10QSB 1 f4.txt BRAUVIN REAL ESTATE FUND 4 - 3/31/02 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2002 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 0-13402 Brauvin Real Estate Fund L.P. 4 (Name of small business issuer as specified in its charter) Delaware 36-3304339 (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 (Issuer's telephone number) 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) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . INDEX PART I Page Item 1. Consolidated Financial Statements. . . . . . . . . . . . . . 3 Consolidated Statement of Net Assets in Liquidation as of March 31, 2002 (Liquidation Basis) . . . . . . . . . . 4 Consolidated Statement of Changes in Net Assets in Liquidation for the period January 1, 2002 to March 31, 2002 (Liquidation Basis) . . . . . . . . . . . . . 5 Consolidated Statement of Changes in Net Assets in Liquidation for the period January 1, 2001 to March 31, 2001 (Liquidation Basis) . . . . . . . . . . . . . 6 Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 (Liquidation Basis). . . . . . . . . . . . . . . . . . . . . 7 Notes to Consolidated Financial Statements . . . . . . . . 8 Item 2. Management's Discussion and Analysis or Plan of Operation . . . . . . . . . . . . . . . . . . . . . . . .20 PART II Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . .28 Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . .28 Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . .28 Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . . . . . . .28 Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . .28 Item 6. Exhibits, and Reports on Form 8-K. . . . . . . . . . . . . .28 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 PART I - FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements The following Consolidated Statement of Net Assets in Liquidation as of March 31, 2002 (Liquidation Basis), Consolidated Statement of Changes in Net Assets in Liquidation for the period January 1, 2002 to March 31, 2002 (Liquidation Basis), Consolidated Statement of Changes in Net Assets in Liquidation for the period January 1, 2001 to March 31, 2001 (Liquidation Basis) and Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 (Liquidation Basis) for Brauvin Real Estate Fund L.P. 4 (the "Partnership") are unaudited 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 financial statements and notes thereto included in the Partnership's 2001 Annual Report on Form 10-KSB. CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION AS OF MARCH 31, 2002 (LIQUIDATION BASIS) (Unaudited) ASSETS Real estate held for sale $6,983,000 Investment in Sabal Joint Venture (Note 6) 75,634 Cash and cash equivalents 741,189 Tenant receivables 82,692 Other assets 7,017 Utility deposits 2,707 Total Assets 7,892,239 LIABILITIES Mortgage notes payable (Note 4) 4,886,147 Accounts payable and accrued expenses 156,162 Deferred gain on sale of real estate (Note 2) 464,312 Reserve for estimated costs during the period of liquidation 189,875 Tenant security deposits 22,725 Due to affiliates 18,565 Total Liabilities 5,737,786 MINORITY INTEREST IN STRAWBERRY JOINT VENTURE (1,359) Net Assets in Liquidation $2,155,812 See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION FOR THE PERIOD JANUARY 1, 2002 TO MARCH 31, 2002 (LIQUIDATION BASIS) (Unaudited) Net assets in liquidation at January 1, 2002 $2,153,149 Income from operations 2,663 Net assets in liquidation at March 31, 2002 $2,155,812 See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION FOR THE PERIOD JANUARY 1, 2001 TO MARCH 31, 2001 (LIQUIDATION BASIS) (Unaudited) Net assets in liquidation at January 1, 2001 $2,249,655 Income from operations 77,875 Net assets in liquidation at March 31, 2001 $2,327,530 See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF OPERATIONS For the three months ended March 31, 2002 and 2001 (Liquidation Basis) (Unaudited) 2002 2001 INCOME Rental $233,132 $459,958 Interest 408 10,751 Other, primarily tenant expense reimbursements 56,073 83,588 Total income 289,613 554,297 EXPENSES Interest 119,026 217,618 Real estate taxes 50,498 69,110 Repairs and maintenance 27,377 14,843 Management fees (Note 5) 20,787 27,406 Other property operating 22,751 29,193 General and administrative 55,869 85,604 Total expenses 296,308 443,774 (Loss)income before minority and equity interests (6,695) 110,523 Minority interest's share of Strawberry Fields Joint Venture's net income -- (35,625) Equity interest in Sabal Palm Joint Venture's net income 9,358 2,977 Net income $ 2,663 $ 77,875 Net income allocated to the General Partners $ 27 $ 779 Net income allocated to the Limited Partners $ 2,636 $ 77,096 Net income per Limited Partnership Interest (9,550 units outstanding) $ 0.28 $ 8.07 See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization The financial statements consolidate the accounts of Brauvin Real Estate Fund L.P. 4 (the "Partnership") and a joint venture ("Strawberry Joint Venture") in which the Partnership has a 58% interest. Additionally, the Partnership has a 47% interest in another joint venture, which is accounted for using the equity method of accounting. The Partnership is a Delaware limited partnership organized for the purpose of acquiring, operating, holding for investment and disposing of existing office buildings, medical office centers, shopping centers and industrial and retail commercial buildings of a general purpose nature, all in metropolitan areas. The General Partners of the Partnership are Brauvin Ventures, Inc. and Jerome J. Brault. Mr. Cezar M. Froelich resigned as a director of the corporate general partner in December 1994, and resigned as an Individual General Partner effective 90 days from August 14, 1997. Brauvin Ventures, Inc. is owned by A.G.E. Realty Corporation Inc.(50%), and by Messrs. Brault (beneficially) (25%) and Froelich (25%). A. G. Edwards & Sons, Inc. and Brauvin Securities, Inc., affiliates of the General Partners, were the selling agents of the Partnership. The Partnership is managed by an affiliate of the General Partners. The General Partners of the Partnership filed a Registration Statement on Form S-11 with the Securities and Exchange Commission, which became effective on February 16, 1984. 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 April 30, 1984 and the Partnership was formed. The Partnership's offering closed on December 31, 1984. A total of $9,550,000 of Units were subscribed and issued between February 16, 1984 and December 31, 1984 pursuant to the Partnership's public offering. Properties acquired by the Partnership either directly or indirectly through joint ventures are: (a) Fortune Professional Building; (b) Raleigh Springs Marketplace; (c) Strawberry Fields Shopping Center(which was sold in July 2001) and (d) Sabal Palm Shopping Center. 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. Basis of Presentation As a result of the July 12, 1999 authorization by a majority of the Limited Partners to sell the Partnership's properties, the Partnership has begun the liquidation process and, in accordance with generally accepted accounting principles, the Partnership's financial statements for periods subsequent to July 12, 1999 have been prepared on the liquidation basis of accounting. Accordingly, the carrying values of assets are presented at their net realizable values and liabilities are presented at estimated settlement amounts, including estimated costs associated with carrying out the liquidation. Preparation of the financial statements on a liquidation basis requires significant assumptions by management, including the estimate of liquidation costs and the resolution of any contingent liabilities. There may be differences between the assumptions and the actual results because events and circumstances frequently do not occur as expected. Those differences, if any, could result in a change in the net assets recorded in the statement of net assets as of March 31, 2002. Accounting Method The accompanying consolidated financial statements have been prepared using the accrual 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. Consolidation of Joint Venture Partnership The Partnership owns a 58% equity interest in an affiliated joint venture ("Strawberry Joint Venture"), which acquired Strawberry Fields Shopping Center ("Strawberry Fields"). The accompanying consolidated financial statements include 100% of the assets, liabilities, operations and partners' capital of Strawberry Joint Venture. The minority interest in the consolidated joint venture is adjusted for the joint venture partner's share of income or loss and any cash contributions to or cash disbursements from the joint venture partner, Brauvin Real Estate Fund L.P. 5 ("BREF 5"). All significant intercompany balances and transactions have been eliminated. Investment in Joint Venture Partnership The Partnership owns a 47% equity interest in Sabal Palm Joint Venture. The accompanying financial statements include the investment in Sabal Palm Joint Venture at estimated net realizable value using the equity method of accounting. Investment in Real Estate Prior to the preparation of the financial statements on the liquidation basis of accounting, the operating properties acquired by the Partnership were stated at cost, including acquisition costs, leasing commissions, and tenant improvements, and net of impairment losses. Depreciation and amortization were recorded on a straight-line basis over the estimated economic lives of the properties, which approximate 38 years, and the term of the applicable leases, respectively. All of the Partnership's properties are subject to liens under first mortgages (see Note 4). Subsequent to the adoption of the liquidation basis of accounting (see Note 2), the Partnership adjusted its investments in real estate to estimated net realizable value, which is recorded as real estate held for sale. Additionally, the Partnership suspended recording any further depreciation expense. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid debt instruments with an original maturity within three months from date of purchase. The Partnership maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Partnership has not experienced any losses in such accounts. Management believes the Partnership is not exposed to any significant credit risk related to cash or cash equivalents. 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, 2002, 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. In connection with the adoption of the liquidation basis of accounting, which approximates fair value at March 31, 2002 (Note 2), assets were adjusted to net realizable value, and liabilities were adjusted to estimated settlement amounts. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which requires that all derivatives be recognized as assets and liabilities in the balance sheet and be measured at fair value. SFAS 133 also requires changes in fair value of derivatives to be recorded each period in current earnings or comprehensive income depending on the intended use of the derivatives. In June, 2000, the FASB issued SFAS 138, which amends the accounting and reporting standards of SFAS 133 for certain derivatives and certain hedging activities. SFAS 133 and SFAS 138 were required to be adopted by the Partnership effective January 1, 2001. The adoption of SFAS 133 and SFAS 138 did not have a material impact on the financial position, results of operations and cash flows of the Partnership. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"). SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which was effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which is effective for years beginning after June 15, 2002. SFAS 143 requires recognition of a liability and associated asset for the fair value of costs arising from legal obligations associated with the retirement of tangible long-lived assets. The asset is to be allocated to expense over its estimated useful life. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which was effective for fiscal years beginning after December 15, 2001. SFAS 144 supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 144 retains the recognition and measurement requirements of SFAS 121, but resolves significant SFAS 121 implementation issues. In addition, it applies to a segment of a business accounted for as a discontinued operation (which was formerly covered by portions of Accounting Principles Board Opinion No. 30). The Partnership does not believe that the adoption of SFAS 141, 142, 143 and 144 will have a significant impact on its financial statements. (2) ADJUSTMENT TO LIQUIDATION BASIS On July 12, 1999, in accordance with the liquidation basis of accounting, assets were adjusted to their estimated net realizable values and liabilities were adjusted to their estimated settlement amounts, including estimated costs associated with carrying out the liquidation. As of June 30, 2001, the Partnership adjusted its investment in real estate to a subsequent offer that was presented for the sale of Raleigh Springs Marketplace. The effects of this adjustment was an increase in the real estate held for sale and an increase in deferred gain of $429,000. As of June 30, 2001, the Partnership adjusted its investment in real estate to a subsequent offer that was presented for the sale of Strawberry Fields. The effects of this adjustment was an increase in the real estate held for sale and an increase in deferred gain of $229,125. In July, 2001, the Partnership sold Strawberry Fields, resulting in an adjustment to real estate held for sale. Real estate held for sale was decreased by $5,426,875, deferred gain on sale was decreased by $758,235 and a gain on sale of property of $720,295 was recorded as a result of the sale. As of December 31, 2001, the Partnership adjusted its investment in real estate for Raleigh Springs Marketplace. The effects of this adjustment was an increase in the real estate held for sale and an increase in deferred gain of $18,500. In the fourth quarter of 2001, the Partnership recorded a reduction in real estate held for sale of $346,125 related to other than temporary decline in the value of real estate for the Fortune Professional Building. (3) PARTNERSHIP AGREEMENT The Partnership Agreement (the "Agreement") provides that 99% of the net profits and losses from operations of the Partnership for each fiscal year shall be allocated to the Limited Partners and 1% of net profits and losses from operations shall be allocated to the General Partners. The net profit of the Partnership from the sale or other disposition of a Partnership property shall be allocated as follows: first, there shall be allocated to the General Partners the greater of: (i) 1% of such net profits; or (ii) the amount distributable to the General Partners as Net Sale Proceeds from such sale or other disposition in accordance with paragraph 2, SECTION K of the Agreement; and second, all remaining profits shall be allocated to the Limited Partners. The net loss of the Partnership from any sale or other disposition of a Partnership property shall be allocated as follows: 99% of such net loss shall be allocated to the Limited Partners and 1% of such net loss shall be allocated to the General Partners. The Agreement provides that distributions of Operating Cash Flow, as defined in the Agreement, shall be distributed 99% to the Limited Partners and 1% to the General Partners. The receipt by the General Partners of such 1% of Operating Cash Flow shall be subordinated to the receipt by the Limited Partners of Operating Cash Flow equal to a 10% per annum, cumulative, non-compounded return on their Adjusted Investment (the "Preferential Distribution"), as such term is defined in the Agreement. In the event the full Preferential Distribution is not made in any year (herein referred to as a "Preferential Distribution Deficiency") and Operating Cash Flow is available in following years in excess of the Preferential Distribution for said year, then the Limited Partners shall be paid such excess Operating Cash Flow until they have been paid any unpaid Preferential Distribution Deficiency from prior years. Net Sale Proceeds, as defined in the Agreement, received by the Partnership shall be distributed as follows: (a) first, to the Limited Partners until such time as the Limited Partners have been paid an amount equal to the amount of their Adjusted Investment; (b) second, to the Limited Partners until such time as the Limited Partners have been paid an amount equal to any unpaid Preferential Distribution Deficiency; and (c) third, 85% of any remaining Net Sale Proceeds to the Limited Partners, and the remaining 15% of the Net Sale Proceeds to the General Partners. At March 31, 2002, the Preferential Distribution Deficiency equaled $14,695,065. (4) MORTGAGE NOTES PAYABLE Mortgage notes payable at March 31, 2002 consist of the following: Interest Date Rate Due Raleigh Springs Marketplace $ 4,429,905 (a)10% 04/02 Fortune Professional Building 456,242 (b)4.75% 06/02 $ 4,886,147 Raleigh Springs Marketplace and Fortune Professional Building serve as collateral under the respective nonrecourse debt obligations. (a) Monthly principal and interest payments are based on a 25- year amortization schedule. In the first quarter of 2001, the mortgage holder agreed to extend the maturity of the mortgage until April 1, 2002. On March 11, 2002, the Partnership accepted a proposal to modify the Raleigh Springs Marketplace mortgage loan. Under the terms of the proposal, the maturity date will be extended to April 1, 2007. The loan which will continue to bear interest at 10% per annum, will continue to be payable in monthly installments of principal and interest of $46,839(based upon a 25 year amortization schedule) with a final payment of unpaid interest and principal on April 1, 2007. The carrying value of Raleigh Springs Marketplace at March 31, 2002 was approximately $6,026,500. (b) On June 26, 1997, the Partnership obtained a first mortgage loan in the amount of $875,000 secured by Fortune Professional Building, from American National Bank and Trust Company (the "Replacement Loan"). In connection with the funding of the Replacement Loan, the Partnership was required to reduce the principal balance of the original loan by approximately $59,000, out of cash and cash equivalents, to release the original mortgage loan and pay loan fees of approximately $33,000. The Replacement Loan has a floating interest rate based on American National Bank's prime rate, which at March 31, 2002 was 4.75%. Principal is being amortized based on a 15-year amortization period and is payable with interest on a monthly basis. As of December 31, 2001, the Partnership was in violation of its annual debt service coverage ratio. Subsequent to the year end, the Partnership received a waiver of this covenant violation from the mortgage lender for the period ended December 31, 2001. The carrying value of Fortune at March 31, 2002 was approximately $956,500. The Partnership was required to make balloon mortgage payments for Raleigh Springs Marketplace in the amount of approximately $4,420,000 on April 1, 2002 and for Fortune Professional Building in the amount of approximately $442,000 on June 30, 2002. However, the Partnership reached an agreement to extend the existing mortgage loan for Raleigh Springs Marketplace through April 2007 under the same terms and conditions of the existing loan. The Partnership has commenced discussions with the Fortune lender to extend the maturity of the current loan. However there can be no assurances that the lender will grant such an extension. (5) TRANSACTIONS WITH AFFILIATES Fees and other expenses paid or payable to the General Partners or their affiliates for the three months ended March 31, 2002 and 2001 were as follows: 2002 2001 Management fees $18,565 $26,544 Reimbursable office expenses 25,052 31,792 The Partnership had made all payments to affiliates, except for $18,565 for management fees, as of March 31, 2002. (6) EQUITY INVESTMENT The Partnership owns a 47% interest in Sabal Palm Joint Venture ("Sabal Palm") and accounts for its investment under the equity method. The following are condensed financial statements for Sabal Palm: March 31, 2002 (unaudited) (Liquidation Basis) Real estate held for sale $3,028,375 Other assets 345,015 3,373,390 Mortgage note payable 3,028,386 Other liabilities 180,408 3,208,794 Net Assets in Liquidation $ 164,596 For the three months ended (unaudited) (Liquidation Basis) March 31, March 31, 2002 2001 Rental income $115,538 $134,449 Other income 13,460 12,634 128,998 147,083 Mortgage and other interest 67,318 68,347 Operating and administrative expenses 41,770 72,403 109,088 140,750 Net income $ 19,910 $ 6,333 The Sabal Palm first mortgage loan bears interest at the rate of 8.93% per annum, is amortized over a 25-year period, requires monthly payments of principal and interest of approximately $26,700 and matured on March 26, 2002. A portion of the proceeds of the first mortgage loan, approximately $3,077,000, was used to retire Sabal Palm's existing mortgage from Lincoln National Pension Insurance Company. In the second quarter of 1998, Winn-Dixie vacated its space at the center. Winn-Dixie failed to timely pay its rental obligation for November and December 2001 and January through March 2002 and is currently in default. On August 7, 2000 Sabal Palm was given notice that Walgreens will vacate the space prior to its lease termination of April 30, 2025. Walgreens has moved out, however, it remains liable for rental payments under its lease with Sabal Palm. The General Partners are considering potential lease buyout and potential releasing strategies for this tenant. As a result of Winn-Dixie's lease default, in the third quarter of 2001, Sabal Palm recorded an adjustment to liquidation basis of $114,367 related to an other than temporary decline in the value of real estate at Sabal Palm. In the fourth quarter of 2001, Sabal Palm recorded a further adjustment to liquidation basis of $7,508 related to an other than temporary decline in the value of real estate at Sabal Palm. In April 2002, the joint venture and the lender agreed to a twelve month extension of the existing loan. The loan extension was subject to the lease termination of Winn-Dixie and Winn-Dixie's payment of a termination fee. As a requirement of the extension, the joint venture and the lender agreed to use the proceeds from the termination to redemize the former Winn-Dixie space into three spaces as well as certain other improvements to the center. The joint venture has signed a lease with Sav A Lot a national grocery chain for 14,350 square feet (one of the demized spaces). In addition, the joint venture was in lease negotiations with a potential retail tenant for 10,675 square feet in another one of the demized spaces. However the tenant has withdrawn from the negotiations. Further, Walgreens has approached the joint venture with a proposal to sublease its space in the center to another retail tenant. The joint venture is currently reviewing this proposal. Due to the nonpayment of Winn-Dixie's rental obligations, the joint venture did not make its mortgage payments for Sabal Palm in November and December 2001 and January through March 2002 thus resulting in a default on its loan. However, the lender took no foreclosure action and the twelve month extension (as detailed above) with the lender included the joint venture's payment of all past due amounts thus curing the default. ITEM 2. Management's Discussion and Analysis or Plan of Operation. General Certain statements in this Quarterly Report that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Without limiting the foregoing, words such as "anticipates," "expects," "intends," "plans" and similar expressions are intended to identify forward-looking statements. These statements are subject to a number of risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The Partnership undertakes no obligation to update these forward-looking statements to reflect future events or circumstances. Liquidity and Capital Resources The Partnership intends to satisfy its short-term liquidity needs through cash flow from the properties. Mortgage notes payable are expected to be satisfied through property sales. The General Partners have determined to pursue the disposition of the Partnership's assets. In 1999, the Partnership solicited and received the votes of the Limited Partners to approve a sale of all the Partnership's properties, either on an individual or group basis, and to subsequently liquidate the Partnership. The solicitation, which was approved by the Limited Partners in the third quarter of 1999, stated that the Partnership's properties may be sold individually or in any combination provided that the total sales price for the properties included in the transaction equals or exceeds 70% of the aggregate appraised value for such properties, which valuation was conducted by an independent third party appraisal firm. The Partnership intends to sell the properties under a closed bid process, which will include identification of target buyers with proven financing ability and performance of certain evaluations of the properties, such as environmental testing. Potential buyers will be requested to sign confidentiality agreements to safeguard the Partnership's confidential proprietary information. The General Partners have determined that each bid must be all cash, completely unconditional and accompanied by a substantial deposit. In 2001, over 1,000 potential investors were contacted regarding the sale of the properties. Of this group, approximately 180 became registered potential buyers for the properties. Combined with prior periods, there have been approximately 300 potential buyers. In addition, the properties are listed on the Internet at Loopnet.com, the largest commercial real estate website in the nation. Subsequent to the end of the second quarter, the Partnership engaged a new brokerage firm to assist in the marketing of the Partnership's properties for sale. The brokerage firm is national in scope and one of the largest real estate investment brokers in the country. The terms of the engagement are substantially similar to the terms previously negotiated. Property Status Fortune Office Building Fortune was required to make a balloon mortgage payment in July 1997 of approximately $934,000. On June 26, 1997, the Partnership obtained the Replacement Loan in the amount of $875,000 secured by Fortune, from American National Bank and Trust Company. In connection with the funding of the Replacement Loan, the Partnership was required to reduce the outstanding principal balance of the original mortgage loan by approximately $59,000, out of cash and cash equivalents, to release the original mortgage loan and pay loan fees of approximately $33,000. The Replacement Loan has a floating interest rate based on American National Bank's prime rate, which at March 31, 2002 was 4.75%. Principal is being amortized based on a 15-year amortization period and is payable with interest on a monthly basis. The Replacement Loan has been extended through June 30, 2002. The occupancy level at Fortune at March 31, 2002 was 68%, compared to 70% at March 31, 2001. In the third quarter of 2001, the Partnership changed the on-site leasing and management representative in order to improve the property's occupancy. In addition, the Partnership has replaced the local representative marketing the property for sale. Raleigh Springs Marketplace In 1996, Raleigh Springs lost an anchor tenant, T.J. Maxx, which occupied 21% of the total space. In November 1996, Methodist Hospital entered into a lease for approximately 9,500 square feet. The remaining space was leased to a carpet supplier. This tenant moved to a smaller space in the first quarter of 2001 and, due to nonpayment of rent, has been evicted. The occupancy rate at Raleigh at March 31, 2002 was 77%, compared to 80% at March 31, 2001. In the fourth quarter 2001 approximately 12% of the center was successfully leased to Sav A Lot, a national grocery chain. In the first quarter of 2002, Methodist Hospital gave notice to the Partnership that it will be vacating the 9,500 square feet it occupies at the expiration of its base term which is April, 2002. In addition, Toys 'R Us , the anchor tenant at the property has given the Partnership notice of its intent to vacate its space in the second quarter of 2002. However, the Partnership anticipates that Toys 'R Us will continue to honor its lease obligations. The Partnership anticipates that this property will be in a negative cash flow position until this space is released. In the second quarter of 2002, the Partnership replaced its local leasing agent. In November 1992, the Partnership negotiated a modification of the terms of the mortgage on Raleigh Springs with the lender (the "Modified Loan"). In October 1992, the interest rate was reduced from 12.75% to 10.00%. Since November 1992 and through September 1999, principal and interest payments were based on a 25-year amortization schedule. The Modified Loan capitalized the August, September and October 1992 mortgage payments. The Partnership negotiated an extension of the terms of the mortgage on August 26, 1999 and August 30, 2000. On March 11, 2002, the Partnership accepted a proposal to modify the Raleigh Springs Marketplace mortgage loan. Under the terms of the proposal, the maturity date will be extended to April 1, 2007. The loan, which will continue to bear interest at 10% per annum, will continue to be payable in monthly installments of principal and interest of $46,839(based upon a 25 year amortization schedule) with a final payment of unpaid interest and principal due on April 1, 2007. In 2000, the Partnership received three offers for Raleigh ranging from $5.625 million to $6.2 million. The Partnership successfully negotiated an increase in the highest offer to $6.5 million and subsequently accepted this offer. The Partnership executed the contract for sale. The buyer had a 45 day due diligence period during which it could formally accept or reject the sale. Late in the third quarter of 2000 the Partnership received notice that the potential purchaser terminated the contract. After extensive negotiation, the contract was reinstated at $5,835,000. However, the potential purchaser again rejected the contract in March, 2001. The Partnership received $15,000 of the earnest money as settlement of potential legal claims against the contract party. Strawberry Fields In 2001, the Strawberry Joint Venture received an offer to purchase Strawberry Fields for $5.585 million. In addition, Syms exercised its right of first refusal on the sale of the property. Accordingly, the Strawberry Joint Venture executed a purchase and sale agreement with Syms for $5.585 million in the second quarter of 2001. On July 20, 2001, Strawberry Fields was sold to Syms for the contract price. At closing Strawberry Joint Venture received net sales proceeds of approximately $299,000. Sabal Palm Shopping Center Sabal Palm was required to make a balloon mortgage payment in February 1997. Prior to the scheduled maturity of the First Mortgage Loan, the lender granted Sabal Palm an extension until April 1, 1997. On June 30, 1997, Sabal Palm obtained a first mortgage loan in the amount of $3,200,000 (the "First Mortgage Loan") secured by its real estate, from NationsBanc Mortgage Capital Corporation. The First Mortgage Loan bears interest at the rate of 8.93% per annum, is amortized over a 25-year period, requires monthly payments of principal and interest of approximately $26,700 and was scheduled to mature on March 26, 2002. A portion of the proceeds of the First Mortgage Loan, approximately $3,077,000, was used to retire Sabal Palm's existing mortgage from Lincoln National Pension Insurance Company. In the second quarter of 1998, Winn-Dixie vacated its space at the center. Winn-Dixie failed to timely pay its rental obligation for November and December 2001 and January through March, 2002. On August 7, 2000 Sabal Palm was given notice that Walgreens will vacate the space prior to its lease termination of April 30, 2025. Walgreens has moved out, however, it remains liable for rental payments under its lease with Sabal Palm. The General Partners are considering potential lease buyout and potential releasing strategies for this tenant. In total, Sabal Palm has received six offers on the property ranging in price from $2.2 million to $3.4 million. As a result of the two vacant anchor spaces, representing more than 55,000 square feet of space or 62% of the property, this center has proved very difficult to sell. The Partnership is continuing to market this property for sale. To the extent the Partnership is successful replacing Winn-Dixie with smaller tenants, the redemizing of the anchor space will require a substantial investment by the Partnership into the property. Any such investment will be evaluated on the benefits to the Partnership including the increased potential value to the Partnership and the likelihood that the property will be sold sooner. As a result of Winn-Dixie's lease default, in the third quarter of 2001, Sabal Palm recorded an adjustment to liquidation basis of $114,367 related to an other than temporary decline in the value of real estate for Sabal Palm. In the fourth quarter of 2001, Sabal Palm recorded a further adjustment to liquidation basis of $7,508 related to an other than temporary decline in the value of real estate at Sabal Palm. In April 2002, the joint venture and the lender agreed to a twelve month extension of the existing loan. The loan extension was subject to the lease termination of Winn-Dixie and Winn-Dixie's payment of a termination fee. As a requirement of the extension, the joint venture and the lender agreed to use the proceeds from the termination to redemize the former Winn-Dixie space into three spaces, as well as certain other improvements to the center. The joint venture has signed a lease with Sav A Lot, a national grocery chain for 14,350 square feet (one of the demized spaces). In addition, the joint venture was in lease negotiations with a potential retail tenant for 10,675 square feet in another one of the demized spaces. However, the tenant has withdrawn from the negotiations. Further, Walgreens has approached the joint venture with a proposal to sublease its space in the center to another retail tenant. The joint venture is currently reviewing this proposal. Due to the nonpayment of Winn-Dixie's rental obligations, the joint venture did not make its mortgage payments for Sabal Palm in November and December 2001 and January through March 2002 thus resulting in a default on its loan. However, the lender took no foreclosure action and the twelve month extension (as detailed above) with the lender included the joint venture's payment of all past due amounts thus curing the default. As a result of the July 1999 authorization by a majority of the Limited Partners to sell the Partnership's properties, the Partnership has begun the liquidation process and, in accordance with generally accepted accounting principles, the Partnership's financial statements for periods subsequent to July 12, 1999 have been prepared on the liquidation basis of accounting. Accordingly, the carrying values of the assets are presented at their net realizable values and liabilities are presented at estimated settlement amounts, including estimated costs associated with carrying out the liquidation. Preparation of the financial statements on the liquidation basis of accounting requires significant assumptions by management, including the estimate of liquidation costs and the resolution of any contingent liabilities. There may be differences between the assumptions and the actual results because events and circumstances frequently do not occur as expected. Those differences, if any, could result in a change in the net assets recorded in the statement of net assets as of in liquidation March 31, 2002. The General Partners expect to distribute proceeds from operating cash flow, if any, and from the sale of real estate to Limited Partners in a manner that is consistent with the investment objectives of the Partnership. Management of the Partnership believes that cash needs may arise from time to time that will have the effect of reducing distributions to Limited Partners to amounts less than would be available from refinancing or sale proceeds. These cash needs include, among other things, maintenance of working capital reserves in compliance with the Agreement as well as payments for major repairs, tenant improvements and leasing commissions in support of real estate operations. The Partnership anticipates the loss of its second largest tenant at Raleigh Springs. As a result of a loss of this tenant, Raleigh Springs will likely not cover its operating expenses until additional leasing is achieved. With regard to Sabal Palm, if the retenanting of the anchor space is successful, an additional capital investment will be required. In addition, it is likely that the Partnership will be required to make a significant loan reduction for the Fortune property in order to extend the term of the debt. The debt matures in June, 2002. On June 20, 2001, the Partnership received an unsolicited tender offer to purchase up to 4,770 of the outstanding Units for $100 per Unit. The offer was made by a group that beneficially owned the economic interests with respect to approximately 18.95% of the outstanding Units. The offer period expired on August 17, 2001. Subsequent to August 17, 2001 the tender offer was increased to $120 per unit and the term was extended to October 1, 2001. As of October 1, 2001, 461 economic interests were transferred as a result of this tender offer. Upon completion of the offer, the purchasers held an aggregate of 2,270.75 economic interests, or approximately 24% of the total outstanding Units. Included in the aggregate total of 2,270.75 are 166.75 Units that were purchased on the secondary market. The General Partners remained neutral as to the particular merits or risks associated with the tender offer. The General Partners cautioned that the ultimate amount actually received by each Limited Partner who did not tender their Units would be affected by items including, but not limited to, the timing of the liquidation of the assets, changes in market conditions, necessary Partnership reserves and the sales prices that can be negotiated. The General Partners further informed the Limited Partners that, for those investors who are primarily interested in liquidating their Units immediately, the tender offer provided such an opportunity. Results of Operations The Partnership's revenue and expenses are affected primarily by the operations of the properties. Property operations, and in particular the components of income, demand for space and rental rates are, to a large extent, determined by local and national market conditions. These conditions have generally adversely impacted the Partnership's property economics. The General Partners conduct an in-depth assessment of each property's physical condition as well as a demographic analysis to assess opportunities for increasing occupancy and rental rates and decreasing operating costs. In all instances, decisions concerning restructuring of loan terms, reversions and subsequent operation of the property are made with the intent of maximizing the potential proceeds to the Partnership and, therefore, return of investment and income to Limited Partners. In certain instances and under limited circumstances, management of the Partnership entered into negotiations with lenders for the purpose of restructuring the terms of loans to provide for debt service levels that could be supported by operations of the properties. When negotiations are unsuccessful, management of the Partnership considers the possibility of reverting the properties to the first mortgage lender. Foreclosure proceedings may require 6 to 24 months to conclude. An affiliate of the Partnership and the General Partners is assigned responsibility for day-to-day management of the properties. The affiliate receives a combined management and leasing fee, which cannot exceed 6% of gross revenues generated by the properties. Management fee rates are determined by the extent of services provided by the affiliate versus services that may be provided by third parties, e.g., independent leasing agents. In all instances, fees paid by the Partnership to the property management affiliate are, in the General Partners' opinion, comparable to fees that would be paid to independent third parties. Results of Operations - Three months ended March 31, 2002 and 2001 (Liquidation Basis) As a result of the Partnership's adoption of the liquidation basis of accounting, and in accordance with generally accepted accounting principles, the Partnership's financial statements for periods subsequent to July 12, 1999 have been prepared on a liquidation basis. The Partnership generated net income of $3,000 for the period ended March 31, 2002 as compared to a net income of $78,000 for the same period in 2001. The $75,000 decrease in net income is primarily a result of a decrease in total income of $264,000 partially offset by a decrease in total expenses of $148,000, an increase in the Partnership's share of the net income from Sabal Palm of $6,000, and a decrease in the minority share of net income from Strawberry Fields of $36,000. Total income for the period ended March 31, 2002 was $290,000 as compared to $554,000 for the same period in 2001. The $264,000 decrease in total income was primarily a result of a $227,000 decrease in rental income, primarily resulting from the loss of rental income due to the sale of the Strawberry Field property in July 2001. Also contributing to the decrease in rental income is the decline in occupancy at both Fortune and Raleigh Springs. Total expenses for the period ended March 31, 2002 were $296,000 as compared to $444,000 for the same period in 2001. The $148,000 decrease in total expense was due to an decrease in interest expense of $99,000, a decrease in general and administration expense of $30,000, and decrease in real estate tax of $19,000 a decrease of management fees of $7,000 and a decrease in operating expense of $6,000. The decrease in expenses is primarily the result of the sale of the Strawberry Field property in July 2001. These decreases were partially offset by and increase in repairs and maintenance of $13,000. Repairs and maintenance increased due to a painting project at Raleigh Springs Marketplace. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. None. 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. None. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BY: Brauvin Ventures, Inc. Corporate General Partner of Brauvin Real Estate Fund L.P. 4 BY: /s/ Jerome J. Brault Jerome J. Brault Chairman of the Board of Directors and President DATE: June 4, 2002 BY: /s/ Thomas E. Murphy Thomas E. Murphy Chief Financial Officer and Treasurer DATE: June 4, 2002