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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2003
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: 110-9305
REEVES TELECOM LIMITED PARTNERSHIP
----------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 57-0700063
--------------------------------- ---------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
c/o Grace Property Management, Inc.
55 Brookville Road, Glen Head, New York 11545
---------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 686-2201
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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:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Partnership Units None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes | | No |X|
On March 19, 2004, registrant had outstanding 1,812,062 partnership units. See
Item 5. There is no active market for the partnership units, nor was there an
active market for the partnership units at any time during 2003. As of March 19,
2004, non-affiliates held 1,321,159 partnership units.
The following documents are incorporated by reference into this annual report on
Form 10-K: NONE.
[THE REST OF THIS PAGE IS BLANK]
TABLE OF CONTENTS
Page
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PART I ....................................................................... 1
Item 1. Business ......................................................... 1
Item 2. Properties ....................................................... 17
Item 3. Legal Proceedings ................................................ 19
Item 4. Submission of Matters to a Vote of Security Holders .............. 19
PART II ...................................................................... 20
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters .......................................................... 20
Item 6. Selected Financial Data .......................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...... 33
Item 8. Financial Statements and Supplementary Data ...................... 34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................. 34
Item 9A. Controls and Procedures ......................................... 35
PART III ..................................................................... 36
Item 10. Directors and Executive Officers of Registrant .................. 36
Item 11. Executive Compensation .......................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management .. 38
Item 13. Certain Relationships and Related Transactions .................. 39
Item 14. Principal Accountant Fees and Services .......................... 41
PART IV ...................................................................... 44
Item 15. Exhibits, Financial Statements Schedules, and Reports on Form 8-K 44
SIGNATURES ................................................................... 47
PART I
ITEM 1. BUSINESS
GENERAL
Reeves Telecom Limited Partnership (the "Registrant" or the "Partnership")
is a South Carolina limited partnership that is engaged in owning, developing,
selling, leasing, or otherwise dealing in real estate in North Carolina.
BACKGROUND; DEVELOPMENT OF BUSINESS
The Partnership was formed for the purpose of accepting certain assets and
liabilities from its predecessor corporation, Reeves Telecom Corporation (the
"Corporation"). The Corporation sold its principal assets during the
twelve-month period ended May 15, 1980 and distributed cash and the limited
partnership units of the Partnership to its former shareholders as a liquidation
distribution. The Partnership was initially organized October 25, 1979 but had
only nominal assets and no liabilities until May 15, 1980. To reflect a change
in South Carolina law, the Partnership's name was changed from Reeves Telecom
Associates to Reeves Telecom Limited Partnership on January 21, 1987.
The Partnership succeeded to the ownership of real estate situated within
two developments, Boiling Spring Lakes in North Carolina, and Pimlico Plantation
in South Carolina. By 1990, substantially all of the real estate within Pimlico
Plantation had been sold (with the final lot sold in 2003), and since then the
Partnership's principal assets have been its real estate in Boiling Spring Lakes
and a golf course and country club located within that development. See Item 2,
"Properties."
From its inception to mid-1993, in view of limited resources, Management
focused on holding down costs until the Partnership could sell all or
substantially all of its assets in a bulk sale. Local real estate brokers were
relied upon to generate individual lot sales, and the golf course and country
club were leased to a third party operator. Under this arrangement, lot sales
were slow and, generally, operating expenses significantly exceeded revenue from
such sales.
Since June 1993, Management has focused on the sale of individual lots on
an all-cash basis through the Partnership's sales office in Boiling Spring
Lakes. The Partnership also became increasingly involved in the management and
operation of the golf course and country club.
During 2000, the Partnership sold approximately 5,127 acres of land, or
approximately 80% of the total acreage then owned by the Partnership in Boiling
Spring Lakes, to The Nature Conservancy. The sale generated gross proceeds of
$2,400,000.
Page 1
In March 2001, the Partnership sold the assets of the golf course and
country club for total consideration of $862,500, consisting of a combination of
cash and a note receivable. For financial reporting purposes, the assets that
were sold remained on the Partnership's balance sheet and were classified as
assets held for sale or disposal, and the operations of the golf course and
country club were classified as discontinued operations through the date of
sale. In June 2003, the buyer of the assets made a substantial prepayment of
principal on the note receivable, and the transaction was recorded as a sale of
assets on the Partnership's financial statements for the fiscal year ended
December 31, 2003. See "Description of Business - Boiling Spring Lakes - Golf
Course and County Club," below.
See the Partnership's audited financial statements and the summary
information set forth in Table 5, "Selected Income Statement Data," and Table 6,
"Selected Balance Sheet Data," for financial information on the business
segments.
DESCRIPTION OF BUSINESS
- - BOILING SPRING LAKES
- REAL ESTATE SALES
Boiling Spring Lakes began in 1962 as a 14,000-acre development. Most of
the land has been sold and that which remains lies within the City of Boiling
Spring Lakes, in Brunswick County, North Carolina. Revenue from real estate
sales and the type of land sold for each of the last five fiscal years ended
December 31 are shown on Table 1, below (see "Description of Business - Pimlico
Plantation," for revenue from real estate sales in Pimlico Plantation).
As used in Table 1 and throughout this annual report on Form 10-K:
- "individual lot" refers to a platted residential lot (a platted
residential lot owned by the Partnership typically comprises
approximately 1/3-acre, although some lots are less than 1/4-acre
and some comprise up to 5 acres);
- "unimproved individual lot" refers to an individual lot on which
construction of a house has not yet been started;
- "improved individual lot" refers to an individual lot on which the
construction of a house has been started, even if at the time of
sale construction was not completed;
- "commercial land" refers to land zoned or otherwise intended by the
Partnership for commercial use; and
- "other land" refers to all other types of unimproved land of varying
sizes.
Page 2
TABLE 1: REVENUE FROM REAL ESTATE SALES
AND TYPE OF PROPERTY SOLD IN BOILING SPRING LAKES
2003 2002 2001 2000 [a] 1999
-------- -------- -------- -------- --------
REVENUE
Individual lots:
Unimproved $228,849 $250,454 $347,832 $378,732 $317,929
Improved -- -- -- -- 130,865
Commercial land 230,013 65,410 -- -- 70,378
Other land -- -- 72,911 56,437 36,269
-------- -------- -------- -------- --------
Total revenue $458,862 $315,864 $420,743 $435,169 $555,441
======== ======== ======== ======== ========
TYPE OF PROPERTY SOLD
Individual lots:
Unimproved 27 19 68 55 65
Improved -- -- -- -- 1
Commercial land (acres) 7 6 -- -- 4
Other land (acres) -- -- 23 2 2
[a] Excludes two transactions with The Nature Conservancy in 2000 covering
approximately 5,127 acres, which generated gross revenue of $2,400,000.
During 2000, the Partnership sold approximately 5,127 acres of land to The
Nature Conservancy in two transactions for an aggregate of $2,400,000. The first
transaction involved the sale of certain large tracts of undeveloped land,
mostly wetlands and woodlands, for an aggregate of $1,625,850, and closed in
July 2000. The second transaction involved the sale of certain unimproved
individual lots, small tracts and certain commercial land for an aggregate of
$774,150, and closed in September 2000.
The one improved individual lot sold during 1999 generated a profit of
approximately $11,200.
Since the 1970's, health standards in Brunswick County have become
increasingly stringent regarding septic tanks and on-site sewage disposal.
Management estimates that 70% to 75% of the property in Boiling Spring Lakes
that would have complied with applicable regulations in the 1970's do not meet
present health standards. This has had a detrimental effect on the Partnership's
real estate operations, primarily by substantially reducing the price that the
Partnership can realize for land that is not suitable for the installation of an
individual on-site
Page 3
septic system. In limited cases the problem can be cured by the use of drains,
or by the scraping away of hard pan and adding fill dirt. In most cases,
however, the only solution to the inability to install an on-site septic system
on individual lots is to install a sewer system covering multiple lots, portions
of a section, or larger areas. In 1997, the Partnership installed a small
multi-user system on certain commercial land. Depending upon the Partnership's
financial resources, the market for real estate in and around Boiling Spring
Lakes, and economic conditions generally, among other factors, Management may
consider installing one or more similar multi-user systems in other areas of the
development in the future but currently there are no plans to do so. The
Partnership has no plans to install a sewer system covering most or all of the
land remaining in the Partnership's inventory. Brunswick County has plans for an
area-wide sewer system for Boiling Spring Lakes; however, there is no firm date
for the County to begin installing such a system and the Partnership believes
that installation is at least several years in the future.
- GOLF COURSE AND COUNTRY CLUB
Fox Squirrel Country Club, now known as The Lakes Country Club ("Fox
Squirrel/The Lakes"), is a semi-private golf course and country club. Its
18-hole golf course serves as the centerpiece of the Boiling Spring Lakes
development. Management believes that its attraction as a recreational facility
to those who are considering purchasing or building a home in the area allows
the Partnership to generate more lot sales, at a higher sales price per lot,
than would be the case in the absence of such a facility.
On March 9, 2001, the Partnership sold the assets of Fox Squirrel/The
Lakes to WW-Golf & Services, LLC, a South Carolina limited liability company
("WW-Golf"), for consideration totaling $862,500, comprised of $150,000 in cash
and a note receivable (the "Promissory Note") having an initial principal amount
of $712,500. Originally, the Promissory Note bore interest at an annual rate of
9.5% and matured on March 9, 2004, and WW-Golf was obligated to make monthly
payments of $6,641 per month commencing April 9, 2001 up to and including
February 9, 2004, and a final payment of $677,642 on March 9, 2004. The
Partnership had a security interest in all of the assets sold until the
Promissory Note was paid in full. In June 2003, in connection with WW-Golf's
obtaining financing from a local financial institution (the "Bank"), WW-Golf
made an early repayment of principal of $534,748, reducing the unpaid principal
amount outstanding under the Promissory Note at that time to $147,757. The terms
of the Promissory Note were then modified to provide for an annual interest rate
equal to the higher of (i) 8.75% and (ii) 2% over the Bank's prime rate, and the
maturity date was extended to June 15, 2008. Assuming that the interest rate on
the Promissory Note remains at 8.75%, the Promissory Note as modified provides
for payments of principal and interest as follows: (i) $779 of interest only on
July 9, 2003, (ii) monthly payments of $1,371 from August 9, 2003 up to and
including July 9, 2008, and (iii) a final payment of $125,459 on July 15, 2008.
In addition to the foregoing modifications to the Promissory Note, the
Partnership subordinated its lien priority on the assets sold to WW-Golf to that
of the Bank.
Page 4
The cash down payment of $150,000 received by the Partnership in March
2001 represented less than 25% of the total consideration paid for the assets;
therefore, the transaction was originally recorded on the Partnership's
financial statements using the deposit method as defined in SFAS 66. Under the
deposit method, among other things, the assets that were sold remained on the
Partnership's balance sheet and were classified as assets held for sale or
disposal, and the operations of the golf course and country club were classified
as discontinued operations through the date of sale. In June 2003, WW-Golf made
an early repayment of principal of $534,748. With such repayment of principal,
the cash consideration paid by WW- Golf exceeded 25% of the total consideration
paid for the assets. Accordingly, for the fiscal year ended December 31, 2003,
the transaction was recorded on the Partnership's financial statements as a sale
of assets and a $341,221 gain on the sale of the assets was recognized. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies - Accounting for the Sale of the
Assets of Fox Squirrel/The Lakes."
In connection with the sale of the assets of Fox Squirrel/The Lakes, in
March 2001 the Partnership and WW-Golf entered into an indemnification agreement
relating to the remediation of certain environmental contamination from an
underground storage tank formerly located on the golf club grounds. Pursuant to
such agreement, WW-Golf had the right to extend the maturity of the Promissory
Note if the Partnership had not, prior to the original March 9, 2004 maturity
date, completed the remediation. The indemnification agreement limited the
length of time that the maturity date could be extended to 20 years. In
connection with the modification of the Promissory Note terms in June 2003, the
Partnership and WW-Golf agreed to a modification of the indemnification
agreement that limits the Partnership's indemnification to not later than June
17, 2005. In addition, WW-Golf gave up its right to further extensions of the
Promissory Note's maturity date. The Partnership believes that all necessary
remediation work had been completed as of December 31, 2001, although the North
Carolina Department of Environment and Natural Resources ("NCDENR") has required
the Partnership to continue monitoring and testing the subsurface groundwater.
The results of all but one of the tests of subsurface groundwater conducted in
2001 and thereafter showed no concentrations of hydrocarbon contamination
exceeding permissible limits; the sole exception is a test conducted in 2003
showing concentrations approximating permissible limits. The most recent
sampling of subsurface groundwater was taken in February 2004. The written test
results have not yet been received but the Partnership was advised orally that
the test results showed no concentrations of hydrocarbon contamination exceeding
permissible limits. The Partnership is waiting for a closure letter from NCDENR,
although it is possible that NCDENR may require the Partnership to conduct
further monitoring and testing. See "Description of Business - Risk Factors -
Environment Matters - Underground Storage Tank; Indemnification."
The Partnership's revenue and operating loss from Fox Squirrel/The Lakes
for the last five fiscal years ended December 31 are shown on Table 2, below.
Page 5
TABLE 2: REVENUE AND OPERATING LOSS
FOX SQUIRREL COUNTRY CLUB / THE LAKES COUNTRY CLUB
2003 2002 2001 2000 1999
--------- -------- --------- --------- ---------
Revenue $-- $-- $ 32,511 $ 332,462 $ 355,506
Operating loss -- -- (67,326) (214,975) (192,953)
The Partnership sold the assets of Fox Squirrel/The Lakes on March 9, 2001
and, accordingly, the results of Fox Squirrel/The Lakes are shown as a
discontinued operation on the Partnership's financial statements for all periods
presented. Revenue and Operating Loss for 2001 shown in Table 2 are for the
period from January 1, 2001 until March 9, 2001. Since Revenue and Operating
Loss for each of 1999 and 2000 are for twelve-month periods, a comparison of
Revenue and Operating Loss for 2001 to prior years does not present an accurate
portrayal of the comparative performance of Fox Squirrel/The Lakes.
- OTHER
From time to time the Partnership has generated revenue in Boiling Spring
Lakes from sources other than real estate sales and Fox Squirrel/The Lakes, such
as rental income and the sale of timber and pine straw on certain unsold lots.
The amount of revenue generated from such sources during the last five fiscal
years ended December 31 is shown on Table 3, below.
TABLE 3: OTHER REVENUE AND OTHER INCOME
IN BOILING SPRING LAKES
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Other revenue [a] $ -- $ -- $8,920 $ -- $ --
Sale of timber [a] -- -- -- -- 1,266
Rental income - net [b] 1,375 3,766 2,550 3,400 --
Notes:
[a] Reported under "Revenues" on the Statements of Operations.
[b] Reported as a separate line item under "Operating Income/(Loss)" on the
Statements of Operations.
Page 6
- - PIMLICO PLANTATION
Pimlico Plantation is a development located in Berkeley County, South
Carolina. Virtually all of the land in Pimlico Plantation was sold in past
years. The last lot owned by the Partnership in the development was sold in
2003. Revenue from lot sales and the number of lots sold during the last five
fiscal years ended December 31 are set forth in Table 4, below.
TABLE 4: REVENUE FROM REAL ESTATE SALES
AND NUMBER OF LOTS SOLD IN PIMLICO PLANTATION
2003 2002 2001 2000 1999
------ ------ ------ ------ -------
Revenue $24,545 $ -- $20,104 $ -- $ --
Individual lots sold 1 -- 1 -- --
During the first quarter of 2002, the Partnership donated two
park/recreational lots to the Pimlico Civic Club. These two lots had no
realizable value and were carried on the Partnership's balance sheet at no cost.
Consequently, the Partnership recorded no gain or loss from the donation. As of
December 31, 2003, the Partnership owns no assets in Pimlico Plantation.
- - SEASONALITY
The sale of real estate in North Carolina is seasonal. The Partnership has
generally experienced slower than average lot sales in the period from November
to January, inclusive.
- - MARKETING AND ADVERTISING
The Partnership's marketing and advertising plan emphasizes the print
media to promote the sale of its land and, when available for sale, improved
individual lots.
- - DEPENDENCE UPON CUSTOMERS
For the year ended December 31, 2003, the Partnership generated revenue of
$230,013 from the sale of commercial land in Boiling Spring Lakes in three
separate transactions involving different buyers. Such revenue represents
approximately 48% of total revenue from property sales for 2003, and
approximately 15% of total revenue for 2003. For the year ended December 31,
2000, $2,400,000 in revenue from property sales, or approximately 85% of the
total for that year, was attributable to one buyer. Generally, however, the
Partnership is not dependent in any
Page 7
respect upon one or a few customers, the loss of any one of which might
significantly affect the financial results of the Partnership.
- - COMPETITION
The real estate market in Brunswick County, North Carolina is extremely
competitive. The Partnership competes against other real estate developers, real
estate brokers, property owners acting without brokers, and others. Property
values are dependent upon, among other factors, proximity to and the nature and
quality of recreational facilities, retail shopping, commercial sites and
schools, and the availability of municipal water (as opposed to well water) and
sewer service (as opposed to septic systems). Management believes that other
real estate developers have bought some of the Partnership's land in past years
and that other developers may buy land from the Partnership in the future, and
that such developers may compete with the Partnership for land sales or sale of
improved properties.
Many real estate developments in Brunswick County provide recreational
facilities, such as a golf course, lakes and/or swimming pools, and tennis
courts. In many cases, depending upon the financial resources of the particular
developer, such facilities are more extensive and/or more varied than the
facilities in Boiling Spring Lakes. Lots associated with such facilities
generally command higher sales prices than lots owned by the Partnership.
Management believes that the Partnership can compete effectively against other
real estate developers, many of whom are believed to have substantially greater
resources than the Partnership, principally on the basis of price.
- - RECENT REAL ESTATE MARKET CONDITIONS
The real estate market in Brunswick County, North Carolina was weak for
most of 2003, continuing a trend that began in mid-2001. Not until late 2003 did
the combination of low interest rates and a generally improving economy lead to
a perceptible increase in demand for buildable residential lots. Through early
March 2004, the core market has gained strength, though market prices for
buildable lots have not reached the peak levels seen in the period 2000 to 2002.
Management believes that demand for buildable lots and market prices for such
lots in the southern coastal region of North Carolina will continue to improve
into the second quarter of 2004.
- - GOVERNMENT REGULATION; ENVIRONMENTAL LAWS AND REGULATIONS; ENDANGERED AND
PROTECTED SPECIES
The real estate development industry is subject to extensive and complex
regulations. The Partnership must comply with various federal, state and local
laws, ordinances, rules and
Page 8
regulations regarding zoning and construction; population density; availability
and installation of utility services such as water, electricity, gas and waste
disposal; the preservation of the natural terrain; and other related matters.
The Partnership is subject to the Interstate Land Sales Full Disclosure Act,
which requires registration with the U.S. Department of Housing and Urban
Development of any project that consists of 100 or more lots. The Partnership
relies upon its employees, the General Partner, and various legal and other
advisors for the expertise necessary to comply with all applicable regulations.
The Partnership is subject to various federal, state and local laws,
ordinances and regulations regarding environmental matters. In addition, the
Partnership is subject to laws and regulations relating to the use of wetlands,
over which the Army Corps of Engineers has jurisdiction. Portions of Boiling
Spring Lakes and the surrounding area are known or believed to be the habitat of
various species of flora and fauna which have been identified as endangered or
protected species. Development of the Partnership's land is subject to various
laws and regulations intended to limit disturbance of endangered and protected
species.
- - EMPLOYEES
The Partnership has two full-time employees, both of whom are located in
the sales office in Boiling Spring Lakes, North Carolina. Officers and employees
of the General Partner and one or more of its affiliates devote a portion of
their time to the management and affairs of the Partnership. Such persons,
however, have other responsibilities and they will devote only as much of their
time to the business of the Partnership as the General Partner, in its judgment
and experience, determines is reasonably required.
- - LIQUID ASSETS AND RESERVES
As of December 31, 2003, the Partnership held $822,517 in cash. Accounts
payable and accrued expenses, including accrued expenses owed to affiliates, as
of such date totaled $149,184.
The Partnership Agreement obligates the General Partner to distribute
Distributable Cash (as such term is defined in the Partnership Agreement).
Distributable Cash excludes, among other items, reserves established for working
capital, contingent liabilities, taxes, debt service, repairs, replacements,
renewals, capital expenditures, or other purposes consistent with the
Partnership Agreement. Such reserves are used solely for calculating
Distributable Cash and are not treated as deductions from income for accounting
purposes. At the beginning of 1999, reserves totaling $850,000 had been
established. During 1999, a reserve of $150,000 was established to purchase and
refurbish a residential property for resale. Also during 1999, a reserve of
$50,000 was established for certain capital improvements at Fox Squirrel/The
Lakes. During 2000, reserves of $175,000 were established to fund certain
capital improvements within
Page 9
the development. During 2001, reserves totaling $100,000 were established to
fund repairs to a dam and certain road repair and improvement work within the
development. During 2002, reserves totaling $100,000 were established to fund
the additional cost of repairs to the dam and certain road repair and
improvement work within the development. During 2003, reserves totaling $250,000
were established to fund costs associated with the extension of municipal water
service to land owned by the Partnership and to fund certain road repair and
improvement work within the development.
- - RISK FACTORS
The Partnership's business faces numerous risks, including those set forth
below. If any of the following risks and uncertainties develop into actual
events, the Partnership's business, financial condition or results of operations
could be materially adversely affected. The risks described below are not the
only ones the Partnership faces. Additional risks not presently known to
Management or that Management currently deems immaterial may also impair the
Partnership's business operations.
- DETERIORATION IN ECONOMIC CONDITIONS AND THE REAL ESTATE MARKET
The Partnership's ability to generate revenues is directly related to the
real estate market, primarily in North Carolina, and to the national and local
economy in general. Considerable economic and political uncertainties currently
exist that could have adverse effects on consumer buying habits, construction
costs, availability of labor and materials, and other factors affecting the
Partnership and the real estate industry in general. Significant expenditures
associated with investment in real estate, such as real estate taxes and
infrastructure maintenance costs, cannot generally be reduced if changes in
North Carolina's or the nation's economy cause a decrease in revenues from the
sale of the Partnership's real estate. As a result, if the growth rate for the
nation's economy declines or if a recession occurs, the Partnership's
profitability could be materially adversely affected.
- CONCENTRATION OF BUSINESS IN NORTH CAROLINA
The economic growth and health of the State of North Carolina,
particularly in Brunswick County and the southern coastal region where the
Partnership's land is located, are important factors in sustaining demand for
the Partnership's real estate. As a result, any adverse change to the economic
growth and health of North Carolina, particularly Brunswick County, could
materially adversely affect the Partnership's financial results. The future
economic growth of Brunswick County may be adversely affected if its
infrastructure, such as roads, airports, medical facilities, and schools, are
not improved to meet increased demand. There can be no assurance that these
improvements will occur.
Page 10
- CHANGES IN INTEREST RATES
The Partnership's business is sensitive to changes in interest rates.
Generally, demand for real estate decreases when interest rates are high or
increasing, and demand increases when interest rates are low or decreasing.
Interest rates are currently very low by historical standards. An increase in
interest rates could reduce the demand for individual lots, commercial
properties, and other land that the Partnership sells or develops. A reduction
in demand could materially adversely affect the Partnership's profitability.
The Partnership currently has no long-term debt; however, if the
Partnership were to incur debt in the future, the Partnership would have
exposure to changes in market rates. If the Partnership were to incur fixed rate
debt, the Partnership would have exposure to changes in market rates at the time
such debt matures in that a market interest rate higher than that on the
maturing debt: (a) may lower the amount of proceeds secured from a refinancing,
and (b) will decrease cash flow from future operations due to the higher
interest rate. If the Partnership were to incur floating rate debt, the
Partnership would also have exposure to changes in market rates in that with
increases in market interest rates, interest costs on such debt would increase
and cash flow from future operations would decrease while such floating rate
debt is outstanding.
- REAL ESTATE OPERATIONS ARE CYCLICAL
The Partnership's business is affected by demographic and economic trends
and the supply and rate of absorption of lot sales and new construction. As a
result, the Partnership's real estate operations are cyclical, which may cause
revenues and operating results to fluctuate significantly from quarter to
quarter and from year to year, and to differ materially from the expectations of
Management and investors.
- REAL ESTATE ASSETS ARE ILLIQUID
Real estate generally cannot be sold quickly. It may not be possible to
sell land on favorable terms when it is to the Partnership's economic advantage
to do so.
- NATURAL DISASTERS
The southern coastal region of North Carolina has historically experienced
natural disasters, such as fires, hurricanes, floods, unusually heavy or
prolonged rain, and droughts. In the past, the Partnership's operations have
been affected by such occurrences through lower real estate sales and higher
operating and capital costs associated with clean-up and repairs in the
aftermath of such occurrences. The occurrence of natural disasters, such as
fires, hurricanes, floods, unusually heavy or prolonged rain, and droughts,
could have a material adverse effect on
Page 11
the Partnership's ability to develop and sell properties or realize income from
projects, and could result in higher than expected operating and capital costs.
Due to protracted drought or near-drought conditions that existed for
several years up to late 2002 in the southern coastal region of North Carolina,
nearly all of the lakes within the City of Boiling Spring Lakes had a water
level that was substantially below normal. These conditions resulted in a
lowering of the water table, and sink holes developed in the bed of Boiling
Spring Lake, the largest lake in the community, which resulted in a further
lowering of the water level of that lake. A series of remedial measures taken by
the City, combined with heavy precipitation during the fourth quarter of 2002,
seem to have solved the issue of the sink holes and filled the lakes, including
Boiling Spring Lake, to approximately normal levels. Currently, the lakes are
generally at or near normal levels. A return to protracted drought or
near-drought conditions in the coastal region of North Carolina could result in
a reoccurrence of substantially lower water levels, including in Boiling Spring
Lake, and the reoccurrence of one or more sink holes. The occurrence of such
eventualities could have a material adverse effect on the Partnership's ability
to develop and sell properties or realize income from projects.
- ENVIRONMENTAL MATTERS - GENERAL
The Partnership is subject to various federal, state and local laws,
ordinances and regulations regarding environmental matters. Under these laws,
the Partnership may be required to investigate and clean up hazardous or toxic
substances or petroleum product releases on land currently or formerly owned by
it, and may be held liable to a governmental entity or to third parties for
property damage and the cost of investigation, removal and decontamination
incurred by such parties. The penalty may be imposed whether or not the
Partnership was aware of, or responsible for, the hazardous or toxic substances,
and the liability under such laws has been interpreted to be joint and several
unless the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, removal and decontamination of such
substances could be substantial. If such substances are found on land currently
owned by the Partnership, or there is a failure to properly remove or
decontaminate the area, the property could be difficult to sell, rent or
develop. Some environmental laws create a lien on a contaminated site in favor
of the government for damages and costs it incurs in connection with such
contamination. The Partnership may be subject to common law claims by third
parties based on damages and costs resulting from environmental contamination
emanating from a site.
- ENVIRONMENTAL MATTERS - UNDERGROUND STORAGE TANK; INDEMNIFICATION
In 2000, the Partnership removed an underground storage tank located
adjacent to the club house building of Fox Squirrel/The Lakes. Soil samples
taken shortly after the removal showed a certain amount of contamination of
soil and indications that diesel fuel may have leaked into the subsurface
groundwater. The Partnership undertook remediation by removing
Page 12
approximately 15 tons of contaminated soil, and adding fill to the affected
area. Test wells were placed near the former site of the underground storage
tank to measure the level of subsurface groundwater contamination, and the test
results were submitted to the North Carolina Department of Environment and
Natural Resources ("NCDENR"). Initial test results showed levels of groundwater
contamination to be just above the standards. From time to time during 2002 and
2003, additional tests were performed on subsurface groundwater samples, and the
test results were submitted to NCDENR. With one exception, all of the additional
test results showed that the concentration of hydrocarbon compounds in the
subsurface groundwater were either below detection limits or were substantially
below standards; the one exception was the testing in May 2003, which showed
that "C11-C22 aromatic concentration is non-compliant." NCDENR has requested the
Partnership to continue monitoring and sampling the groundwater and to submit
the test results to NCDENR periodically. The latest samples of subsurface
groundwater were taken in February 2004. The written test results have not yet
been received but the Partnership was orally advised that the concentration of
hydrocarbon compounds in the subsurface groundwater were either below detection
limits or were substantially below standards.
The Partnership believes that all necessary remediation work has been
completed and that only additional monitoring and testing will likely be
required before NCDENR issues a final closing letter releasing the Partnership
from future monitoring and testing. If NCDENR should request the Partnership to
conduct additional monitoring and testing or to conduct additional remediation,
the Partnership believes that the cost of any such additional monitoring and
testing or remediation is not likely to be material.
In connection with the sale of the assets of Fox Squirrel/The Lakes, the
Partnership entered into an indemnification agreement with WW-Golf, the buyer of
the assets. Pursuant to such indemnification agreement, as amended, the
Partnership's liability related to testing and remediation involving the
underground storage tank does not extend beyond June 17, 2005. However, should
NCDENR require additional testing and/or remediation beyond June 17, 2005, and
should WW-Golf be unable to bear the entire cost of such testing and/or
remediation, it is possible that the Partnership will be required to bear some
or all of such costs.
- ENDANGERED/PROTECTED SPECIES
Portions of Boiling Spring Lakes and the surrounding area are known or
believed to be the habitat of various species of flora and fauna which have been
identified as endangered or protected species. Development of the Partnership's
land is subject to various laws and regulations intended to limit disturbance of
endangered and protected species. The Partnership may be subject to common law
claims by third parties based on damages and costs resulting from the presence
of endangered or protected species on or near land owned by the Partnership.
Page 13
- ZONING AND OTHER REGULATIONS
At December 31, 2003, the Partnership owns approximately 244 acres of
undeveloped, unplatted land intended for residential use and approximately 223
additional acres of undeveloped, unplatted land intended for commercial use.
Changes in zoning or other regulations may prevent the Partnership from
subdividing all or a substantial portion of such acreage, which, in turn, may
adversely affect the Partnership's ability to continue generating revenue from
real estate sales and/or its ability to effect a bulk sale of all or
substantially all of its assets. Rezoning commercial land for residential use
may not be possible or, if possible, may be prohibitive due to time and cost.
The inability to obtain a rezoning of commercial land may prevent the
Partnership from realizing any value in a sale of such land. In addition,
changes in zoning or other regulations may require significant modifications to
or the abandonment of the phased development project described in Item 2,
"Properties - Boiling Spring Lakes," and/or require substantially greater
expenditures by the Partnership than currently expected to complete the phased
development project.
- AVAILABILITY OF WATER AND SEWER SERVICES
The lack of municipal water and public sewer services to most of the City
of Boiling Spring Lakes has been a major inhibiting factor in the Partnership's
efforts to sell and/or develop land in the development. Virtually all residents
are forced to rely upon well water and individual septic systems. The City of
Boiling Spring Lakes plans to begin phasing in municipal water service to
certain portions of the development beginning in 2004. The extension of water
service to other portions of the development will depend on, among other
factors, the ability to control costs of laying pipelines and the demand for
such water service. Brunswick County has plans for an area-wide sewer system for
Boiling Spring Lakes; however, there is no firm date for the County to begin
installation of such a system and the Partnership believes that such
installation is at least several years in the future. A significant portion of
the cost of water distribution and sewer lines to land owned by the Partnership
must be borne by the Partnership or by subsequent purchasers of the land.
- INCREASED OPERATING OR CAPITAL COSTS
The Partnership is responsible for maintaining certain roads, most of
which are unpaved, and certain road rights-of-way within the City of Boiling
Spring Lakes. During 2001, 2002 and 2003, the Partnership spent a total of
approximately $47,270 for rocking and paving roads. Otherwise, in recent years,
the Partnership has not spent significant amounts toward maintaining such roads
and rights-of-way, and the amount required to maintain them may increase
substantially, or the failure by the Partnership to provide proper maintenance
in the future may subject the Partnership to substantially greater risk of
litigation from persons adversely affected by such failure.
Page 14
The Partnership is responsible for the maintenance and repair of a dam
designed to retain water in one of the lakes. The dam was breeched and partially
washed out following a storm approximately eight years ago. During 2001, 2002
and 2003, the Partnership spent a total of approximately $102,608 to repair the
dam. The Partnership intends to deed the dam to the City of Boiling Spring Lakes
during 2004. The City has required that additional work, in the form of adding
"rip rap" to the dry side of the dam, be performed prior to accepting title. The
Partnership expects to complete the additional work during the first quarter of
2004 but, until such time as the title is transferred, there can be no assurance
that the City will not require the Partnership to undertake and complete
additional work on the dam, or decide not to accept title, notwithstanding the
additional work on the dam by the Partnership. The occurrence of a hurricane,
flood, or unusually heavy or prolonged rain could result in damage to the dam.
In such an eventuality before the transfer of title to the dam, the Partnership
would be responsible for the repair costs, which could be substantial, and
until such repair is completed, the Partnership's ability to develop and sell
properties or realize income from projects could be materially adversely
affected.
- NEW PROJECTS
The Partnership may undertake one or more new projects within or nearby
the development. Management may fail to accurately gauge conditions prior to
undertaking a new project, and therefore the Partnership may not achieve
anticipated results in the new project. If this were to occur, the Partnership
may experience lower cash flow from operations. To the extent that the
Partnership incurs debt to finance a portion of the capital costs of a new
project, the cash flow from the new project may be inadequate to cover the debt
service.
- NEED FOR ADDITIONAL CAPITAL
To date, the Partnership has financed its operations with cash primarily
from the sale of property, by accruing amounts owed to the General Partner and
its affiliates, and from time to time borrowing from the General Partner and its
affiliates or from local banks. If the Partnership does not generate enough cash
from its operations to finance its business in the future, it may need to raise
additional funds through private financing. If the Partnership borrows funds, it
may be required to agree to restrictions limiting its operating flexibility. If
the Partnership requires additional funds and is not able to obtain such funds,
it would have a material adverse affect on the Partnership's operations.
- INSURANCE RISKS; UNINSURED DAMAGE TO PROPERTY
The Partnership maintains comprehensive liability and fire insurance
policies on its assets. However, the Partnership may suffer losses that are not
covered by such policies. For
Page 15
example, losses resulting from war or from environmental liabilities generally
are not covered by insurance. If an uninsured loss or a loss in excess of
insured limits should occur, the Partnership could lose capital invested in its
property, as well as future revenue from the sale of such property.
Due in large part to the terrorist activities of September 11, 2001,
insurance companies have re-examined many aspects of their business and have
taken certain actions in the wake of these terrorist activities, including
increasing premiums, mandating higher self-insured retentions and deductibles,
reducing limits, restricting coverages, imposing exclusions (such as sabotage
and terrorism), and refusing to underwrite certain risks and classes of
business. Significantly increased premiums, mandated exclusions, or changes in
limits, coverages, terms and conditions could adversely affect the Partnership's
ability to obtain appropriate insurance coverages. However, at this time the
only impact on the Partnership has been an increase in premiums.
- FINANCIAL COVENANTS ON INDEBTEDNESS
At December 31, 2003, the Partnership has no debt outstanding. Should the
Partnership incur indebtedness in the future, required payments on such future
indebtedness generally would not be reduced if the Partnership's economic
performance declines. If the Partnership's economic performance declines, cash
flow from operations would be reduced. Under such circumstances, the Partnership
might not be able to sell some of its assets quickly enough to avoid default on
any such future indebtedness. If debt service payments could not be made, the
Partnership might sustain a loss, suffer foreclosure by a mortgagee, or suffer
judgments against the Partnership.
- FDIC INSURANCE RISK
The Partnership maintains its cash primarily at a bank insured by the
Federal Deposit Insurance Corporation ("FDIC"). The FDIC insures deposits up to
$100,000 per depositor, per bank, subject to certain conditions. At December 31,
2003, the Partnership maintained cash balances $722,467 in excess of
FDIC-insured amounts. In the event that the bank where the Partnership maintains
its accounts becomes insolvent, the Partnership may lose some or all of such
excess.
- STRUCTURE AS A LIMITED PARTNERSHIP
The Partnership is treated for federal and state income tax purposes as a
limited partnership, and the General Partner has taken such steps as are known
to it to perfect such treatment. Changes to laws may adversely affect the
treatment of the Partnership as a limited partnership. No assurance can be given
that new tax laws will not significantly affect the
Page 16
Partnership's qualification as a limited partnership or the federal income tax
consequences of such qualification. New laws could be applied retroactively,
which means that past operations could be found to be in violation, which would
have a negative effect on the Partnership's business. If the Partnership were to
lose its status as a limited partnership for federal and state tax purposes, the
Partnership would be subject to federal and state income tax on the
Partnership's taxable income at the corporate tax rates.
ITEM 2. PROPERTIES
BOILING SPRING LAKES
Boiling Spring Lakes began in 1962 as a 14,000-acre development. Part of
the tract is now within the City of Boiling Spring Lakes, which has
approximately 3,000 residents. Boiling Spring Lakes is in Brunswick County, 25
miles southwest of Wilmington, North Carolina, and 8 miles northwest of
Southport, placing the city in the northern portion of the coastal corridor
connecting Wilmington, North Carolina and Myrtle Beach, South Carolina.
The Partnership's principal asset is its undeveloped land in Boiling
Spring Lakes, comprising approximately 965 acres. As of December 31, 2003, the
Partnership owns the following:
- approximately 438 acres, divided into 1,290 platted unimproved
individual lots, both recorded and unrecorded, intended for
residential use;
- approximately 304 acres of undeveloped land, including 60 acres that
are divided into six 10-acre tracts, intended for residential use;
- approximately 223 acres of undeveloped land intended for commercial
use;
- a single family residence comprising 1,648 sq. ft. that is rented
out by the Partnership;
- a building comprising approximately 500 sq. ft. that is leased to
the City of Boiling Spring Lakes at a rate of $1 per year for use as
a post office; and
- a sales office comprising approximately 1,269 sq. ft.
The Partnership obtained from Robert C. Cantwell and Associates (the
"Appraiser") an independent MAI appraisal report dated January 20, 2004 valuing
the Partnership's real estate assets located in Boiling Spring Lakes at December
31, 2003. Such assets comprise substantially all of the assets of the
Partnership on such date other than cash and the Promissory Note. The appraisal
values the appraised assets at $1,200,000 (the "Appraised Value"). The Appraised
Value is the Appraiser's opinion of the most probable price which the property
should bring in a
Page 17
competitive and open market under all conditions requisite to a fair sale, and
assumes, among other things, a typically motivated buyer and seller in an "arm's
length" transaction, both parties are well informed or well advised about the
assets and each acting in what he considers his own best interest, and a
reasonable time is allowed for exposure in the open market. As such, there is no
guarantee that the Partnership could realize the Appraised Value of such assets
upon a sale. The actual sale price could be higher or lower than the Appraised
Value. The appraisal is not in connection with any requested minimum, maximum or
specific appraised value, any pending or proposed sale or other transaction, or
approval of any loan involving the appraised assets or the Partnership. The
foregoing summary of the appraisal is limited in its entirety to the full
appraisal report, a copy of which is filed with the Securities and Exchange
Commission as an exhibit to this annual report on Form 10-K (the photographs,
maps and drawings that appear in the hard copy of the appraisal are necessarily
excluded from the electronic filing of the exhibit).
During 1988, the Partnership reduced the carrying value of the Boiling
Spring Lakes property as a result of an appraisal obtained in December 1988.
During 1993, 1995, 1998, and 2000, the Partnership obtained updated appraisals
of the Boiling Spring Lakes property. Based upon those updated appraisals, no
additional reduction to the carrying value was made. As a result of the
appraisal dated as of December 31, 2003, the Partnership and its accountants
believe that the valuation allowance at December 31, 2003 is appropriate, and
that no adjustment to the valuation allowance need be made.
Management intends to continue emphasizing the sale of individual lots at
Boiling Spring Lakes, concentrating on lots situated on existing paved roads and
rocked roads. The Partnership intends to continue selling its land on an
all-cash basis.
To increase lot sales, in 1995 Management initiated a project involving
the construction of a house on a lot owned by the Partnership and the immediate
marketing of the house and lot for sale, with the cost of construction financed
with a line of credit from a local bank. After initial success in 1996, the
Partnership continued the project in 1997, with the sale of two improved
individual lots during the year; the first was sold for $115,000 and generated a
profit of approximately $20,000, and the second was sold for $128,000 and
generated a profit of approximately $17,100. In 1998, the Partnership sold one
improved individual lot for $117,300, generating a profit of approximately
$13,700. During 1999, the Partnership sold one improved individual lot for
approximately $130,900, generating a profit of approximately $11,200. In view of
rising construction costs and decreased margins, the Partnership elected to
suspend the project in 2000 and has not constructed any houses since 2000.
Management may resume the project during 2004.
During 1995 and 1996, the Partnership conceived plans for a small, phased
development project involving the construction of 23 patio homes on 13
contiguous lots owned by the Partnership as a means of supplementing revenue
from lot sales. The City of Boiling Spring Lakes granted its approval for the
development in 1996. Construction was delayed for nearly two years due to new
state regulations, promulgated after the city granted its approval but before
Page 18
construction on the patio homes commenced, which required the Partnership to
file storm water drainage plans with respect to the patio homes project. The
storm water drainage plans were filed during 1997 and final approval was granted
during 1998. The Partnership has postponed construction indefinitely due to
regional real estate market conditions, which have, among other things, driven
patio home construction costs above what Management believes is prudent.
Management expects that, once construction begins, the Partnership will have one
or two patio homes under construction at any given time, and that once a patio
home is sold, construction will begin immediately on another until all 23 have
been built and sold.
PIMLICO PLANTATION
Pimlico Plantation is situated in Berkeley County, near Charleston, South
Carolina. Virtually all of the land in Pimlico Plantation was sold in past
years. During 2003, the Partnership sold its one remaining residential lot,
comprising approximately 3/8-acre, at this location. Consequently, at December
31, 2003, the Partnership owns no assets in Pimlico Plantation.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is not currently a party to any material pending legal
proceedings. From time to time the Partnership has been and may become a party
to ordinary routine litigation incidental to its business. Management believes
that the potential liability to the Partnership from any of such proceedings is
immaterial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of unit holders during the fourth
quarter of 2003.
Page 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the partnership units,
and there are only limited or sporadic quotations on the over-the-counter market
for the units. It is not anticipated that there will ever be an active public
market for the units. The Partnership Agreement does not provide for redemption
of partnership interests on demand by limited partners. Accordingly, the General
Partner believes that the partnership units have substantially no liquidity.
As of December 31, 2003 there were 1,948 registered holders of partnership
units. The total number of record holders has not changed substantially from
December 31, 2003 to March 19, 2004, the latest practicable date prior to the
filing of this annual report on Form 10-K.
It is the Partnership's experience that revenues are highly variable and
may not be sufficient in future years to cover expenses and necessary capital
expenditures and that a bulk sale of assets for cash is extremely difficult to
achieve. Absent a bulk sale, Management believes that the best use of the
current cash balance and cash surpluses, if any, generated in future years is to
preserve or improve the overall value of the Partnership's assets by: (i)
undertaking certain infrastructure and other improvements in the development;
(ii) pursuing limited scale home construction on lots owned by the Partnership
as market conditions may allow; and (iii) making certain other real
estate-related investments in or near Boiling Spring Lakes. Management believes
that this plan will, in future years, result in, among other things, an increase
in the number of lots sold and a higher average sales price per lot than would
otherwise be the case. There can be no assurance, however, that sufficient cash
will be generated from operations to successfully implement Management's plan.
Consistent with the above described plan and in view of the costs
associated with a distribution to all partners, Management believes it would be
impractical and imprudent to make a distribution to partners prior to the sale
of all or substantially all of the Partnership's assets, or such time as the
Boiling Spring Lakes development, as a whole, has been established to operate at
a level sufficient to consistently generate revenues in excess of expenses and
capital expenditures. However, from time to time, in accordance with applicable
securities laws, the Partnership may utilize excess cash by repurchasing
partnership units, although there are currently no plans to do so. Since the
amount of excess cash available for such purpose cannot be estimated at this
time due to the highly variable nature of the Partnership's cash flow, there can
be no assurance as to the number of partnership units which will actually be
repurchased, if any such repurchases will, in fact, occur, or the prices at
which such repurchases, if any, will be made. As of the date of this annual
report on Form 10-K, none of the Partnership, the General Partner, or any
affiliate of either of the foregoing has made any filing with the Securities and
Exchange Commission with respect to any planned repurchases of partnership
units.
Page 20
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth in Tables 5 and 6, below, has been
derived from the Partnership's historical audited financial statements. The
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited financial statements and related notes thereto.
TABLE 5: SELECTED INCOME STATEMENT DATA
Year Ended December 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ----------- ----------
Revenues:
Property sales $ 483,407 $ 315,864 $ 440,847 $ 2,835,169 $ 555,441
Sale of golf club
Prev. deferred revenue 862,500 -- -- -- --
Prev. deferred interest income 149,745 -- -- -- --
Interest income on note receivable 6,145 -- -- -- --
Other interest income and fin. charges 3,559 5,399 7,867 10,887 1,250
Other revenue -- 379 8,920 -- --
---------- ---------- ---------- ----------- ----------
Total revenue 1,505,356 321,642 457,634 2,846,056 556,691
Operating expenses:
Direct costs of property sold 462,256 8,643 31,757 367,259 163,114
Selling, general & admin. expenses 443,135 311,525 376,384 511,864 494,740
Depreciation 1,468 2,571 2,462 2,681 3,144
Interest 4,702 10,308 9,801 72,929 81,081
---------- ---------- ---------- ----------- ----------
Total operating expenses 911,561 333,047 420,404 954,733 742,079
---------- ---------- ---------- ----------- ----------
Operating income (loss) 593,795 (11,405) 37,230 1,891,323 (185,388)
Rental income - net 1,375 3,766 2,550 3,400 1,266
---------- ---------- ---------- ----------- ----------
Income (loss) from continuing ops. $ 595,170 $ (7,639) $ 39,780 $ 1,894,723 $ (184,122)
Loss from discontinued operations -- -- (67,326) (214,975) (192,953)
---------- ---------- ---------- ----------- ----------
Net income (loss) $ 595,170 $ (7,639) $ (27,546) $ 1,679,748 $ (377,075)
========== ========== ========== =========== ==========
PER UNIT DATA:
Income (loss) from continuing ops. $ 0.33 $-- $ 0.02 $ 1.04 $ (0.10)
Net income (loss) $ 0.33 $-- $ (0.02) $ 0.92 $ (0.21)
Distributions $ -- $-- $ -- $ -- $ --
Page 21
Some amounts in Table 5 for prior years are reclassified to conform to the
presentation in the current year. Such reclassifications have not resulted in a
change in net income or loss.
TABLE 6. SELECTED BALANCE SHEET DATA
At December 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ----------- ----------
Cash, prepaid expenses and other
current assets $ 823,274 $ 320,661 $ 312,485 $ 242,772 $ 134,861
Properties held for sale and
property and equipment, net 489,777 921,485 846,591 855,491 960,480
Note receivable 146,265 -- -- -- --
Total assets 1,459,316 1,242,146 1,159,076 1,098,263 1,095,341
Accounts payable and accrued expenses 149,184 138,657 123,051 222,620 1,875,204
Deposit on contract -- 280,245 200,548 -- --
Long-term debt -- 108,282 112,876 117,454 141,696
Total liabilities 149,184 527,184 436,475 340,074 2,016,900
Partners' capital (deficit) 1,310,132 714,962 722,601 758,189 (921,559)
It is the Partnership's experience that its historical financial condition
and results of operations are not reliable indicators of future financial
condition and results of operations. Sales of real estate for development in
Boiling Spring Lakes are highly variable, both as to the amount of land sold as
well as the sales price per lot. See also Item 1, "Description of Business -
Risk Factors," for a discussion of material uncertainties that might cause the
Partnership's future financial condition or results of operations to be
materially different from the historical financial condition and results of
operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Partnership's audited financial statements and the notes thereto which are
included as part of this annual report on Form 10-K. Certain amounts in prior
years have been reclassified to conform to the presentation in the current year.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
In addition to historical information, this annual report on Form 10-K
contains certain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act
Page 22
of 1995 and other applicable securities laws. These forward-looking statements
include, without limitation, any statement that may predict, forecast, indicate,
or imply future results, performance, achievements, or events, and may contain
forward-looking words or phrases such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "might," "plan," "project," "strategies,"
"will be," "will continue," "will likely result," and similar terms that convey
uncertainty of future events or outcomes. These statements represent the
Partnership's (including the General Partner's) beliefs, expectations,
intentions, and plans, and, as such, are not guarantees of future outcomes or
future performance, and are subject to risks and uncertainties that are beyond
the Partnership's control and could cause the Partnership's actual results to
differ materially from those reflected in the forward-looking statements.
Readers are cautioned not to place undue reliance upon these
forward-looking statements, which reflect Management's analysis only as to the
date hereof. Readers should carefully review the risk factors described in Item
1, "Description of Business - Risk Factors" and other documents the Partnership
has filed and from time to time will file with the Securities and Exchange
Commission which could cause the Partnership's actual results to differ
materially from those in these forward-looking statements. The Partnership
undertakes no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
Management to make estimates and judgments that affect reported amounts of
certain assets, liabilities, revenues, expenses, and related disclosures. Actual
results may differ from these estimates under different assumptions and
conditions. A "critical accounting policy" is one that is both important to the
portrayal of the Partnership's financial condition and results and requires
Management's most difficult, subjective, or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. The Partnership believes that the following of its accounting
policies fit this description:
- - BASIS OF ACCOUNTING
The Partnership's financial statements are prepared using the accrual
basis of accounting. The Partnership's assets have been written down, from time
to time, to reflect their fair values based upon appraisals.
- - PROPERTY SALES
Property sales represent individual building lots sold for cash and the
gross sales price of residential houses built or acquired by the Partnership for
resale. The revenue from these sales
Page 23
are recognized at the closing date unless a deferral is required pursuant to
Statement of Financial Standards No. 66, "Accounting for Sales of Real Estate."
Land cost included in direct costs of property sold represents the proportionate
amount of the total initial project costs, after recorded valuation allowances,
based on the sales value of the lot to the total estimated project sales value
plus the value per lot of any capital improvements made subsequent to the
initial project costs.
- - PROPERTIES HELD FOR SALE AND PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation for financial reporting purposes is calculated on the straight-line
basis over the estimated useful lives of 8 to 31.5 years for buildings and 5 to
20 years for equipment and land improvements.
The Partnership assesses the realizability of the carrying value of its
properties held for sale and related buildings and equipment whenever events or
changes in circumstance indicate that impairment may have occurred in accordance
with the provisions of Statement of Financial Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets."
- - CASH AND EQUIVALENTS
For purposes of the Statements of Cash Flows, the Partnership considers
cash as cash on hand, cash deposited in financial institutions, and money market
accounts with maturities of less than 90 days at the date of purchase. Cash
equivalents are stated at cost, which approximates market value.
- - IMPAIRMENT OF LONG-LIVED ASSETS
The Partnership's long-lived assets, primarily real estate held for sale,
are carried at cost unless circumstances indicate that the carrying value of the
assets may not be recoverable. The Partnership obtains appraisals periodically
(typically, every two years) for the Boiling Spring Lakes property and evaluates
the carrying value of the property based on those appraisals. The Partnership
does not expect to reduce the carrying value of the properties in the near
future.
The Partnership applies a valuation allowance to land if such land is
unsuitable for the installation of an individual septic system as determined by
testing conducted by the local health department or, in the absence of such
testing, as determined by the Partnership based upon topography. Land that the
Partnership believes to be suitable for the installation of an individual septic
system based upon topography may, by subsequent testing, be determined to be
unsuitable. More typically, land that the Partnership believes to be unsuitable
for septic based upon topography may, by subsequent testing, be determined to be
suitable. The valuation allowance is allocated among the land held for sale only
following each periodic appraisal, while the determination of a particular lot
or parcel of land as being suitable or unsuitable for septic may be made at any
time prior to the sale of such land. Since the direct cost of land sold is net
of the
Page 24
applicable valuation allowance, the direct cost of a lot or parcel of land that
the Partnership believes to be suitable for septic that, on the basis of
testing, is subsequently determined to be unsuitable may, therefore, exceed the
sales price of such land, in which case the Partnership would realize a loss on
the sale of such land. To the best of Management's knowledge, the Partnership
has never realized such a loss, and if such a loss or losses were to occur,
Management believes that the aggregate amount of such losses would not
materially affect the Partnership's financial condition or results from
operations.
- - ACCOUNTING FOR THE SALE OF THE ASSETS OF FOX SQUIRREL/THE LAKES
The Partnership closed a sale agreement for the assets of Fox Squirrel/The
Lakes on March 9, 2001. Under the agreement, the Partnership received $150,000
in cash and the Promissory Note for $712,500. The Promissory Note initially
accrued interest at 9.75% per annum, payable monthly, and had a maturity date of
March 9, 2004. The Promissory Note was initially collateralized by a first
mortgage on the assets of the country club. Since the cash down payment
represented less than 25% of the total consideration paid for the assets, the
transaction was recorded on the Partnership's financial statements using the
deposit method as defined in SFAS No. 66, "Accounting for Sales of Real Estate."
The deposit method requires, among other things, that until the total cash
received by the Partnership from the down payment and principal payments on the
Promissory Note is at least 25% of the total consideration paid: (a) the sold
assets remain on the Partnership's balance sheet as assets held for sale or
disposal; (b) the operations of Fox Squirrel/The Lakes prior to the sale be
recorded as discontinued operations; (c) cash received from the buyer be shown
as a deposit on contract; and (d) payments received from the buyer in respect of
the Promissory Note be treated as an increase in the deposit.
In June 2003, in connection with the buyer's obtaining financing from the
Bank, WW- Golf, the buyer of the assets, made an early repayment of principal of
$534,748, reducing the unpaid principal amount outstanding under the Promissory
Note at that time to $147,757. The terms of the Promissory Note were then
modified to provide for an annual interest rate equal to the higher of (i) 8.75%
and (ii) 2% over the Bank's prime rate, and the maturity date was extended to
June 15, 2008. In addition to the foregoing modifications to the Promissory
Note, the Partnership subordinated its lien priority on the assets sold to
WW-Golf to that of the Bank. With such prepayment of principal, the cash
consideration paid by WW-Golf exceeded 25% of the total consideration paid for
the assets. Accordingly, for the fiscal year ended December 31, 2003, the
transaction was recorded on the Partnership's financial statements as a sale of
assets and a $341,221 gain on the sale of the assets was recognized. The gain on
sale is calculated as follows:
Revenues:
Previously deferred revenue $862,500 [a]
Operating expenses:
Direct costs of property sold 442,587 [b]
Selling, general and administrative expenses 78,692 [c]
--------
Net gain on sale of assets $341,221
========
Page 25
[a] Represents the contract sales price of the assets.
[b] Represents the net book value of the assets sold.
[c] Represents commissions payable and other expenses relating to
the transaction.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
- - REVENUES
Overall, revenues increased 368% to $1,505,356 in 2003, compared to
$321,642 in 2002. The principal components of revenues and Management's
explanations for year-to-year changes are set forth below.
- PROPERTY SALES
Revenue increased 53% to $483,407 in 2003, compared to $315,864 in 2002.
Revenue in 2003 includes $458,862 from land sales in Boiling Spring Lakes, and
$24,545 from land sales in Pimlico Plantation. Revenue in 2002 is attributable
entirely to land sales in Boiling Spring Lakes.
BOILING SPRING LAKES
Revenue from the sale of unimproved individual lots was $228,849 in 2003,
compared to $250,454 for 2002. The number of lots sold during 2003 and 2002 was
27 and 19, respectively. Management attributes the 42% increase in the number of
lots sold to a pick-up in economic conditions generally in the last half of
2003. During the fourth quarters of 2003 and 2002, for example, the Partnership
sold 13 lots and 2 lots, respectively. Management attributes the 9% decrease in
revenue to the fact that the increase in the number of lots sold was more than
offset by a decrease in the average sales price per lot. For 2003 and 2002, the
average sales price per lot was $8,476 and $13,182, respectively. Management
attributes the 36% decrease in the average sales price per lot primarily to the
relative mix of lots sold. Lots adjoining or close to the golf course, for
example, generally sell for more than lots that are not close to the golf
course, and lots which are suitable for the installation of individual on-site
septic systems generally sell for more than lots that are not suitable for
on-site septic systems.
Revenue from the sale of commercial land rose 252%, to $230,013, in 2003,
from $65,410 in 2002. During 2003, the Partnership sold approximately 7 acres of
commercial land, of which total approximately 3 acres lie within the West North
Shore Drive commercial district. None of the approximately 6 acres of
commercial land sold in 2002 lies within the district. The West North Shore
Drive commercial district was established by the Partnership in the 1990's and
originally comprised approximately 8 acres. Lots within the district share a
multi-user septic system installed by the Partnership and command a higher
sales price than other commercial land within the development. In 2003, for
example, the Partnership sold commercial district land for an average of
approximately $70,000 per acre, but commercial land elsewhere in the
Page 26
development was sold at an average of approximately $5,000 per acre in 2003 and
approximately $11,000 per acre in 2002. The Partnership's sales of commercial
land are sporadic, highly variable, and largely beyond the Partnership's
control. The average sales price per acre of commercial land varies widely.
During 2003, the Partnership sold its last commercial lot located within the
West North Shore Drive commercial district. Unless the Partnership establishes a
new commercial district with a multi-user septic system or a municipal sewer
system is extended to the Partnership's commercial land, it is unlikely that the
Partnership will generate revenue per acre from the sale of commercial land
substantially equal to the $70,000 realized in the abovementioned sales in 2003.
PIMLICO PLANTATION
During 2003, the Partnership sold one unimproved individual lot for
$24,545. No lots were sold during 2002.
- SALE OF THE ASSETS OF FOX SQUIRREL/THE LAKES
During 2003, the Partnership recognized a gain on the sale totaling
$341,221. See "Critical Accounting Policies - Accounting for the Sale of the
Assets of Fox Squirrel/The Lakes." The recognition of the gain was triggered by
the early repayment of principal on the Promissory Note of $534,748 in June
2003. Since the cash down payment of $150,000 received by the Partnership at the
closing of the sale in March 2001 represented less than 25% of the total
consideration paid for the assets, the transaction was originally recorded on
the Partnership's financial statements using the deposit method as defined in
SFAS 66.
Along with the recognition of the gain on sale, the Partnership recognized
$149,745 of interest income collected on the Note Receivable from March 9, 2001,
the date of the sale, up to and including the date of the early repayment of
principal on the Promissory Note of $534,748 in June 2003. Previously, interest
collected on the Note Receivable was treated for financial reporting purposes as
an increase in the deposit on the sale contract. Interest collected on the Note
Receivable after the date of the early repayment, totaling $6,145, is treated as
revenue for 2003.
- OTHER INTEREST INCOME AND FINANCE CHARGES
Other interest income and finance charges in 2003 was $3,559, compared to
$5,399 in 2002. The 34% decrease is due principally to lower interest rates in
2003 than in 2002.
Page 27
- - DIRECT COSTS OF PROPERTY SOLD
Direct costs of property sold rose 5,246% to $462,256 in 2003, compared to
$8,643 in 2002. The amount for 2003 includes $442,587 relating to the sale of
the assets of Fox Squirrel/The Lakes. Excluding such amount, direct costs of
property sold was $19,669 in 2003, an increase of 128% over 2002. The increase
is due principally to the sale during 2003 of approximately 3 acres of
commercial land within the West North Shore Drive commercial district. The
carrying cost of such land includes the proportionate share of the cost of
installing the commercial district's multi-user septic system. During 2002 none
of the commercial land sold by the Partnership was within the West North Shore
Drive commercial district.
- - SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses rose 42% to $443,135 in 2003,
compared to $311,525 in 2002. The amount for 2003 includes $78,692 relating to
the sale of the assets of Fox Squirrel/The Lakes. Excluding such amount,
expenses rose 17% to $364,443 for 2003. Management attributes the increase
principally to higher property taxes following a county-wide reassessment of
land in Brunswick County, North Carolina in 2002, and higher accounting fees and
expenses resulting from a substantially greater role by auditors generally in
the financial reporting of public companies following the enactment of the
Sarbanes-Oxley Act of 2002.
- - DEPRECIATION
Depreciation expense fell 43% to $1,468 in 2003, compared to $2,571 for
2002. Management attributes the decrease principally to the recording in 2003 of
amortization of the valuation allowance relating to the rental house owned by
the Partnership, whereas no such amortization was recorded for 2002. Since the
valuation allowance is a contra-asset, amortizing the valuation allowance has
the effect of reducing net depreciation.
- - INTEREST
Interest expense was $4,702 for 2003, compared to $10,308 for 2002. The
54% decrease is due principally to the early repayment of long-term debt by the
Partnership in 2003, after which repayment the Partnership has no long-term debt
outstanding.
- - RENTAL INCOME
Net rental income in 2003 was $1,375, compared to $3,766 in 2002. The 63%
decrease is due principally to the recording of depreciation in 2003 relating to
the rental house owned by the Partnership, whereas no such depreciation was
recorded in 2002. Gross rental income in 2003
Page 28
was $9,288, compared to $3,766 in 2002. Management attributes the 147% increase
to the lower vacancy rate of the rental house in 2003 compared to 2002.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
- - REVENUES
Overall, revenues declined 30% to $321,642 in 2002, compared to $457,634
in 2001. The principal components of revenues and Management's explanations for
year-to-year changes are set forth below.
- PROPERTY SALES
Revenue declined 28% to $315,864 in 2002, compared to $440,847 in 2001.
Revenue in 2002 is attributable entirely to land sales in Boiling Spring Lakes.
Revenue in 2001 includes $420,743 from land sales in Boiling Spring Lakes, and
$20,104 from land sales in Pimlico Plantation.
BOILING SPRING LAKES
Management attributes the 25% decrease in revenue from land sales
principally to weaker demand for buildable residential lots during 2002 as
compared to 2001, which, in turn, is due primarily to poorer economic conditions
generally. Revenue from the sale of unimproved individual lots was $250,454 for
2002, compared to $347,832 for 2001. The 28% decrease is due to a smaller number
of lots sold during 2002 than during 2001. The number of unimproved individual
lots sold during 2002 and 2001 was 19 and 68, respectively, a decrease of 72%.
An increase in the average price per lot sold was more than offset by the
overall decrease in total lots sold. Revenue from the sale of commercial land
for 2002 and 2001 was $65,410 and $0, respectively. The Partnership's sales of
commercial land are sporadic, highly variable, and largely beyond the
Partnership's control. Revenue from the sale of other land for 2002 and 2001 was
$0 and $72,911, respectively.
PIMLICO PLANTATION
No lots were sold during 2002. During 2001, the Partnership sold one
undeveloped individual lot for $20,104.
- INTEREST INCOME
Revenue in 2002 was $5,399 in 2002, compared to $7,867 in 2001. Management
attributes the 31% decrease principally to lower interest rates earned on cash
balances.
Page 29
- - DIRECT COSTS OF PROPERTY SOLD
For the year ended December 31, 2002, direct costs of property sold was
$8,643, all of which relates to land sold in Boiling Spring Lakes. For the year
ended December 31, 2001, direct costs of property sold was to $31,757, of which
amount $31,507 relates to land sold in Boiling Spring Lakes and $250 relates to
land sold in Pimlico Plantation. With respect to Boiling Spring Lakes,
Management attributes the 73% decrease in direct cost of property sold
principally to a smaller number of lots sold during 2002 than during 2001.
- - SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 2002 were $311,525,
compared to $376,384 for 2001. Management attributes the 17% decrease
principally to legal fees incurred in 2001 in connection with certain litigation
that was concluded in 2001, whereas no such legal fees were incurred during
2002; lower general partner's fees, which reflect the fact that following the
sale of Fox Squirrel/The Lakes in 2001, the General Partner has had to devote
less time to the affairs of the Partnership than in the past; and to lower real
estate taxes, which reflect the land sales during 2001.
- - DEPRECIATION
Depreciation was $2,571 for 2002, compared to $2,462 in 2001. Management
attributes the 4% increase principally to capital expenditures incurred during
2001 and 2002.
- - INTEREST
Interest expense was $10,308 for 2002, compared to $9,801 in 2001.
Management attributes the 5% increase in interest expense primarily to a
slightly higher average amount of interest-bearing liabilities outstanding
during 2002 than during 2001.
- - RENTAL INCOME
Revenue for 2002 was $3,766, compared to $2,550 in 2001. Management
attributes the 48% increase to a lower vacancy rate for the rental house in 2002
than in 2001.
- - DISCONTINUED OPERATIONS
Fox Squirrel/The Lakes is classified as a discontinued operation. The
Partnership's financial results for 2002 include none of the operations of Fox
Squirrel/The Lakes, since the assets were sold during 2001, and the financial
results for 2001 reflect the operations of Fox
Page 30
Squirrel/The Lakes only for the period from January 1, 2001 through March 9,
2001, the closing date of the sale. In addition, the results for 2001 include
certain post-closing adjustments totaling $4,390, comprised of $1,580 in
adjustments to revenue (reflecting a revision to the allocation of revenue made
at closing) and $2,810 in adjustments to selling, general and administrative
expenses (reflecting a revision to the allocation of expenses made at closing).
LIQUIDITY AND CAPITAL RESOURCES
- - GENERAL
The Partnership requires cash primarily for the payment of operating
expenses, overhead, and capital expenditures incurred in connection with real
estate sales. Historically, the Partnership has met its liquidity requirements
by accruing general partner fees and certain other fees and expenses payable to
the General Partner and its affiliates, selling certain non-real estate assets,
and, from time to time, borrowing from local banks or the General Partner and/or
its affiliates. Cash is generated primarily from individual lot sales and may
not be sufficient to meet future operating costs, debt service and other cash
requirements. The Partnership may seek to negotiate credit facilities, issue
debt on such terms and conditions as the General Partner deems prudent, or seek
other forms of debt or equity financing as the General Partner deems
appropriate.
The Partnership finances construction of houses for sale on lots owned by
the Partnership with construction loans obtained through a line of credit
established with a local bank. Under such an arrangement, the bank will from
time to time make payments to the contractor for work performed, increasing the
amount of the construction loan and decreasing by the same amount the total
available for future borrowing under the line of credit. Borrowing under the
line of credit in respect of any house is repaid at closing of the sale. Under
the terms of the line of credit, if the house is unsold at the time of its
completion, interest will accrue for up to one year after the date of the first
draw, after which time the construction loan converts to a fixed-rate loan. At
any given time, the Partnership has not had more than one construction loan
outstanding, with a maximum balance, including accrued interest, not exceeding
$110,000, and has generally succeeded in selling the house and lot on which it
stands prior to the completion of construction. The Partnership did not
construct or begin construction on any house for sale during 2003 or 2002, and
so no lines of credit were utilized and no debt incurred in connection with any
such construction during those years. In 2004 and subsequent years, depending
upon market conditions and other factors, the Partnership may seek to have up to
two such loans outstanding at any given time and the maximum amount of any loan
is not expected to exceed $120,000.
In March 1999, the Partnership borrowed $120,000 from a local financial
institution to finance the purchase of an improved individual lot for eventual
resale. The Partnership leases the property to third parties for terms generally
of one year while making monthly payments on the financing. Management expects
to continue leasing the property for the foreseeable future.
Page 31
During 2003, the Partnership repaid in full the amount of such financing and at
December 31, 2003, there was no amount outstanding.
- - CASH FLOWS FROM OPERATING ACTIVITIES
During 2003, the Partnership generated $1,114,588 of net cash from
operating activities, compared to $8,409 of net cash used in operating
activities during 2002. The amount for 2003 includes $783,808 relating to the
sale of the assets of Fox Squirrel/The Lakes, comprised of $442,587,
representing the net book value of assets sold, and $341,221, representing the
gain on sale of the assets.
- - CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities was $465,026 in 2003, compared to
$6,410 in 2002. Excluding payments of principal and interest received on the
Promissory Note and the effects of recording the sale of the assets of Fox
Squirrel/The Lakes, net cash used in investing activities in 2003 and 2002 was
$38,516 and $86,107, respectively. The decrease in cash used is primarily due to
lower capital expenditures in 2003 than in 2002.
- - CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used in financing activities in 2003 was $128,969, compared to
$19,750 of net cash provided by financing activities in 2002. The change is due
primarily to the repayment in 2003 of the outstanding long-term debt owed by the
Partnership.
OFF-BALANCE SHEET ARRANGEMENTS
The Partnership has no off-balance sheet arrangements.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The Partnership has no contractual obligations of the type required to be
disclosed by Item 303(a)(5) of Regulation S-K.
CAPITAL EXPENDITURES DURING 2004
During the first quarter of 2004, Management paid approximately $55,000 in
assessments relating to access to municipal water for land owned by the
Partnership. Such amount is treated as a capital expenditure and has been
allocated as of December 31, 2003 among the unimproved individual
Page 32
lots assessed. Other capital projects may be undertaken, depending upon, among
other factors, the Partnership's cash position and Management's expectations of
return on investment.
IMPACT OF INFLATION
Generally, demand for real estate is adversely affected by increases in
interest rates. To the extent that a significant increase in the rate of
inflation leads to a significant increase in interest rates, the Partnership's
ability to sell real estate may be significantly adversely affected.
Inflation has had only a minor impact on the Partnership's operations
during the fiscal years ended December 31, 2003, 2002, and 2001. Moderate
increases in costs and expenses incurred as a result of inflation have,
Management believes, largely been offset by moderate increases in the sales
prices of land sold.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's principal market risk exposure is to changes in interest
rates, which are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
considerations, and other factors beyond the control of the Partnership. Changes
in the general level of interest rates can affect the Partnership's revenue from
property sales, since the market for real estate in general varies to a large
degree upon the level and stability of interest rates. Generally, when interest
rates are high or are increasing, the market for real estate declines, and when
interest rates are low or are decreasing, the market for real estate increases.
Management believes that the extent of such risk is neither quantifiable nor
predictable because of the variability of future interest rates and because of
the highly variable nature of the Partnership's real estate sales. The
Partnership does not enter into derivative contracts for its own account to
hedge against the risk of changes in interest rates.
At December 31, 2003, the Partnership had cash of $822,517, substantially
all of which is deposited in an account at a local financial institution bearing
interest at a variable rate. At December 31, 2003, the Partnership owed no
interest-bearing debt, although during the year the Partnership had outstanding
interest-bearing obligations in the form of long-term debt secured by a mortgage
on an improved individual lot purchased in 1999, and the outstanding balance of
such long-term debt was as high as $108,282. The interest rate on the
outstanding principal amount of the loan was fixed at 8.65% for most of the
period in 2003 that the loan was outstanding and was lowered to a fixed rate of
5.65% approximately three months before the then outstanding balance was repaid
in full during the third quarter. Had the average level of interest rates during
2003 been higher or lower by 100 basis points or one percent (1%), the
Partnership's net income would have been approximately $5,000 more or less,
respectively. The foregoing estimate of the change in net income is based upon
quarterly average balances and assumes that the interest rate on the long-term
debt remained at 8.65% until the interest rate was lowered, and, thereafter,
that
Page 33
the interest rate was 100 basis points or one percent (1%) high or lower that
the actual, lower interest rate.
At December 31, 2002, the Partnership had cash of $301,924, substantially
all of which was deposited in interest-bearing accounts at a local financial
institution, and owed $108,282 to that same institution in the form of long-term
debt secured by a mortgage on an improved residential lot purchased in 1999. The
interest rate earned on the cash balance was variable. The interest rate on the
outstanding principal amount of the loan was fixed at 8.65%. Had the average
level of interest rates during 2002 been higher or lower by 100 basis points or
one percent (1%), the Partnership would have earned approximately $3,000 more or
less, respectively, on its cash balances. Since the interest rate on the
Partnership's outstanding debt is fixed, there would have been no change in
interest expense. The foregoing estimate of the change in net income is based
upon quarterly average balances.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 15, "Exhibits, Financial Statement Schedules, and
Reports on Form 8- K," for the response to this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 22, 2003, the Partnership dismissed PricewaterhouseCoopers LLP
as the Partnership's independent accountants and engaged Lynch & Howard, P.A. in
that capacity. The Board of Directors of Grace Property Management, Inc., the
general partner of the Partnership, made such determination.
The reports of PricewaterhouseCoopers LLP on the Partnership's financial
statements for the past two fiscal years contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope, or accounting principles, except that those reports contained an
explanatory paragraph expressing substantial doubt regarding the Partnership's
ability to continue as a going concern.
In connection with its audits for the two most recent fiscal years and
through December 22, 2003, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers
LLP, would have caused them to make reference thereto in their report on the
financial statements for such years.
During the two most recent fiscal years and through December 22, 2003,
there were no reportable events as defined in Item 304(a)(1)(v) of Regulation
S-K.
Page 34
At no time during the Partnership's past two fiscal years or the period
from January 1, 2003 to December 22, 2003 did the Partnership consult with Lynch
& Howard, P.A. with respect to any of the matters set forth in Item 304(a)(2)(i)
or (ii) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
The Partnership maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the
Partnership's Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to the Partnership's Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, Management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and Management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within the Partnership have been detected. These inherent
limitations include the realities that judgments in decision- making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people or by management override of the
control. The design of any system of controls is also based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any control will succeed in achieving its stated goals under all potential
future conditions. Over time, a control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures
related to the control may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
Since the Registrant is a limited partnership, it has no officers or
directors. Mr. Davis P. Stowell, President of the General Partner, carries out
the functions of the principal executive officer and the principal financial
officer of the Partnership. Mr. Stowell has, as of the end of the period covered
by this annual report on Form 10-K, evaluated the effectiveness of the
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) and has determined that
such disclosure controls and procedures are effective at the reasonable
assurance level. There have been no changes during the last fiscal quarter of
2003 that materially affected or are reasonably likely to affect internal
controls over financial reporting. The Partnership does not believe any
significant deficiencies or material weaknesses exist in its internal controls
over financial reporting. Accordingly, no corrective actions have been taken.
Page 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL PARTNER
The Partnership has no officers or directors. Grace Property Management,
Inc., the general partner, performs functions generally performed by officers
and directors. Grace Property Management, Inc. is a Delaware corporation engaged
in the business of real estate management, and has served as general partner
since May 15, 1980.
OFFICERS AND DIRECTORS OF THE GENERAL PARTNER
DAVIS P. STOWELL, 47, PRESIDENT AND DIRECTOR OF THE GENERAL PARTNER. Mr.
Stowell has been President and a director of Grace Property Management,
Inc. since 2003. He was Vice President of the General Partner from 1993 to
2003. He is also Vice President of affiliates of Grace Property
Management, Inc., positions he has held since 1989.
PETER METZ, 39, SECRETARY AND DIRECTOR OF THE GENERAL PARTNER. Mr. Metz
has been Secretary and a director of Grace Property Management, Inc. since
2003. He is also Chief Financial Officer and Accounting Manager of
affiliates of Grace Property Management, Inc., positions he has held since
1999. He is a certified public accountant.
AUDIT COMMITTEE OF THE GENERAL PARTNER
The General Partner has no committees, including an audit committee. The
Board of Directors functions in the capacity of an audit committee. The Board of
Directors of the General Partner has determined that Davis P. Stowell is an
"audit committee financial expert" and that he is not "independent" as each such
term is defined by the Securities and Exchange Commission.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Securities Exchange Act of 1934, as amended, requires
that reports of beneficial ownership of limited partnership units and changes in
such ownership be filed with the Securities and Exchange Commission by Section
16 "reporting persons." The Partnership is required to disclose in this annual
report on Form 10-K each reporting person whom it knows to have failed to file
any required reports under Section 16 on a timely basis during the fiscal year
ended December 31, 2003. To the Partnership's knowledge, during the fiscal year
ended December 31, 2003, all reporting persons complied with all Section 16(a)
filing requirements applicable to them, except that Messrs. Stowell and Metz
filed their respective Form 3 late.
Page 36
CODE OF ETHICS
In connection with its role as general partner of the Partnership, the
General Partner has adopted a Code of Ethics that applies to each person who
performs one or more of the following functions: principal executive officer,
principal financial officer, and principal accounting officer or controller. The
Partnership shall furnish, without charge, a copy of the Code of Ethics to any
person who requests a copy in writing sent to the General Partner at the
following address: Mr. Davis P. Stowell, President, Grace Property Management,
Inc., 55 Brookville Road, Glen Head, NY 11545.
ITEM 11. EXECUTIVE COMPENSATION
The total compensation earned by the General Partner during each of the
last three fiscal years ended December 31 is set forth in Table 7, below.
TABLE 7: SUMMARY COMPENSATION TABLE
Name and Principal Position Year General Partner Fee [1]
- --------------------------- ---- -----------------------
Grace Property Management, Inc., 2003 $80,000
General Partner
2002 80,000
2001 90,000
Notes:
[1] Excludes payments made to affiliates of the General Partner as
described in Item 13, "Certain Relationships and Related
Transactions."
During 2003, payments made by the Partnership to the General Partner
totaled $100,000, representing general partner fees for the first three quarters
of 2003 as well as the last two quarters of 2002. During 2002, payments made by
the Partnership to the General Partner totaled $60,000, representing general
partner fees for the first two quarters of 2002 as well as the last quarter of
2001. During 2001, payments made by the Partnership to the General Partner
totaled $143,750, representing general partner fees for the first three quarters
of 2001 as well as the last two quarters of 2000. As of December 31, 2003,
general partner fees accrued but not paid to Grace Property Management, Inc.
totaled $20,000, representing general partner fees for the fourth quarter of
2003. Such amount was paid during the first quarter of 2004. The Partnership has
no ongoing plan or arrangement with respect to future remuneration to Grace
Property Management, Inc. other than to accrue interest (at an annual rate of
10%, compounded quarterly) on the unpaid balance when cash flow is insufficient
to pay general partner fees.
As of December 31, 2003, the Partnership had a group life insurance plan
in place covering the full-time employees of the Partnership located in Boiling
Spring Lakes. The
Page 37
Partnership has no pension or profit sharing plan but does provide for incentive
bonus compensation to its employees located in Boiling Spring Lakes for meeting
or exceeding predesignated budget targets. The Partnership has no options,
warrants, or appreciation rights outstanding. No Management person is indebted
to the Partnership. Other than for accrued vacation and accrued travel and other
expenses, the Partnership is not indebted to any of its employees.
See Item 13, "Certain Relationships and Related Transactions," for
payments of interest on accrued and unpaid general partner's fees paid to the
General Partner, and for other payments made to affiliates of the General
Partner.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Not applicable.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The General Partner does not compensate its officers and directors. Each
of the officers and directors of the General Partner has duties and
responsibilities with affiliates of the General Partner and is compensated by
one or more of such affiliates. Such compensation is independent of the general
partner fees paid by the Partnership to the General Partner.
PERFORMANCE GRAPH
No distributions have been made on partnership units, and the partnership
units have substantially no liquidity. Therefore, there is no basis for
comparison of returns to partners to any other measure.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 19, 2004, the Partnership has 1,812,062 partnership units
issued and outstanding. Information as of March 19, 2004 concerning the number
of partnership units beneficially owned by (1) the persons who, to the knowledge
of Management, beneficially owned more than 5% of the units issued and
outstanding on such date, (2) Grace Property Management, Inc., the General
Partner, (3) each director of Grace Property Management, Inc., and (4) the
directors and executive officers of Grace Property Management, Inc. as a group
is set forth in Table 8, below.
Page 38
TABLE 8: SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Amount
Beneficially Percent of
Name and Address of Beneficial Owner Owned [a] Class
------------------------------------ ------------ -----------
US Bank Trust National Association, as trustee 316,403 [b] 17.5%
141 North Main Avenue
Suite 300
Sioux Falls, SD
Lorraine G. Grace 149,400 [c] 8.2%
14 East 90th Street
New York, NY
Grace Property Management, Inc. [d] 25,100 1.4%
Davis P. Stowell [d] -- [e] --
Peter Metz [d] -- [e] --
All directors and officers of the General Partner
as a group (2 persons) -- [e] --
Notes:
[a] Unless otherwise indicated, each of the persons named has sole voting and
investment power.
[b] Includes 109,173 units owned by the Grace Grandchildren Trust and 207,230
units owned by the Lorraine QTIP Trust, of which trusts US Bank Trust
National Association is trustee.
[c] Excludes 207,230 units owned by US Bank Trust National Association as
trustee of the Lorraine QTIP Trust.
[d] Address is 55 Brookville Road, Glen Head, NY.
[e] Excludes 25,100 units owned by the General Partner.
EQUITY COMPENSATION PLAN INFORMATION
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For 2003, 2002, and 2001, the General Partner and its affiliates charged
the Partnership for general partner fees, rent, consulting fees, legal services,
and interest on unpaid balances at an
Page 39
annual rate of 10%, compounded quarterly, as set forth in Table 9, below. All of
such charges have been provided for in the Partnership's financial statements.
Amounts paid by the Partnership to the General Partner and its affiliates during
2003, 2002, and 2001 reflect amounts previously accrued and unpaid. See Item 11,
"Executive Compensation," for information on general partner fees paid to the
General Partner.
TABLE 9: CHARGES BY GENERAL PARTNER AND ITS AFFILIATES
2003 2002 2001
------- ------- -------
General partner fee $80,000 $80,000 $90,000
Rent for office space 15,000 15,000 15,000
Consulting fees 13,587 337 3,982
Reimbursement of travel expenses 1,398 1,108 --
Legal services -- -- 4,500
Interest on unpaid balances -- 594 3,254
An affiliate of the General Partner charges the Partnership for office
space used by officers of the General Partner. The amounts charged for 2003,
2002, and 2001 are set forth in Table 9, above. The amount paid by the
Partnership during 2003 was $18,750, which represents rent for the first three
quarters of 2003 as well as the last two quarters of 2002. The amount paid by
the Partnership during 2002 was $11,250, which represents rent for the first two
quarters of 2002 as well as the last quarter of 2001. The amount paid by the
Partnership during 2001 was $18,750, which represents rent for the first three
quarters of 2001 as well as the last two quarters of 2000. At December 31, 2003,
the amount of accrued but unpaid rent was $3,750, which amount was paid during
the first quarter of 2004.
An affiliate of the General Partner charges the Partnership for consulting
fees in connection with the sale of the assets of Fox Squirrel/The Lakes. The
amounts charged for and paid during 2003, 2002, and 2001 are set forth in Table
9, above. Such consulting fees are equal to 2 1/2% of the gross purchase price
paid in cash at the March 2001 closing and, thereafter, 2 1/2% of the principal
payments received by the Partnership on the Promissory Note. Future consulting
fees will be payable as and when principal on the Promissory Note is received by
the Partnership. Assuming that all future payments of principal are received in
a timely manner, the Partnership will pay additional consulting fees to such
affiliate of the General Partner of $95 in 2004, $104 in 2005, $113 in 2006,
$124 in 2007, and $3,221 in 2008. Given the relatively minor amounts of each
monthly payment prior to maturity, the Partnership will pay consulting fees to
the affiliate of the General Partner quarterly in arrears. The General Partner
has waived interest for late payments in respect of such quarterly payments of
consulting fees.
Officers of the General Partner charge the Partnership for their
out-of-pocket expenses incurred when traveling on Partnership business. The
amounts charged for and paid during 2003,
Page 40
2002, and 2001 are set forth in Table 9, above. At February 29, 2004, the
Partnership owed the President of the General Partner a total of $1,522 for
reimbursement of travel expenses incurred in February 2004. Such amount was paid
during the first quarter of 2004.
The General Partner and its affiliates charge the Partnership late fees on
amounts not timely paid, with interest at an annual rate of 10%, compounded
quarterly. The amounts charged for 2003, 2002, and 2001 are set forth in Table
9, above. The amount of interest paid during 2003, 2002, and 2001 were $594, $0
and $4,517, respectively. The amount paid in 2003 represents interest due in
respect of 2002, and the amount paid in 2001 represents $3,254 of interest due
in respect of 2001 and $1,263 of interest due in respect of 2000.
The General Partner and its affiliates charge the General Partner for
reimbursement of legal fees incurred by them in connection with matters
involving the Partnership. The amounts charged for 2003, 2002, and 2001 are set
forth in Table 9, above. The amounts paid during 2003, 2002, and 2001 are $0, $0
and $11,500, respectively, the last amount representing $4,500 in legal fees
incurred during 2001 and $7,000 incurred during 2000.
Except for the preceding items, there were no transactions between the
General Partner or its affiliates (including Management of the General Partner
and their immediate families) and the Partnership during the fiscal year ended
December 31, 2003 or thereafter. There were no other related party transactions
and there existed no indebtedness to the Partnership from the General Partner or
its affiliates (including Management of the General Partner and their immediate
families).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
PricewaterhouseCoopers, LLP served as the Partnership's principal
accountant for all of 2002 and for 2003 up to December 22, 2003, on which date
the Partnership dismissed PricewaterhouseCoopers LLP and engaged Lynch & Howard,
P.A. In its capacity as the Partnership's principal accountant,
PricewaterhouseCoopers, LLP audited the Partnership's financial statements for
the fiscal years ended December 31, 2001 and 2002, and reviewed the financial
statements included in the Partnership's Quarterly Reports on Form 10-Q for each
of the quarters ended March 31, 2002; June 30, 2002; September 30, 2002; March
31, 2003; June 30, 2003; and September 30, 2003. The aggregate amounts billed by
PricewaterhouseCoopers, LLP for each of the last two fiscal years ended December
31 for such services are set forth in Table 10, "Aggregate Amounts Billed by
Principal Accountants," below.
On December 22, 2003, the Partnership engaged Lynch & Howard, P.A. as its
principal accountant to audit the Partnership's financial statements for the
fiscal year ended December 31, 2003 and to review the financial statements that
will be included in the Partnership's Quarterly Reports on Form 10-Q for each of
the quarters ended March 31, 2004; June 30, 2004; and September 30, 2004. As of
December 31, 2003, the Partnership has not been billed by Lynch &
Page 41
Howard, P.A., however, the Partnership has accrued the fees that the Partnership
expects to pay to Lynch & Howard, P.A. during 2004 in connection with its audit
of the Partnership's financial statements for the fiscal year ended December 31,
2003. Through March 12, 2004, progress billings totaled $12,500.
TABLE 10: AGGREGATE AMOUNTS BILLED BY PRINCIPAL ACCOUNTANTS
2002-2003
2003 2002
-------- ------
PricewaterhouseCoopers, LLP:
Accounting fees $22,000 [a] $20,000 [d]
Expenses 1,968 [b] 1,419 [e]
------- -------
Total $23,968 $21,419
Lynch & Howard, P.A
Accounting fees -- [c] --
Expenses -- --
------- -------
Total -- --
Notes:
[a] Includes $14,000 in fees relating to the audit and review of the
Partnership's 2002 financial statements but billings were dated in
2003.
[b] Includes $1,568 in expenses relating to the audit and review of the
Partnership's 2002 financial statements but billings were dated in
2003.
[c] $20,000 was accrued at December 31, 2003 for fees relating to the
audit of the Partnership's 2003 financial statements but no amounts
were billed as of December 31, 2003. Through March 12, 2004,
progress billings totaled $12,500.
[d] Includes $17,000 in fees relating to the audit of the Partnership's
2001 financial statements but billings were dated in 2002.
[e] Includes $1,219 in expenses relating to the audit of the
Partnership's 2001 financial statements but billings were dated in
2002.
AUDIT-RELATED FEES
There have been no billings in either 2003 or 2002 for assurance and
related services by the Partnership's principal accountant that are reasonably
related to the performance of the audit or review of financial statements that
are not reported under "Audit Fees," above.
Page 42
TAX FEES
The Partnership relies upon the expertise of an accounting firm other than
the principal accountant for tax compliance, tax advice, and tax planning.
Therefore, there have been no billings in either 2003 or 2002 for professional
services rendered by the Partnership's principal accountant for tax compliance,
tax advice, and tax planning.
ALL OTHER FEES
There have been no billings in either 2003 or 2002 for products or
services rendered by the Partnership's principal accountant other than as set
forth under "Audit Fees," above.
APPROVAL PROCESS
The General Partner has no committees, including an Audit Committee. The
Board of Directors of the General Partner is responsible for the appointment,
compensation, and oversight of the work of the independent auditors and approves
in advance any services, whether audit- related or not, to be performed by the
independent auditors.
[THE REST OF THIS PAGE IS BLANK]
Page 43
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The documents filed as part of this report are listed in the Index to
Financial Statements and Supplemental Schedules set forth in Table 11, below.
TABLE 11: INDEX TO FINANCIAL STATEMENTS
AND SUPPLEMENTAL SCHEDULES
Document Page
----------------------------------------------------------- ----
The following financial information is contained within the
Audited Financial Statements:
Report of Lynch & Howard, P.A., independent auditors F-1
Report of PricewaterhouseCoopers, LLP, independent auditors F-2
Balance Sheets as of December 31, 2003 and 2002 F-3
Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 F-4
Statements of Changes in Partners' Capital for the
years ended December 31, 2003, 2002 and 2001 F-5
Statements of Cash Flows for the years
ended December 31, 2003, 2002 and 2001 F-6
Notes to Financial Statements F-7-18
Report of Lynch & Howard, P.A., independent auditors
on Financial Statement Schedules 68
Report of PricewaterhouseCoopers, LLP, independent auditors
on Financial Statement Schedules 69
Valuation and Qualifying Accounts 70
Real Estate and Accumulated Depreciation 71
All other required supplemental financial schedules are either contained
within the notes to the financial statements or are not applicable.
REPORTS ON FORM 8-K
The Partnership filed a current report on Form 8-K on December 29, 2003
relating to the dismissal of PricewaterhouseCoopers, LLP as its independent
accountants and the engagement of Lynch & Howard, P.A. in such capacity.
Page 44
INDEX TO EXHIBITS
A complete listing of exhibits, including those incorporated by reference,
is shown on Table 12, below. All other exhibits are not applicable.
TABLE 12: LIST OF EXHIBITS
Exhibit
No. Description of Exhibit
------- --------------------------------------------------------------
3.1 The Limited Partnership Agreement of Reeves Telecom Associates
sets forth the rights of unit holders. Such agreement was
filed as Exhibit B to Amendment No.2 to the Partnership's
Registration Statement on Form S-14 dated March 28, 1980
(Registration No.2-66452). [a]
10.1 Purchase and Sale Agreement between the Partnership, as
seller, and WW-Golf & Services, LLC, as purchaser, dated
October 18, 2000 relating to the sale of the assets of Fox
Squirrel Country Club, with exhibits. Such agreement was filed
as Exhibit 10.1 to Form 10-Q filed on November 14, 2000. [a]
10.2 Amendments No. 1 through 7 to the Purchase and Sale Agreement
relating to the sale of the assets of Fox Squirrel Country
Club. Such amendments were filed as Exhibit 10.4 to Form 10-K
filed on March 29, 2001. [a]
10.3 Loan Agreement between the Partnership, as lender, and WW-Golf
& Services, LLC, as borrower, dated March 9, 2001. Such
agreement was filed as Exhibit 10.5 to Form 10-K filed on
March 29, 2001. [a]
10.4 Promissory Note dated March 9, 2001, issued by WW-Golf &
Services, LLC to the Partnership in connection with the sale
of the assets of Fox Squirrel Country Club. Such note was
filed as Exhibit 10.6 to Form 10-K filed on March 29, 2001.
[a]
10.5 Indemnification Agreement dated March 9, 2001 between the
Partnership and WW-Golf & Services, LLC issued in connection
with the sale of the assets of Fox Squirrel Country Club. Such
agreement was filed as Exhibit 10.7 to Form 10-K filed on
March 29, 2001. [a]
10.6 Note Modification Agreement dated June 17, 2003 between
WW-Golf & Services, LLC and the Partnership.
10.7 Modification to Indemnification Agreement dated June 17, 2003
between the Partnership and WW-Golf & Services, LLC.
16.1 Letter from PricewaterhouseCoopers, LLP, the former
independent accountant of the Partnership, regarding its
concurrence with the statements made by the Partnership
concerning the resignation or dismissal as the Partnership's
principal accountant. Such letter was filed as part of Form
8-K filed on December 29, 2003. [a]
31.1 Rule 13a-14(a)/15d-14(a) Certification as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Page 45
Exhibit
No. Description of Exhibit
------- -------------------------------------------------------------
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1 The Robert C. Cantwell IV, MAI appraisal of the Boiling Spring
Lakes property dated as of December 31, 2003.
Notes:
[a] Incorporated herein by reference.
[THE REST OF THIS PAGE IS BLANK]
Page 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REEVES TELECOM LIMITED PARTNERSHIP
Signatures Title Date
By: Grace Property Management, Inc. General Partner March 26, 2004
--------------
By: /s/ DAVIS P. STOWELL
---------------------------------
Davis P. Stowell
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
By: /s/ PETER METZ Director of General Partner March 26, 2004
--------------------------------- ---------------
Peter Metz
By: /s/ DAVIS P. STOWELL President and Director of March 26, 2004
--------------------------------- General Partner ---------------
Davis P. Stowell (Principal Executive Officer,
Principal Financial Officer,
Principal Accounting Officer)
[THE REST OF THIS PAGE IS BLANK]
Page 47
INDEPENDENT AUDITOR'S REPORT
To the Partners
Reeves Telecom Limited Partnership
Boiling Spring Lakes, North Carolina
We have audited the accompanying balance sheet of Reeves Telecom Limited
Partnership as of December 31, 2003, and the related statements of operations,
changes in partners' capital and cash flows for the year ended December 31,
2003. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The 2002 and 2001 financial statements were
audited by other auditors whose report dated February 20, 2003 on those
statements included an explanatory paragraph describing conditions that raised
substantial doubt about the partnership's ability to continue as a going
concern.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Reeves Telecom Limited
Partnership as of December 31, 2003, and the results of its operations and its
cash flows for the year ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Lynch & Howard, P.A
Raleigh, North Carolina
March 4, 2004
F-1
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Reeves Telecom Limited Partnership:
In our opinion, the balance sheet as of December 31, 2002 and the related
statements of operations, of partners' capital, and of cash flows for each of
the two years in the period ended December 31, 2002 of the Reeves Telecom
Limited Partnership 2003 Form 10-K present fairly, in all material respects, the
financial position, results of operations and cash flows of Reeves Telecom
Limited Partnership at December 31, 2002 and for each of the two years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 12 to the
2002 financial statements (not included herein), the cash generated from
individual lot sales may not be sufficient to meet future operating costs, debt
service and other cash requirements and raises substantial doubt about the
entity's ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 12 of the 2002 financial statements.
The financial statements do not include any adjustments relating to the
recoverability of reported asset amounts or the amounts of liabilities that
might result should the Partnership be unable to continue as a going concern.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 20, 2003
F-2
EXHIBIT A
REEVES TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
BALANCE SHEETS
DECEMBER 31, 2003 AND DECEMBER 31, 2002
ASSETS
2003 2002
---------- ----------
ASSETS:
Cash $ 822,517 $ 301,924
Prepaid expenses and other current assets 757 18,737
Note receivable 146,265 --
Properties held for sale and property and equipment:
Properties held for sale 327,840 354,009
Sales property and equipment - net 161,937 124,889
Golf club property and equipment - net -- 442,587
---------- ----------
$1,459,316 $1,242,146
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued expenses $ 115,109 $ 83,895
Accrued expenses - affiliates 34,075 54,762
Deposit on contract - net -- 280,245
Long-term debt -- 108,282
---------- ----------
Total Liabilities $ 149,184 $ 527,184
---------- ----------
PARTNERS' CAPITAL:
Issued and outstanding 1,812,062 units
at December 31, 2003 and 2002 $1,310,132 $ 714,962
---------- ----------
COMMITMENTS AND CONTINGENCIES
$1,459,316 $1,242,146
========== ==========
The Notes to Financial Statements are an integral part of this statement.
F-3
EXHIBIT B
REEVES TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
STATEMENTS OF OPERATIONS
Years Ended December 31
--------------------------------------------
2003 2002 2001
----------- ----------- -----------
REVENUES:
Property sales $ 483,407 $ 315,864 $ 440,847
Sale of golf club
Previously deferred revenue 862,500 -- --
Previously deferred interest income 149,745 -- --
Interest income on note receivable 6,145 -- --
Other interest income and finance charges 3,559 5,399 7,867
Other revenue -- 379 8,920
----------- ----------- -----------
Total Revenues $ 1,505,356 $ 321,642 $ 457,634
----------- ----------- -----------
OPERATING EXPENSES:
Direct costs of property sold $ 462,256 $ 8,643 $ 31,757
Selling, general and administrative expenses 443,135 311,525 376,384
Depreciation 1,468 2,571 2,462
Interest 4,702 10,308 9,801
----------- ----------- -----------
Total Operating Expenses $ 911,561 $ 333,047 $ 420,404
----------- ----------- -----------
OPERATING INCOME (LOSS) $ 593,795 $ (11,405) $ 37,230
Rental income - net 1,375 3,766 2,550
----------- ----------- -----------
Income (loss) from continuing operations $ 595,170 $ (7,639) $ 39,780
Loss from discontinued operations -- -- (67,326)
----------- ----------- -----------
NET INCOME (LOSS) $ 595,170 $ (7,639) $ (27,546)
=========== =========== ===========
Income per partnership unit from continuing operations $ 0.33 $ -- $ 0.02
=========== =========== ===========
Income (loss) per partnership unit $ 0.33 $ -- $ (0.02)
=========== =========== ===========
Weighted average partnership units outstanding 1,812,062 1,812,062 1,814,070
=========== =========== ===========
The Notes to Financial Statements are an integral part of this statement.
F-4
EXHIBIT C
REEVES TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
Years Ended December 31
-----------------------------------------
2003 2002 2001
---------- ---------- ----------
PARTNERS' CAPITAL AT BEGINNING OF YEAR $ 714,962 $ 722,601 $ 758,189
Repurchase of partnership units -- -- (8,042)
Net income (loss) 595,170 (7,639) (27,546)
---------- ---------- ----------
PARTNERS' CAPITAL AT END OF YEAR $1,310,132 $ 714,962 $ 722,601
========== ========== ==========
The Notes to Financial Statements are an integral part of this statement.
F-5
EXHIBIT D
REEVES TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
STATEMENTS OF CASH FLOWS
Years Ended December 31
---------------------------------------------
2003 2002 2001
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income (loss) $ 595,170 $ (7,639) $ (27,546)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation 9,381 2,571 12,427
Provision for loss on property held for sale -- -- 3,585
Changes in operating assets and liabilities:
Prepaid and other assets 17,980 (3,245) 3,297
Property held for sale - net 18,256 8,642 28,172
Golf club property and equipment - net 442,587 -- --
Accounts payable and accrued expenses 31,214 (8,738) (30,271)
----------- ----------- -----------
Net Cash Provided By (Used In) Operating Activities $ 1,114,588 $ (8,409) $ (10,336)
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of land improvements and equipment $ (38,516) $ (86,107) $ (35,284)
Increase (decrease) in deposit on contract (280,245) 79,697 209,773
Principal payment on note receivable 1,492 -- --
Note received from sale of golf club (147,757) -- --
Transaction costs related to the sale of the golf club -- -- (9,225)
----------- ----------- -----------
Net Cash Provided By (Used In) Investing Activities $ (465,026) $ (6,410) $ 165,264
----------- ----------- -----------
FINANCING ACTIVITIES:
Repurchase of partnership units $ -- $ -- $ (8,042)
Repayment of long-term debt (108,282) (4,594) (4,578)
Increase (decrease) in accrued expenses - affiliates (20,687) 24,344 (69,298)
----------- ----------- -----------
Net Cash Provided By (Used In) Financing Activities $ (128,969) $ 19,750 $ (81,918)
----------- ----------- -----------
NET INCREASE IN CASH $ 520,593 $ 4,931 $ 73,010
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 301,924 296,993 223,983
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 822,517 $ 301,924 $ 296,993
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Interest paid $ 5,296 $ 9,714 $ 16,761
=========== =========== ===========
The Notes to Financial Statements are an integral part of this statement.
F-6
REEVES TELECOME LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(1) NATURE OF OPERATIONS
On May 17, 1979 the stockholders of Reeves Telecom Corporation (the
"Corporation") approved a plan of liquidation (the "Plan") for the
Corporation and its subsidiaries. The Plan, which was determined by the
Internal Revenue Service to qualify as a Section 337 liquidation,
authorized the Corporation's Board of Directors to sell the Corporation's
assets and distribute any remaining unsold assets to its stockholders
and/or a liquidation trust. On May 8, 1980, stockholders at a special
meeting approved an amendment to the Plan whereby assets not sold within
one year of the date the Plan was approved could be transferred, at the
discretion of the Board of Directors, from the Corporation to a South
Carolina limited partnership which would undertake to sell the remaining
assets on behalf of the stockholders. On May 15, 1980 the Corporation was
liquidated and all of its unsold assets and liabilities were transferred
to Reeves Telecom Associates, a South Carolina limited partnership (the
"Partnership"). Stockholders of the Corporation received one Partnership
unit in exchange for each share of common stock. The units are registered
under the Securities Act of 1933 but are not listed on any national
securities exchange. In January 1987, pursuant to a change in South
Carolina law, the Partnership's legal name was changed from Reeves Telecom
Associates to Reeves Telecom Limited Partnership. From the sale of the
remaining assets, the Partnership may acquire additional properties or
make distributions to the partners. The Partnership currently has no
intent to acquire additional properties but is not precluded from doing
so.
Pursuant to the Plan, the Corporation sold all of its broadcasting assets
and substantially all of the land held for development and sale at one of
its two land development locations and distributed to its stockholders
cash of $.90 per share on February 29, 1980 and $2.30 per share on May 14,
1980.
The remaining assets of the Partnership are primarily land held for sale,
note receivable and cash. The cash was generated from real estate sales
including the sale of the golf club. During the first quarter of 2001, the
Partnership sold the golf club (Note 11).
The Partnership intends to continue to sell lots in the normal course of
business and, while no assurances can be given, the Partnership believes
the carrying value of the remaining lots is less than their net realizable
value. Should the Partnership elect to effect a bulk sale and/or
abandonment, the net amount realized could be less than the carrying
value.
The Partnership's Managing General Partner is Grace Property Management,
Inc.
F-7
REEVES TELECOME LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared using the accrual
basis of accounting. The Partnership's assets have been written down, from
time to time, to reflect their fair values based upon appraisals.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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.
PROPERTY SALES
Property sales represent individual building lots sold for cash and the
gross sales price of residential houses built or acquired by the
Partnership for resale. The revenues from these sales are recognized at
the closing date unless a deferral is required pursuant to Statement of
Financial Standards No. 66, "Accounting for Sales of Real Estate." Land
cost included in direct costs of property sold represents the
proportionate amount of the total initial project costs, after recorded
valuation allowances, based on the sales value of the lot to the total
estimated project sales value plus the value per lot of any capital
improvements made subsequent to the initial project costs. See Note 11 for
details relating to the sale of the golf club.
PROPERTIES HELD FOR SALE AND PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation for financial reporting purposes is calculated on the
straight-line basis over the estimated useful lives of 8 to 31.5 years for
buildings and 5 to 20 years for equipment and land improvements.
The Partnership assesses the realizability of the carrying value of its
properties held for sale and related buildings and equipment whenever
events or changes in circumstance indicate that impairment may have
occurred in accordance with the provisions of Statement of Financial
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."
F-8
REEVES TELECOME LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The Partnership maintains cash deposits in bank in excess of the federally
insured amounts.
CASH AND EQUIVALENTS
For purposes of the statement of cash flows, the Partnership considers
cash as cash on hand, cash deposited in financial institutions and money
market accounts with maturities of less than 90 days at the date of
purchase. Cash equivalents are stated at cost, which approximates market
value.
ADVERTISING COSTS
Advertising costs of $16,173, $17,817 and $19,570 were expensed as
incurred during the years ended December 31, 2003, 2002 and 2001,
respectively.
(3) PROPERTIES HELD FOR SALE AND PROPERTY AND EQUIPMENT
The Partnership obtained an independent appraisal report dated January 20,
2004 valuing the properties held for sale at December 31, 2003. Based upon
this appraisal, management determined that no additional valuation
allowances were required. Management believes that the properties held for
sale are not reported in excess of their fair values. The change in the
valuation allowances reported below are reductions related to the
properties sold. See Note 12 to the financial statements for contingent
liabilities related to the properties held by the Partnership.
A summary of properties held for sale and property and equipment at
December 31, 2003 and 2002 is as follows:
F-9
REEVES TELECOME LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(3) PROPERTIES HELD FOR SALE AND PROPERTY AND EQUIPMENT - CONTINUED
2003 2002
--------- ---------
Properties held for sale:
Boiling Spring Lakes land held for sale $ 737,897 $ 791,526
Pimlico Plantation lots -- 250
Residential house held for sale - net 150,347 158,260
--------- ---------
$ 888,244 $ 950,036
Less: Valuation allowance (560,404) (596,027)
--------- ---------
Total Properties Held for Sale $ 327,840 $ 354,009
--------- ---------
Sales property and equipment:
Land and land improvements $ 162,502 $ 125,863
Buildings 49,844 49,844
Equipment 10,184 6,895
--------- ---------
$ 222,530 $ 182,602
Less: Accumulated depreciation (60,593) (57,713)
--------- ---------
Total Sales Property and Equipment - Net $ 161,937 $ 124,889
--------- ---------
Golf club property and equipment:
Land and land improvements $ -- $ 410,555
Buildings -- 250,129
Equipment -- 317,353
--------- ---------
$ -- $ 978,037
Less: Accumulated depreciation -- (535,450)
--------- ---------
Total Golf Club Property and
Equipment - net $ -- $ 442,587
--------- ---------
Total Properties Held for Sale and
Equipment - Net $ 489,777 $ 921,485
========= =========
F-10
REEVES TELECOME LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(4) ACCRUED EXPENSES - AFFILIATES
A summary of accrued expenses owed to affiliates at December 31, 2003 and
2002 is as follows:
2003 2002
------- -------
General Partner's fees $20,000 $40,000
Rent 3,750 7,500
Interest -- 594
Fees to a former general partner 6,668 6,668
Consulting fee 3,657 --
------- -------
$34,075 $54,762
======= =======
General Partner's fees represent amounts owed to the General Partner. Rent
represents amounts owed to certain affiliates of the General Partner. From
time to time the General Partner and its affiliates charge the Partnership
interest on amounts owed to them. See Note 6 for additional information
regarding related party transactions.
(5) LONG-TERM DEBT
Long-term debt at December 31, 2003 and 2002 consisted of the following:
2003 2002
----- --------
8.65% Note payable in monthly installments of $1,193,
including interest, maturing March 27, 2005.
Collateralized by property with a net book value of
$130,000 at December 2002 $ -- $108,282
===== ========
F-11
REEVES TELECOME LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(6) RELATED PARTY TRANSACTIONS
The General Partner and its affiliates charged the Partnership for
services and office space for the years ended December 31, 2003, 2002 and
2001 as follows:
2003 2002 2001
---- ---- ----
General Partner fees $ 80,000 $ 80,000 $ 90,000
Legal fees -- -- 4,500
Office space 15,000 15,000 15,000
Consulting fees 13,587 337 3,982
Reimbursement of travel expenses 1,398 1,108 --
Interest at 10% -- 594 3,254
-------- -------- --------
$109,985 $ 97,039 $116,736
======== ======== ========
(7) INCOME TAXES
No provision has been made for income taxes since income or loss is
includable in the partners' returns as they report to tax authorities in
their respective capacities as partners.
(8) LEASES
The Partnership leased certain office and golf course equipment under
operating leases related to Fox Squirrel Country Club. In connection with
the sale of the golf club, the leases were transferred to buyer (Note 11).
Equipment rental and lease expense for the years ended December 31, 2003,
2002 and 2001 was $0, $0 and $6,894, respectively.
F-12
REEVES TELECOME LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosure About Fair Value of
Financial Instruments." The estimated fair value amounts have been
determined by the Partnership using the methods and assumptions described
below. However, considerable judgment is required to interpret market data
to develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Partnership could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts. The fair value of cash in banks is
estimated to be its carrying value and is not included in the analysis
below.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practical to
estimate that value:
LONG-TERM DEBT
The fair value of long-term debt has been estimated by discounting
the future cash flows using the current rates offered for debt
issues with similar characteristics. Based on the borrowing rates
available to the Partnership at December 31, 2002, the fair value of
long-term debt at December 31, 2002 was $112,347. The note was paid
off during the year ended December 31, 2003.
NOTE RECEIVABLE
The fair value of the note receivable has been estimated by
discounting the future cash flows using the rate the Partnership
would expect to receive on similar type instruments. The note was
modified on June 17, 2003 and a current interest rate was
negotiated. The fair value of the note receivable at December 31,
2003 was estimated to be $146,265.
(10) BUSINESS SEGMENT DATA
The following disclosure is made in accordance with the requirements of
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements of the
enterprise and in condensed financial statements of interim periods. It
also requires disclosure of certain
F-13
REEVES TELECOME LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(10) BUSINESS SEGMENT DATA - CONTINUED
information about the Partnership's products and services and the
geographic areas in which the Partnership operates and its major
customers. The adoption of this pronouncement has resulted in a revision
of the Partnership's operating segments footnote disclosures, but did not
have an impact on the financial statements.
The Partnership operated two business segments until the sale of the golf
club on March 9, 2001. The two segments disclosed below are property sales
and the golf club operations. Revenues and direct costs are separately
stated in the financial statements. Substantially all revenues during the
years ended December 31, 2003, 2002 and 2001 for both segments have been
generated in the State of North Carolina; the exception to the foregoing
is $24,545 and $20,104 in revenue from property sales in 2003 and 2001,
respectively, generated in the State of South Carolina. As of December 31,
2003, all of the assets of the Partnership are located in the eastern
portion of North Carolina. Operating income (loss), net income (loss),
depreciation, identifiable assets and capital expenditures by business
segment are summarized as follows:
2003 2002 2001
---- ---- ----
Operating income (loss):
Property and sale of golf
club $ 593,795 $ (11,405) $ 37,230
Golf club operations -- -- (67,326)
----------- ----------- -----------
593,795 (11,405) (30,096)
=========== =========== ===========
Net income (loss):
Property and sale of golf
club $ 595,170 $ (7,639) $ 39,780
Golf club operations -- -- (67,326)
----------- ----------- -----------
595,170 (7,639) (27,546)
=========== =========== ===========
Depreciation:
Property and sale of golf
club $ 9,381 $ 2,571 $ 2,462
Golf club operations -- -- 9,965
----------- ----------- -----------
9,381 2,571 12,427
=========== =========== ===========
Identifiable assets:
Property and sale of golf
club $ 1,459,316 $ 780,822 $ 700,997
Golf club operations -- 461,324 458,079
----------- ----------- -----------
1,459,316 1,242,146 1,159,076
=========== =========== ===========
Capital expenditures:
Property and sale of golf
club $ 38,516 $ 86,107 $ 35,284
Golf club operations -- -- --
----------- ----------- -----------
38,516 86,107 35,284
=========== =========== ===========
F-14
REEVES TELECOME LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(11) DISPOSAL OF BUSINESS SEGMENT / NOTE RECEIVABLE
The Partnership closed a sale agreement for Fox Squirrel Country Club on
March 9, 2001. Under the agreement, the Partnership received $150,000 in
cash and a note for $712,500. The note required monthly payments of $6,641
including interest at 9.75% per annum and maturing on March 9, 2004. The
note is collateralized by a first mortgage on the golf club.
Since the cash down payment represented less than 25% of the total
consideration paid for the assets, the transaction was originally recorded
on the Partnership's financial statements using the deposit method as
defined in SFAS No. 66, "Accounting for Sales of Real Estate." The deposit
method requires, among other things, that until the total cash received by
the Partnership from the down payment and principal payments on the note
receivable is at least 25% of the total consideration paid, then: (a) the
sold assets remain on the Partnership's balance sheet as assets held for
sale or disposal, (b) cash received from the buyer be shown as a deposit
on contract, and (c) payments received from the buyer in respect to note
receivable are treated as an increase in the deposit.
The Partnership received the scheduled payments described above through
June 2003. On June 17, 2003, the Partnership received an additional
principal payment of $534,748. This payment resulted in cash received
exceeding 25% of the purchase price; therefore the sale was recorded and
the assets and liabilities related to the golf club were removed from the
balance sheet. The revenues and interest income previously deferred were
reported in the Statement of Operations for the year ended December 31,
2003. The cost of the golf club assets and related transaction costs
totaled $521,279 and were reported in the Statement of Operations for the
year ended December 31, 2003. The Partnership subordinated its lien
priority on the assets sold to a bank.
The note receivable was modified effective June 17, 2003. This note
requires monthly payments of $1,371 including interest at the greater of
8.75% or FNB Southeast's prime interest rate plus 2%. The note requires a
balloon payment of $125,459 due June 15, 2008. The remaining balance on
the note receivable as of December 31, 2003 was $146,265.
Golf club revenues, prior to the sale, were $32,511 for 2001.
F-15
REEVES TELECOME LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(12) COMMITMENTS AND CONTINGENT LIABILITIES
CONTAMINATION FROM UNDERGROUND STORAGE TANK
The Partnership sold Fox Squirrel Country Club on March 9, 2001, which
contained contamination from an underground storage tank. The Partnership
believes that all remediation work had been completed as of December 31,
2001 although the North Carolina Department of Environment and Natural
Resources ("NCDENR") has required the Partnership to continue monitoring
and testing the subsurface groundwater. As of the date of this report,
NCDENR has not issued the final closing letter releasing the Partnership
from future monitoring and testing. If the NCDENR requires additional
remediation the Partnership may be responsible. Management believes that
if additional remediation is required that it would not have a material
affect on the financial statements and no additional expense was accrued
in these financial statements.
DAM REPAIRS
The Partnership is responsible for the maintenance and repair of an
earthen dam designed to retain water in one of the lakes. The dam was
breeched approximately eight years ago and the Partnership has spent over
$102,000 in repairs. The Partnership intends to deed the dam to the City
of Boiling Spring Lakes but the city has required additional repairs
before accepting ownership. The Partnership does not believe this
additional cost will be material.
COMMITMENT FOR MUNICIPAL WATER AND SEWER SERVICES
The land owned by the Partnership lacks municipal water and sewer service.
The City of Boiling Spring Lakes plans to begin phasing municipal water
service to certain portions of the development in 2004. A significant
portion of the costs of water distribution and sewer lines to land owned
by the Partnership must be borne by the Partnership or by subsequent
purchasers of the land. As of the date of this report, the Partnership is
unable to determine the magnitude of these costs and accordingly has not
accrued any provision in these financial statements.
ENVIRONMENTAL MATTERS
The Partnership is subject to various federal, state and local laws,
ordinances and regulations regarding environmental matters. The
Partnership may be required to investigate and clean up hazardous or toxic
substances or petroleum product releases on land currently or formerly
owned by it, and may be liable to a governmental entity or to third
parties for property damage and the cost of investigation, removal and
decontamination incurred by such parties. The penalty may be imposed
whether or not the Partnership was aware, or responsible for, the
hazardous or toxic substances, and the liability under such laws has been
interpreted to be joint and several unless the harm is divisible and there
is a reasonable basis for allocation of responsibility. The cost of
F-16
REEVES TELECOME LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(12) COMMITMENTS AND CONTINGENT LIABILITIES
ENVIRONMENTAL MATTERS - CONTINUED
investigation, removal and decontamination of substances could be
substantial. If such substances are found on the land currently owned by
the Partnership, or there is a failure to properly remove or decontaminate
the area, the property could be difficult to sell, rent or develop. Some
environmental laws create a lien on a contaminated site in favor of the
government for damages and costs it incurs in connection with such
contamination. The Partnership may be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from a site. As of the date of this report, the
Partnership is not aware of any environmental matters that would have a
material affect on the financial statements and the Partnership has
accordingly accrued no liabilities in these financial statements. However,
it is at least reasonably possible that such matters may exist at the date
of this report and the affect on the Partnership and these financial
statements could be substantial.
ENDANGERED / PROTECTED SPECIES
Portions of Boiling Spring Lakes and surrounding area are known or
believed to be the habitat of various species of flora and fauna, which
have been identified, endangered or protected species. Development of the
Partnership's land is subject to various laws and regulations intended to
limit disturbance of endangered and protected species. The Partnership has
not made any representations or warranties to buyers as to protected or
endangered species. Nevertheless, it is reasonably possible that one or
more such buyers may seek compensation from the Partnership or seek
rescission of their purchase of land from the Partnership, owing to the
presence of protected or endangered species on or near the land,
preventing such buyer from utilizing the land in the matter intended. If
any litigation is instituted seeking compensation or rescission due to
endangered and protected species, the Partnership believes that it would
prevail on the merits. As of the date of this report, there is no pending
litigation and the Partnership is not aware of any potential claims or
actions relating to these matters. The Partnership has made no provision
in the financial statements related to this contingent liability.
F-17
REEVES TELECOME LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(12) COMMITMENTS AND CONTINGENT LIABILITIES - CONTINUED
WATER LEVEL OF LAKES
The Partnership believes that the lakes within the City of Boiling Spring
Lakes are recreational and scenic attractions to potential buyers of land
from the Partnership. The Partnership's ability to sell land at its asking
prices would be adversely affected to the extent that the water level in
the lakes is substantially below normal for any length of time. Due to
protracted drought or near-drought conditions for several years up to late
2002, nearly all the lakes within the City of Boiling Spring Lakes had a
water level that was substantially below normal. These conditions resulted
in a lowering of the water table, and sinkholes developed in the bed of
Boiling Spring Lake, the largest lake in the community. Remedial measures
taken by the city combined with heavy precipitation during the fourth
quarter of 2002 solved the current problem and filled the lakes to
approximately normal levels. The Partnership has not made any
representations or warranties to buyers of land as to the water level in
the lakes. Nevertheless, it is reasonably possible that one or more of
such buyers may seek compensation from the Partnership or seek rescission
of their purchase of land from the Partnership, owing to the water level
of the lakes being substantially below normal, whether due to damage to
the dam, protracted drought conditions, or otherwise. If any litigation is
instituted seeking compensation or rescission, the Partnership believes
that it would prevail on the merits but the cost of defending such
litigation may by substantial. As of the date of this report, there is no
pending litigation and the Partnership is not aware of any potential
claims or actions in these matters. The Partnership has made no provision
in the financial statements related to this contingent liability.
F-18
INDEPENDENT AUDITOR'S REPORT
ON FINANCIAL STATEMENT SCHEDULES
To the Partners
Reeves Telecom Limited Partnership
Boiling Spring Lakes, North Carolina
Our audit of the financial statements of Reeves Telecom Limited Partnership as
of December 31, 2003 and for the year then ended as referred to in our report
dated March 4, 2004, and appearing on page F-1 of this Form 10-K, also included
an audit of the financial statement schedules listed in Item 15 of this Form
10-K. In our opinion, these financial statement schedules present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related financial statements referred to above.
The information contained in financial statement schedules for 2002 and 2001
were audited by other auditors whose report on those financial statement
schedules was dated February 20, 2003 and expressed an unqualified opinion that
the financial statement schedules were presented fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements.
/s/ Lynch & Howard, P.A.
Raleigh, North Carolina
March 4, 2004
Page 68
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL
STATEMENT SCHEDULES
To the Partners of
Reeves Telecom Limited Partnership:
Our audits of the financial statements referred to in our report dated February
20, 2003, also included an audit of financial statement schedules listed in Item
15 of this Form 10-K. In our opinion, these financial statement schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related financial statements.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 20, 2003
Page 69
REEVES TELECOM LIMITED PARTNERSHIP
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Changes Balance
Beginning Costs and Add at End
of Period Expenses Deductions (Deduct) of Period
--------- -------- ---------- -------- ---------
For year ended December 31, 2003 $596,027 $ -- $(35,623) $-- $560,404
RE valuation allowance
For year ended December 31, 2002
RE valuation allowance 600,170 -- (4,143) -- 596,027
For year ended December 31, 2001
RE valuation allowance 603,040 3,586 (6,456) -- 600,170
NOTES:
(1) Additions to the real estate valuation allowance charged to costs and
expenses reduce the reported book value of certain real estate held for
sale to approximate market.
(2) Deductions to the real estate valuation allowance reflect the sale of real
estate to which the valuation allowance applies.
Page 70
REEVES TELECOM LIMITED PARTNERSHIP
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
Life Upon
Which
Cost Gross Depreciation
Initial Capitalized Amount in Latest
Cost Subsequent Carried at Net Income
to to End of Accumulated Book Date of Statement
Description Encumbrances Partnership Acquisition Period Depreciation Value Acquisition is Computed
----------- ------------ ----------- ----------- ------ ------------ ----- ----------- -----------
Boiling Spring Lakes, NC:
Building lots and land $ -- $ 654,931 $ 82,966 $737,897 $ -- $737,897 May 1980 N/A
Improved lot
held for resale -- 130,047 28,213 158,260 7,913 150,347 April 1999 N/A
---- ---------- -------- -------- ------ --------
$ -- $ 784,978 $111,179 $896,157 $7,913 $888,244 N/A
Pimlico Plantation, SC:
Building lots and land -- -- -- -- -- --
---- ---------- -------- -------- ------ --------
Total at December 31, 2003 $ -- $ 784,978 $111,179 $896,157 $7,913 $888,244
==== ========== ======== ======== ====== ========
NOTES:
(1) All building lots and land held for sale are unimproved.
(2) The amounts shown for building lots, land and improved lot held for resale
in Boiling Spring Lakes do not reflect valuation allowance of $560,404
at December 31,2003. See Schedule II, "Valuation and Qualifying Accounts."
The valuation allowance, established in previous years to reduce the
carrying value of the Partnership's land in Boiling Spring Lakes to
approximate market value, is reviewed from time to time to determine its
adequacy and is reduced as land is sold.
Page 71
REEVES TELECOM LIMITED PARTNERSHIP
SCHEDULE III - CONTINUED
RECONCILIATION OF GROSS AND NET BOOK VALUE
Gross Net
Book Accumulated Book
Value Depreciation Value
----- ------------ -----
YEAR ENDED DECEMBER 31, 2003:
Balance at beginning of period $ 950,036 $ -- $ 950,036
Additions during period:
Acquisitions -- -- --
Improvements -- -- --
Deductions during period:
Cost of real estate sold (53,879) (7,913) (61,792)
-------- ------- -------
Balance at end of period $ 896,157 $(7,913) $ 888,244
======= ======== =======
YEAR ENDED DECEMBER 31, 2002:
Balance at beginning of period $ 946,181 $ -- $ 946,181
Additions during period:
Acquisitions -- -- --
Improvements 16,641 -- 16,641
Deductions during period:
Cost of real estate sold (12,786) -- (12,786)
-------- -- -------
Balance at end of period $ 950,036 $ -- $ 950,036
======= == =======
YEAR ENDED DECEMBER 31, 2001:
Balance at beginning of period $ 945,524 $ -- $ 945,524
Additions during period:
Acquisitions -- -- --
Improvements 35,284 -- 35,284
Deductions during period:
Cost of real estate sold (34,627) -- (34,627)
-------- -- -------
Balance at end of period $ 946,181 $ -- $ 946,181
======= == =======
NOTE:
(1) Cost of real estate sold does not reflect valuation allowances. See
Schedule II, "Valuation and Qualifying Accounts."
Page 72