of the total redemption price stated above, approximately $0.27 was distributed to 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. In September 1997, one of the Partnership's properties located in Elmhurst, Illinois sustained extensive fire damage. The Partnership is currently negotiating with the insurance company and the tenant on the disposition of the insurance proceeds. Additionally, on September 3, 1998, the Partnership sold this property to an unaffiliated third party for a sales price of approximately $300,000, which resulted in a loss on the sale of approximately $289,500. 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 $525,800, $361,400, $644,100 and $500,900. In addition, distributions of approximately $21,500 were paid to various states for income taxes on behalf of all Limited Partners in 1998. A distribution of the Partnership's net earnings for the periods January 1, 1999 to March 31, 1999 was made to Limited Partners on May 17, 1999, in the amount of approximately $512,200. Litigation Two legal actions, as hereinafter described, were pending at December 31, 1998 against the General Partners of the Partnership and affiliates of such General Partners, as well as against the Partnership on a nominal basis in connection with the Merger, with regard to the Illinois Christman lawsuit, as described below. 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 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. One additional legal action, which was dismissed on January 28, 1998 had also been brought against the General Partners of the Partnership and affiliates of such General Partners, as well as the Partnership on a nominal basis in connection with the Merger. With respect to these actions the Partnership and the General Partners and their named affiliates denied all allegations set forth in the complaints and are 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 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. The named plaintiffs were not Limited Partners in the Partnership. Rather, the named plaintiffs are limited partners in Brauvin High Yield Fund L.P. II, one of the Affiliated Partnerships. Jerome J. Brault, the Managing General Partner of the Partnership, and Brauvin Realty Advisors III, Inc., the Corporate General Partner of the Partnership, as well as certain corporate general partners of the Affiliated Partnerships, were named as defendants in this lawsuit. James L. Brault, an officer of the Corporate General Partner and the son of Jerome J. Brault, was also named as a defendant. This lawsuit was dismissed for want of prosecution on January 28, 1998. B. The Illinois Christman Lawsuit On September 18, 1996, a class action lawsuit was filed in the United States District Court for the Northern District of Illinois, styled M. Barbara Christman, Joseph Forte, Janet M. Toolson, John Archbold, and Ben O. Carroll v. Brauvin Realty Advisors, Inc., Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors III, Inc., Brauvin Realty Advisors IV, Inc., Jerome J. Brault, Brauvin Real Estate Funds, L.L.C. and Brauvin High Yield Fund L.P., Brauvin High Yield Fund L.P. II, Brauvin Income Plus L.P. III, and Brauvin Corporate Lease Program IV L.P., Docket No. 96C6025. The Partnership and the Affiliated Partnerships are each named as a "Nominal Defendant" in the lawsuit. Jerome J. Brault and the Corporate General Partner of the Partnership, as well as the corporate general partners of the Affiliated Partnerships, are named as defendants. The plaintiffs filed an amended complaint on October 8, 1996, which alleges claims for breach of fiduciary duties, breaches of the Agreement, and violation of the Illinois Deceptive Trade Practices Act. The amended complaint seeks injunctive relief, as well as compensatory and punitive damages, relating to the Transaction. On October 2, 1996, the District Court certified plaintiffs' proposed class as all of the limited partners of the Partnership and of the Affiliated Partnerships, and appointed plaintiffs' counsel, The Mills Law Firm, as counsel for the class. On October 2, 1996, the District Court also conducted a hearing on plaintiffs' motion to preliminarily enjoin the special meetings of the limited partners and the Transaction. The District Court denied plaintiffs' motion for a preliminary injunction at the conclusion of the October 2, 1996 hearing. On September 27, 1996, counsel for plaintiffs, The Mills Law Firm, mailed a solicitation to all of the Limited Partners, requesting that they revoke their previously-mailed proxies in favor of the Merger. On October 11, 1996, the General Partners filed a counterclaim against plaintiffs and their counsel, The Mills Law Firm, alleging that plaintiffs and The Mills Law Firm violated the federal securities laws and proxy rules by sending their September 27, 1996 letter to the Limited Partners. The plaintiffs and The Mills Law Firm have moved to dismiss this counterclaim. The District Court has taken this motion under advisement and has yet to issue a ruling. On October 10 and 11, 1996, the District Court conducted an evidentiary hearing on the motion of the General Partners to invalidate revocations of proxies procured as a result of The Mills Law Firm's September 27, 1996 letter. In that evidentiary hearing, The Mills Law Firm admitted that it violated the proxy rules by sending its September 27, 1996 letter to the Limited Partners without filing such letter with the Commission (as defined below) in violation of the Commission's requirements. At the conclusion of the hearing on October 10 and 11, the District Court found that the General Partners have a likelihood of succeeding on the merits with respect to their claim that the September 27, 1996 letter sent to the Limited Partners by plaintiffs and The Mills Law Firm is false or misleading in several significant respects. Notwithstanding this finding, the District Court did not invalidate the revocations of proxies resulting from The Mills Law Firm's September 27, 1996 letter because it did not believe it possessed the authority to do so under present law. This ruling was appealed to the Seventh Circuit Court of Appeals. The Seventh Circuit Court of Appeals subsequently dismissed this appeal on the grounds that the appeal was rendered moot by the Limited Partners' approval November 8, 1996 of the Merger. On October 16, 1996 and on November 6, 1996, the parties filed cross-motions for partial summary judgement addressing the allegation in plaintiffs' amended complaint that the Agreement does not allow the Limited Partners to vote in favor of or against the Transaction by proxy. On August 12, 1998, the District Court granted plaintiffs' motion for partial summary judgement, holding that the Agreement did not allow the Limited Partners to vote in favor or against the Transaction by proxy. On April 2, 1997, the Court granted plaintiffs' leave to again amend their complaint. In their second amended complaint, plaintiffs named the Partnership as a "Nominal Defendant." Plaintiffs also added a new claim, alleging that the General Partners violated certain of the rules of the Securities and Exchange Commission (the "Commission") by making false and misleading statements in the Proxy. Plaintiffs also allege that the General Partners breached their fiduciary duties, breached various provisions of the Agreement, violated the Illinois Deceptive Trade Practice Act, and violated section 17-305 of the Delaware Revised Uniform Limited Partnership Act. The General Partners deny those allegations and will continue to vigorously defend against these claims. On April 2, 1997, plaintiffs again requested that the District Court enjoin the closing of the Transaction. After conducting a lengthy hearing on May 1, 1997, the District Court denied plaintiffs' motion to preliminarily enjoin the closing of the Transaction with the Purchaser. Plaintiffs filed a notice of appeal to the Seventh Circuit Court of Appeals from the District Court's May 1, 1997 order denying plaintiffs' motion to preliminarily enjoin the closing of the Transaction. This appeal was dismissed by the Seventh Circuit Court of Appeals on January 23, 1998, based on the appellate court's finding that the District Court's order of January 16, 1998 rendered the appeal moot. On January 16, 1998, by agreement of the Partnership and the General Partners and pursuant to a motion of the General Partners, the District Court entered an order preventing the Partnership and the General Partners from completing the Merger, or otherwise disposing of all or substantially all of the Partnership's assets, until further order of the Court. On January 28, 1998, the District Court entered an Order of Reference to Special Master, designating a Special Master and vesting the Special Master with authority to resolve certain aspects of the lawsuit subject to the District Court's review and confirmation. The Special Master 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 was engaged to perform a valuation of the Partnership. The cost to the Partnership for the services of the Financial Advisor is $110,000. 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 not limited partners in the Partnership, but are limited partners in one of the Affiliated Partnerships, Brauvin High Yield Fund L.P. II. On August 15, 1997, the plaintiffs filed an amended complaint dropping Benjamin Siegel as a plaintiff. The plaintiffs are also represented by the same lawyers that represented them in the Florida lawsuit. The complaint alleges a putative class action consisting of claims that certain Commission rules were violated by making false and misleading statements in the Proxy, the defendants breached their fiduciary duties and breached the Agreement. The complaint was consolidated with the Christman lawsuit, which is described above, pursuant to General Rule 2.31 of the United States District Court of the Northern District of Illinois. The General Partners deny these allegations and intend to vigorously defend these claims. There have been no material developments with respect to this lawsuit since it was filed on June 20, 1997; however, management believes that the terms of the April 13, 1999 settlement agreement described above will encompass this lawsuit. (6) PROPERTY SALES On March 18, 1998, the Partnership sold approximately .332 acres of land on which a Steak-n-Shake restaurant is situated to an unaffiliated third party for approximately $150,000, resulting in a gain of approximately $14,600. On September 3, 1998, the Partnership sold the Elmhurst, Illinois property to an unaffiliated third party for approximately $300,000, resulting in a loss of approximately $289,500. The Partnership continues to negotiate with the insurance company and the tenant on the disposition of the insurance proceeds as a result of the September, 1997, fire at this property. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. General Certain statements in this Quarterly Report that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Without limiting the foregoing, words such as "anticipates," "expects,""intends,""plans" and similar expressions are intended to identify forward-looking statements. Theses statements are subject to a number of risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The Partnership undertakes no obligation to update these forward-looking statements to reflect future events or circumstances. Year 2000 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 October 30, 1989 of 2,500,000 Units. The offering was anticipated to close on October 29, 1990 but was extended by the General Partners with the necessary regulatory approval to October 29, 1991. The Offering was conditioned upon the sale of $1,200,000, which was achieved on January 15, 1990. The Offering closed on October 29, 1991 with the Partnership raising a cumulative total of $21,307,600. Until the proxy solicitation process began, the Partnership continued to raise additional funds through the Plan. The Plan raised $1,459,119 through March 31, 1999 from Limited Partners investing their distributions of Operating Cash Flow in additional Units. As of March 31, 1999, Units valued at $462,972 have been repurchased by the Partnership from Limited Partners liquidating their investment in the Partnership and have been retired. Additionally, a return of capital distribution of $439,619 was distributed by the Partnership to Limited Partners during the year ended December 31, 1998. The Partnership purchased the land, buildings and improvements underlying five Ponderosa restaurants on January 19, 1990, February 16, 1990, March 19, 1990, April 24, 1990 and June 4, 1990, respectively. In addition, the Partnership closed on the land, buildings and improvements underlying two Chi-Chi's restaurants; the first closed on March 12, 1991 and the second closed on March 27, 1991. The land, buildings and improvements underlying an IHOP restaurant were purchased on April 26, 1991, an Applebee's restaurant on June 5, 1991 (which was expanded in 1992), two Sports Unlimited sporting goods stores on September 17, 1991, a Chili's restaurant on February 7, 1992 and three Steak n Shake restaurants on April 16, 1992. On February 7, 1992, the Partnership purchased a 99.5% equity interest in a joint venture with an affiliate, Brauvin Chili's Limited Partnership, which owns one Chili's restaurant. On November 9, 1993, the Partnership purchased a 6.4% interest in a joint venture with affiliated public real estate limited partnerships (the "Venture"). The Venture acquired the land and building underlying a 25,000 square foot CompUSA computer superstore from an unaffiliated seller. On October 31, 1996, the Partnership purchased a 34% joint venture equity interest in a joint venture with affiliated public real estate limited partnerships, the Brauvin Bay County Venture. The Bay County Venture purchased real property upon which is operated a newly constructed Blockbuster video store. The property contains a 6,466 square foot building located on a 40,075 square foot parcel of land. These operating properties are expected to generate cash flow for the Partnership after deducting certain operating and general and administrative expenses from their rental income. The Partnership has no funds available to purchase additional property, excluding those raised through the Plan. Distributions of the Partnership's net earnings for the period January 1, 1999 to March 31, 1999 was made to Limited Partners on May 17, 1999 in the amount of approximately $512,200. Distributions of the Partnership's net earnings for the period 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 $525,000, $361,400, $644,100 and $500,900. In addition, distributions of approximately $21,500 were paid to various states for income taxes on behalf of all Limited Partners during 1998. Below is a table summarizing the four year historical data for distribution rates per unit: Distribution Date 1999 (a) 1998 (b) 1997 (c) 1996 February 15 $.2246 $ -- $.2396 $.2313 May 15 .2296 .2368 .2390 .2313 August 15 -- .1621 .2190 -- November 15 (d) -- .2888 .5665 -- (a) The 1999 May distribution was made on May 17, 1999 (b) The 1998 distributions were made on May 8, 1998, August 15, 1998, November 15, 1998 and February 15, 1999. (c) The 1997 distributions were made on March 31, 1997, July 15, 1997, October 22, 1997 and December 31, 1997. (d) The November 15, 1998 distribution above does not include a return of capital distribution of approximately $0.1971, per Unit. 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, the reserves will be re-established by the Partnership as soon as a definitive sale process has been determined and 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 three months ended March 31, 1999 and the year ended December 31, 1998, the General Partners and their affiliates earned management fees of $6,100, $23,172, respectively, and received $0 and $17,951 in Operating Cash Flow distributions for the three months ended March 31, 1999 and the year ended December 31, 1998, respectively. Included in the $17,951 received in 1998 was approximately $15,100 the Partnership paid the General Partners 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 Agreement, the Limited Partners would have received approximately $8.85 per Unit in cash; of this original amount, approximately $0.27 has already been distributed to the Limited Partners. Promptly upon consummation, 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 Commission, to solicit proxies for use at the Special Meeting originally to be held at the offices of the Partnership on September 24, 1996. As a result of various legal issues, as described in legal proceedings, the Special Meeting was adjourned to November 8, 1996 at 10:00 a.m. The purpose of the Special Meeting was to vote upon the Merger and certain other matters as described in the Proxy. By approving the Merger, the Limited Partners also 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 also asked to approve the adoption of an amendment to the Agreement to allow the majority vote of the Limited Partners to determine the outcome of the Transaction with the Purchaser without the vote of the General Partners. Neither the Act nor the Agreement provides the Limited Partners not voting in favor of the Transaction with dissenters' appraisal rights. The redemption price to be paid to the Limited Partners in connection with the Merger 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 the Assets, to satisfy the Partnership's requirements under the Employee Retirement Income Security Act of 1974, as amended. Cushman & Wakefield determined the fair market value of the Assets to be $19,129,150, or $8.58 per Unit, on April 1, 1996. Subsequently, the Partnership purchased a 34% interest in Brauvin Bay County Venture. Based on the terms of the Merger Agreement, the fair market value of the Assets will be increased by the amount of the investment in Brauvin Bay County Venture, and correspondingly, the Partnership's cash holdings were reduced by the same amount and therefore the total redemption amount would remain unchanged. The redemption price of $8.85 per Unit also included all remaining cash of the Partnership, less net earnings of the Partnership from and after August 1, 1996 through December 31, 1996, less the Partnership's actual costs incurred and accrued through the effective time of the filing of the certificate of merger, including reasonable reserves in connection with: (i) the proxy solicitation; (ii) the Transaction (as detailed in the Merger Agreement); and (iii) the winding up of the Partnership, including preparation of the final audit, tax return and K-1s (collectively, the "Transaction Costs") and less all other Partnership obligations. Of the original cash redemption amount approximately $0.27 was distributed to Limited Partners in the December 31, 1997 distribution. Cushman & Wakefield subsequently provided an opinion as to the fairness of the Transaction to the Limited Partners from a financial point of view. In its opinion, Cushman & Wakefield advised that, the price per Unit reflected in the Transaction 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 properties, the price reflected in the Transaction was believed by Cushman & Wakefield to be reasonable. Mr. Jerome J. Brault is the Managing General Partner and Brauvin Realty Advisors III, Inc. is the Corporate General Partner. Mr. Cezar M. Froelich resigned his position as an Individual General Partner of the Partnership effective as of September 17, 1996. The General Partners 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. Froelich's lack of future involvement will have any adverse effect on the Partnership. The Managing General Partner and his son, James L. Brault, an executive officer of the Corporate General Partner, 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. Mr. Froelich has 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 the Partnership Agreement did not allow the Limited Partners to vote in favor or against the Transaction by proxy. As discussed in "Legal Proceedings", 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 1999 and 1998 distributions were based on the net earnings of the Partnership for the three months ended March 31, 1999 and the year ended December 31, 1998, respectively. These distributions were lower than they otherwise would be because the Partnership has incurred significant legal costs to defend against the lawsuits. In addition, the remaining term on the Partnership's properties' leases continue to shrink. This fact is causing the Partnership to potentially face the risks and costs of lease rollover. This heightened degree of risk may also have an adverse effect on the ultimate value of the Assets. Further, the Partnership's most significant tenant, Ponderosa, has recently closed and vacated six of the Affiliated Partnerships' properties. However, subsequent to their closings, two properties have been reopened and subleased to two unrelated local concept restaurant operators and two have been sold to unaffiliated third parties. Fortunately, none of the Partnership's properties has been closed, with the exception of the Elmhurst property (as described below). However, this is the type of risk the Partnership was seeking to avoid with the successful completion of the Merger. In September 1997, one of the Partnership's property located in Elmhurst, Illinois sustained extensive fire damage. The Partnership is currently negotiating with the insurance company and the tenant on the disposition of the insurance proceeds. On September 3, 1998, the Partnership sold the Elmhurst property to an unaffiliated third party for approximately $300,000, resulting in a loss of approximately $289,500. As detailed in "Legal Proceedings" 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. The cost to the Partnership for the services of the Financial Advisor was $110,000. 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. Results of Operations - Three months ended March 31, 1999 and 1998 Results of operations for the three months ended March 31, 1999 reflected net income of $366,755 compared to $425,123 for the three months ended March 31, 1998, a decrease of approximately $58,400. Total income for the three months ended March 31, 1999 was $560,672 as compared to $572,084 for the three months ended March 31, 1998, an decrease of approximately $11,400. The decrease in total income was mainly due to an decrease in rental income as a result of the loss of rental revenue associated with the sale of the Elmhurst, Illinois property. Total expenses for the three months ended March 31, 1999 were $204,354 as compared to $171,688 for the three months ended March 31, 1998, an increase of approximately $32,700. The increase in expenses was due to a increase in Transaction costs related to the professional fees associated with the settlement of the class action lawsuit. Item 3. Quantitative and Qualitative Disclosures about Market Risk. The Partnership does not engage in any hedge transactions or derivative financial instruments. Part II Item 1. Legal Proceedings. Two legal actions, as hereinafter described, were pending at December 31, 1998 against the General Partners of the Partnership and affiliates of such General Partners, as well as against the Partnership on a nominal basis in connection with the Merger, with regard to the Illinois Christman lawsuit, as described below. 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 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. One additional legal action, which was dismissed on January 28, 1998 had also been brought against the General Partners of the Partnership and affiliates of such General Partners, as well as the Partnership on a nominal basis in connection with the Merger. With respect to these actions the Partnership and the General Partners and their named affiliates denied all allegations set forth in the complaints and are 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 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. The named plaintiffs were not Limited Partners in the Partnership. Rather, the named plaintiffs are limited partners in Brauvin High Yield Fund L.P. II, one of the Affiliated Partnerships. Jerome J. Brault, the Managing General Partner of the Partnership, and Brauvin Realty Advisors III, Inc., the Corporate General Partner of the Partnership, as well as certain corporate general partners of the Affiliated Partnerships, were named as defendants in this lawsuit. James L. Brault, an officer of the Corporate General Partner and the son of Jerome J. Brault, was also named as a defendant. This lawsuit was dismissed for want of prosecution on January 28, 1998. B. The Illinois Christman Lawsuit On September 18, 1996, a class action lawsuit was filed in the United States District Court for the Northern District of Illinois, styled M. Barbara Christman, Joseph Forte, Janet M. Toolson, John Archbold, and Ben O. Carroll v. Brauvin Realty Advisors, Inc., Brauvin Realty Advisors II, Inc., Brauvin Realty Advisors III, Inc., Brauvin Realty Advisors IV, Inc., Jerome J. Brault, Brauvin Real Estate Funds, L.L.C. and Brauvin High Yield Fund L.P., Brauvin High Yield Fund L.P. II, Brauvin Income Plus L.P. III, and Brauvin Corporate Lease Program IV L.P., Docket No. 96C6025. The Partnership and the Affiliated Partnerships are each named as a "Nominal Defendant" in the lawsuit. Jerome J. Brault and the Corporate General Partner of the Partnership, as well as the corporate general partners of the Affiliated Partnerships, are named as defendants. The plaintiffs filed an amended complaint on October 8, 1996, which alleges claims for breach of fiduciary duties, breaches of the Agreement, and violation of the Illinois Deceptive Trade Practices Act. The amended complaint seeks injunctive relief, as well as compensatory and punitive damages, relating to the Transaction. On October 2, 1996, the District Court certified plaintiffs' proposed class as all of the limited partners of the Partnership and of the Affiliated Partnerships, and appointed plaintiffs' counsel, The Mills Law Firm, as counsel for the class. On October 2, 1996, the District Court also conducted a hearing on plaintiffs' motion to preliminarily enjoin the special meetings of the limited partners and the Transaction. The District Court denied plaintiffs' motion for a preliminary injunction at the conclusion of the October 2, 1996 hearing. On September 27, 1996, counsel for plaintiffs, The Mills Law Firm, mailed a solicitation to all of the Limited Partners, requesting that they revoke their previously-mailed proxies in favor of the Merger. On October 11, 1996, the General Partners filed a counterclaim against plaintiffs and their counsel, The Mills Law Firm, alleging that plaintiffs and The Mills Law Firm violated the federal securities laws and proxy rules by sending their September 27, 1996 letter to the Limited Partners. The plaintiffs and The Mills Law Firm have moved to dismiss this counterclaim. The District Court has taken this motion under advisement and has yet to issue a ruling. On October 10 and 11, 1996, the District Court conducted an evidentiary hearing on the motion of the General Partners to invalidate revocations of proxies procured as a result of The Mills Law Firm's September 27, 1996 letter. In that evidentiary hearing, The Mills Law Firm admitted that it violated the proxy rules by sending its September 27, 1996 letter to the Limited Partners without filing such letter with the Commission (as defined below) in violation of the Commission's requirements. At the conclusion of the hearing on October 10 and 11, the District Court found that the General Partners have a likelihood of succeeding on the merits with respect to their claim that the September 27, 1996 letter sent to the Limited Partners by plaintiffs and The Mills Law Firm is false or misleading in several significant respects. Notwithstanding this finding, the District Court did not invalidate the revocations of proxies resulting from The Mills Law Firm's September 27, 1996 letter because it did not believe it possessed the authority to do so under present law. This ruling was appealed to the Seventh Circuit Court of Appeals. The Seventh Circuit Court of Appeals subsequently dismissed this appeal on the grounds that the appeal was rendered moot by the Limited Partners' approval November 8, 1996 of the Merger. On October 16, 1996 and on November 6, 1996, the parties filed cross-motions for partial summary judgement addressing the allegation in plaintiffs' amended complaint that the Agreement does not allow the Limited Partners to vote in favor of or against the Transaction by proxy. On August 12, 1998, the District Court granted plaintiffs' motion for partial summary judgement, holding that the Agreement did not allow the Limited Partners to vote in favor or against the Transaction by proxy. On April 2, 1997, the Court granted plaintiffs' leave to again amend their complaint. In their second amended complaint, plaintiffs named the Partnership as a "Nominal Defendant." Plaintiffs also added a new claim, alleging that the General Partners violated certain of the rules of the Securities and Exchange Commission (the "Commission") by making false and misleading statements in the Proxy. Plaintiffs also allege that the General Partners breached their fiduciary duties, breached various provisions of the Agreement, violated the Illinois Deceptive Trade Practice Act, and violated section 17-305 of the Delaware Revised Uniform Limited Partnership Act. The General Partners deny those allegations and will continue to vigorously defend against these claims. On April 2, 1997, plaintiffs again requested that the District Court enjoin the closing of the Transaction. After conducting a lengthy hearing on May 1, 1997, the District Court denied plaintiffs' motion to preliminarily enjoin the closing of the Transaction with the Purchaser. Plaintiffs filed a notice of appeal to the Seventh Circuit Court of Appeals from the District Court's May 1, 1997 order denying plaintiffs' motion to preliminarily enjoin the closing of the Transaction. This appeal was dismissed by the Seventh Circuit Court of Appeals on January 23, 1998, based on the appellate court's finding that the District Court's order of January 16, 1998 rendered the appeal moot. On January 16, 1998, by agreement of the Partnership and the General Partners and pursuant to a motion of the General Partners, the District Court entered an order preventing the Partnership and the General Partners from completing the Merger, or otherwise disposing of all or substantially all of the Partnership's assets, until further order of the Court. On January 28, 1998, the District Court entered an Order of Reference to Special Master, designating a Special Master and vesting the Special Master with authority to resolve certain aspects of the lawsuit subject to the District Court's review and confirmation. The Special Master 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 was engaged to perform a valuation of the Partnership. The cost to the Partnership for the services of the Financial Advisor is $110,000. 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 not limited partners in the Partnership, but are limited partners in one of the Affiliated Partnerships, Brauvin High Yield Fund L.P. II. On August 15, 1997, the plaintiffs filed an amended complaint dropping Benjamin Siegel as a plaintiff. The plaintiffs are also represented by the same lawyers that represented them in the Florida lawsuit. The complaint alleges a putative class action consisting of claims that certain Commission rules were violated by making false and misleading statements in the Proxy, the defendants breached their fiduciary duties and breached the Agreement. The complaint was consolidated with the Christman lawsuit, which is described above, pursuant to General Rule 2.31 of the United States District Court of the Northern District of Illinois. The General Partners deny these allegations and intend to vigorously defend these claims. There have been no material developments with respect to this lawsuit since it was filed on June 20, 1997; however, management believes that the terms of the April 13, 1999 settlement agreement described above will encompass this lawsuit. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports On Form 8-K. Exhibit 27. Financial Data Schedule SIGNATURES Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BY: Brauvin Realty Advisors III, Inc. Corporate General Partner of Brauvin Income Plus L.P. III BY: /s/ Jerome J. Brault Jerome J. Brault Chairman of the Board of Directors, President and Chief Executive Officer DATE: May 17, 1999 BY: /s/ Thomas E. Murphy Thomas E. Murphy Chief Financial Officer and Treasurer DATE: May 17, 1999