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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-9305
REEVES TELECOM LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
South Carolina 57-0700063
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(State or other jurisdiction of IRS Employer
incorporation or organization) Identification Number
c/o Grace Property Management, Inc.
55 Brookville Road
Glen Head, New York 11545
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(Address of principal executive offices and zip code)
(516) 686-2201
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
On August 10, 2004, the registrant had outstanding 1,812,062 partnership units.
REEVES TELECOM LIMITED PARTNERSHIP
FORM 10-Q
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets at June 30, 2004
(Unaudited) and December 31, 2003 1
Condensed Statements of Operations and Partners'
Capital (Unaudited) for the Three Months Ended
June 30, 2004 and 2003 2
Condensed Statements of Operations and Partners'
Capital (Unaudited) for the Six Months Ended
June 30, 2004 and 2003 3
Condensed Statements of Cash Flows (Unaudited)
for the Six Months Ended
June 30, 2004 and 2003 4
Notes to Condensed Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURE 24
PART I. FINANCIAL INFORMATION
REEVES TELECOM LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
June 30, December 31,
2004 2003
(Unaudited) (Audited)
----------- ------------
Assets
------
Cash and cash equivalents $ 941,759 $ 822,517
Prepaid and other current assets -- 757
Properties held for sale and property
and equipment:
Properties held for sale 360,639 327,840
Sales property and equipment, net 163,610 161,937
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Total properties held for sale and
property and equipment, net 524,249 489,777
Long term notes receivable 144,403 146,265
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Total Assets $1,610,411 $1,459,316
========== ==========
Liabilities and Partners' Capital
- ---------------------------------
Accounts payable and accrued expenses $ 39,185 $ 115,109
Accrued expenses, affiliates 57,778 34,075
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Total Liabilities 96,963 149,184
Commitments and Contingencies
Partners' capital 1,513,448 1,310,132
---------- ----------
Total Liabilities and
Partners' Capital $1,610,411 $1,459,316
========== ==========
The accompanying notes are an integral part of these
condensed financial statements.
-1-
REEVES TELECOM LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF OPERATIONS AND PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited)
2004 2003
----------- -----------
Operating revenues:
Property sales $ 307,300 $ 85,560
Rental income 2,333 2,295
Interest income and finance charges 4,733 147,987
Gain on sale of country club -- 341,221
---------- ----------
314,366 577,063
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Operating costs and expenses:
Direct costs of property sold 11,626 2,013
Selling, general and administrative
expenses 123,970 80,258
Depreciation 2,412 2,301
Interest -- 1,176
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138,008 85,748
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Net income 176,358 491,315
Partners' capital at beginning of period 1,337,090 680,441
---------- ----------
Partners' capital at end of period $1,513,448 $1,171,756
========== ==========
Income per partnership unit $ 0.10 $ 0.27
========== ==========
Weighted average partnership units
issued and outstanding 1,812,062 1,812,062
---------- ----------
The accompanying notes are an integral part of these
condensed financial statements.
-2-
REEVES TELECOM LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF OPERATIONS AND PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited)
2004 2003
----------- -----------
Operating revenues:
Property sales $ 421,743 $ 113,810
Rental income 4,590 4,590
Interest income and finance charges 8,397 150,933
Gain on sale of country club -- 341,221
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434,730 610,554
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Operating costs and expenses:
Direct costs of property sold 14,950 3,423
Selling, general and administrative
expenses 211,633 142,227
Depreciation 4,831 4,602
Interest -- 3,508
---------- ----------
231,414 153,760
---------- ----------
Net income 203,316 456,794
Partners' capital at beginning of period 1,310,132 714,962
---------- ----------
Partners' capital at end of period $1,513,448 $1,171,756
========== ==========
Income per partnership unit $ 0.11 $ 0.25
========== ==========
Weighted average partnership units
issued and outstanding 1,812,062 1,812,062
---------- ----------
The accompanying notes are an integral part of these
condensed financial statements.
-3-
REEVES TELECOM LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited)
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 203,316 $ 456,794
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 4,831 4,602
Change in assets and liabilities:
Prepaid and other current assets 757 18,737
Note Receivable 1,862 --
Property held for sale (33,673) 2,717
Accounts payable and
accrued expenses (75,924) (34,521)
Gain on sale of country club (net) -- 14,585
--------- ---------
Net cash provided by operating activities 101,169 462,914
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in sales property & equipment,net (5,630) (31,593)
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Net cash used in investing activities (5,630) (31,593)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt -- (2,263)
Increase/(Decrease) in accrued expenses,
affiliates 23,703 (20,650)
--------- ---------
Net cash provided by (used in) financing
activities 23,703 (22,913)
--------- ---------
NET INCREASE IN CASH 119,242 408,408
CASH BALANCE - BEGINNING 822,517 301,924
--------- ---------
CASH BALANCE - ENDING $ 941,759 $ 710,332
========= =========
The accompanying notes are an integral part of these
condensed financial statements.
-4-
REEVES TELECOM LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Organization and Basis of Presentation
Organization
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 Exchange Act of 1934 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 primarily from real
estate sales including the sale of the golf club described in Note 2,
below. During the first quarter of 2001, the Partnership sold the golf
club.
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
-5-
REEVES TELECOM LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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.
Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
only normal recurring accruals) considered necessary for a fair
presentation of the Partnership's results of operations and financial
condition have been included. Operating results for the three month and
six month periods ended June 30, 2004 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2004.
For further information, refer to the financial statements and notes
thereto included in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2003 as filed with the Securities and Exchange
Commission on March 30, 2004.
NOTE 2. Sale of Fox Squirrel Country Club/The Lakes Country Club and Disposal
of Business Segment
During the first quarter of 2001, the Partnership completed the sale of
the assets of Fox Squirrel/The Lakes for consideration totaling $862,500,
comprised of $150,000 in cash and a note receivable having an initial
principal amount of $712,500. Since the cash down payment of $150,000
received by the Partnership 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
Statement of Financial Accounting Standard No. 66, "Accounting for Sales
of Real Estate" ("SFAS 66"). The deposit method requires, among other
things, that until the total cash received by the Partnership from the
down payment and subsequent principal payments on the note receivable 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) cash received from the buyer at closing be shown
-6-
REEVES TELECOM LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
as a deposit on contract, and (c) payments received from the buyer in
respect of the note receivable subsequent to closing be treated as an
increase in the deposit. From March 31, 2001 through March 31, 2003, the
Partnership recorded the transaction using the deposit method. At March
31, 2003, the assets held by the Partnership covered by the sale agreement
were held at a net book value of approximately $442,587. During the second
quarter of 2003, the Partnership received an early repayment of principal
on the note of $534,748. Since as of the date of such early repayment the
Partnership has received in excess of 25% of the total consideration paid
for the assets, the transaction has been recorded as a sale of assets on
the Partnership's financial statements for the period ended June 30, 2003.
The operations of Fox Squirrel/The Lakes prior to the sale are recorded as
discontinued operations. During the second quarter of 2003, the
Partnership recognized a gain on the sale totaling $341,221.
NOTE 3. Reclassification
Certain reclassifications have been made in the prior periods to conform
to the current year presentation. These reclassifications have no effect
on net income or partners' capital of the prior periods.
NOTE 4. 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
completed all remediation work as of December 31, 2001, although the North
Carolina Department of Environment and Natural Resources ("NCDENR")
required the Partnership to monitor and test the subsurface groundwater
periodically thereafter, and to submit the results of such tests to NCDENR
for review. In a "no further action" letter to the Partnership dated May
4, 2004, NCDENR stated that its review of a site closure report showed
that soil contamination does not exceed the residential maximum soil
contaminant concentrations under state law, and that contaminated
groundwater has been cleaned up to the level of the standards under state
law, and, accordingly, NCDENR believes that no further action is warranted
for the incident. The "no further action" letter further states that
NCDENR's determination applies unless NCDENR later determines that the
release that resulted in the remediation
-7-
REEVES TELECOM LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
work poses an unacceptable or a potentially unacceptable risk to human
health or the environment. The well that was established for monitoring
and testing subsurface groundwater has been closed, and Management
believes that the Partnership will not incur any further monitoring or
testing costs, or other material or potentially material expenditures
relating to the contamination.
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
$105,000 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.
In 2004, the City of Boiling Spring Lakes began to phase in municipal
water service to certain portions of the development. In connection with
the first phase of the municipal water system, in February 2004 the
Partnership paid its full assessment of $51,000, which amount was treated
for accounting purposes as an increase in the cost basis of the land owned
by the Partnership in those certain portions of the development. A
significant portion of the costs of subsequent phases of municipal water
distribution as well as 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
-8-
REEVES TELECOM LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 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 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
has not made any representations or warranties to buyers of land 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.
-9-
REEVES TELECOM LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 a
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.
-10-
ITEM 2. Management Discussion and Analysis of Financial Condition and Results
of Operations.
In addition to historical information, this quarterly report on Form 10-Q
contains certain "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act 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" within the
Partnership's Annual Report on Form 10-K for the year ended December 31,
2003 as filed with the Securities and Exchange Commission on March 30,
2004, 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.
Sale of Fox Squirrel Country Club / The Lakes Country Club
During the first quarter of 2001, the Partnership completed the sale of
the assets of Fox Squirrel/The Lakes for consideration totaling $862,500,
comprised of $150,000 in cash and a note receivable having an initial
principal amount of $712,500. Originally, the note bore interest at an
annual rate of 9.5%, had a maturity date of March 9, 2004, was
collateralized by all of the
-11-
assets sold to the buyer, and provided for payments of principal and
interest as follows: (i) monthly payments of $6,641 from April 9, 2001 up
to and including February 9, 2004, and (ii) a final payment of $677,642 on
March 9, 2004. During the second quarter of 2003, in connection with the
buyer's obtaining financing from a local financial institution (the
"Bank"), the terms of the note were 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 Bank's prime rate does not exceed 6.75% (meaning that the
interest rate on the note remains constant at 8.75%), the 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 note, the Partnership subordinated its lien priority on the assets
sold to the buyer to that of the Bank. In consideration of the foregoing,
during the second quarter of 2003, the Partnership received from the buyer
an early repayment of principal of $534,748, reducing the unpaid principal
amount outstanding under the note to $147,757 as of the date of such
repayment.
Since the cash down payment of $150,000 received by the Partnership during
the first quarter of 2001 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 66. From March 31, 2001 through March 31, 2003, the Partnership
recorded the transaction using the deposit method. At March 31, 2003, the
assets held by the Partnership covered by the agreement were held at a net
book value of approximately $442,587. Since, as of the date of the early
repayment of principal to the Partnership of $534,748, the Partnership has
received in excess of 25% of the total consideration paid for the assets,
the transaction has been recorded as a sale of assets on the Partnership's
financial statements for the period ended June 30, 2003. The operations of
Fox Squirrel/The Lakes prior to the sale are recorded as discontinued
operations. During the second quarter of 2003, the Partnership recognized
a gain on the sale totaling $341,221.
In connection with the modification of the note's terms as described
above, the Partnership and the buyer agreed to a modification of the
indemnification agreement relating to certain environmental contamination
from an underground storage tank formerly located on the grounds of Fox
Squirrel/The Lakes. The indemnification agreement originally provided that
the buyer may
-12-
extend the maturity of the note beyond March 9, 2004 if by that date the
Partnership had not completed remediation of such environmental
contamination. The duration of such extension was limited to 20 years. The
agreement as modified provides that the Partnership's indemnification
extends to not later than June 17, 2005, even if the North Carolina
Department of Environment and Natural Resources ("NCDENR") has not
furnished a closure letter formally stating that no further testing of
ground water or remediation is required. NCDENR issued a "no further
action" letter dated May 4, 2004, and, as a result, the Partnership's
indemnification pursuant to the agreement as modified has ended.
Results of Operations
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
- REVENUE
Revenue from property sales, and the amount and type of property sold for
the first six months of 2004 and 2003 are set forth in the table below.
Six Months Ended June 30,
-------------------------
2004 2003
---------- ---------
PROPERTY SOLD
Boiling Spring Lakes, NC:
Individual undeveloped lots 36 9
Commercial land (acres) -- 3.63
Pimlico Plantation, SC:
Individual undeveloped lots -- 1
REVENUE
Boiling Spring Lakes, NC:
Individual undeveloped lots $421,743 $ 68,765
Commercial land -- 20,500
Pimlico Plantation, SC:
Individual undeveloped lots -- 24,545
-------- --------
Total Revenue $421,743 $113,810
======== ========
-13-
- Boiling Spring Lakes, NC
Generally, the real estate market in the southern coastal region of North
Carolina, including Brunswick County, where the Partnership's property is
situated, has recovered from the sluggish conditions seen during most of
2002 and 2003. Historically low interest rates and improved economic
conditions generally have led to greater demand for buildable residential
lots. While the strength and durability of the market's recovery is
difficult to predict at this time, Management is cautiously optimistic
about prospects for the Partnership's land sales for the balance of 2004
and into 2005.
During the first six months of 2004, the Partnership sold 27 more
individual undeveloped lots than were sold during the same period of 2003,
for an increase of 300%. Of the 27 lots sold, 9 lots were sold to a single
buyer, a local builder, for an aggregate of $116,049. Management
attributes the increase to the improvement in the real estate market in
Brunswick County, North Carolina. Revenue from the sale of individual
undeveloped lots increased over 513%, reflecting not only the relative
strength of the market but also the higher average sales price per lot i
$11,715 for the first six months of 2004 as compared to $7,641 for the
same period of 2003. The higher average sales price per lot reflects 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 which are not
suitable for on-site septic systems.
During the first six months of 2004, the Partnership sold no commercial
land, whereas the Partnership sold approximately 4 acres in the same
period of 2003 for aggregate revenue of $20,500. The Partnership
experiences great volatility in sales from year to year as to revenue and
acreage, and often the Partnership records no sales of commercial land in
a fiscal year. The price per acre of commercial land that the Partnership
realizes depends upon numerous factors, including, among others, the size
of the tract and its location.
- Pimlico Plantation, SC
The Partnership sold one individual undeveloped lot during the first six
months of 2003. After such sale, the Partnership no longer owned any land
in Pimlico Plantation, SC.
Rental income for the first six months of 2004 was unchanged from the same
period of 2003, reflecting scheduled lease payments.
Interest income and finance charges for the first six months of 2004
decreased 94% from the same period of 2003. Management attributes the
decrease substantially to the fact that, during the
-14-
first six months of 2003, the Partnership recognized the sale of the
assets of Fox Squirrel/The Lakes, which included recognizing the interest
collected on the note receivable from the closing of the transaction in
March 2001 to June 2003. Prior to June 2003, the Partnership recorded
principal and interest in respect of the note receivable as an increase in
the deposit on the sale contract, in accordance with SFAS No. 66,
"Accounting for Sales of Real Estate."
- DIRECT COSTS OF PROPERTY SOLD
Direct costs of property sold for the first six months of 2004 and 2003
were $14,950 and $3,423, respectively, for an increase of approximately
337%. Management attributes the increase in costs principally to the
greater amount of land sold during the first quarter of 2004 compared to
the same period of 2003.
- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the first six months of
2004 were $211,633, compared to $145,735 for the same period of 2003. The
principal components of the approximately 45% increase are as follows:
- Income tax - The Partnership expensed $23,025 in North Carolina and
South Carolina state income taxes due in respect of 2003 for limited
partners, whereas only $5,500 in such taxes was expensed in 2003. As
a limited partnership, the Partnership generally passes income tax
liability through to its partners. With respect to 2003 and 2002,
however, Management believes that the administrative cost of
allocating such liability among the partners, and maintaining
records therefor, would be needlessly time-consuming and complex.
Management, therefore, elected to pay such taxes, with the result
that each partner's pro rata share of the Partnership's income for
each such year would be/has been reduced by a pro rata share of such
taxes paid.
- Accounting fees - Accounting fees were $18,111 for the first six
months of 2004, compared to $7,858 for the same period of 2003. The
increase of approximately 131% is due in part to the increased work
relative to the Partnership's quarterly filings in 2004 compared to
2003 performed by the Partnership's auditors and accountants. The
increase in costs is also due in part to the need to have the
Partnership's annual report on Form 10-K for the fiscal year ended
December 31, 2003 reviewed by both its current and former auditors,
Lynch & Howard PA, and PricewaterhouseCoopers, LLP, respectively, as
is required by Federal securities laws and regulations when a change
of auditors occurs. The cost of the former auditor's review exceeded
the amount accrued therefor at December 31, 2003, and the excess was
expensed in 2004. During 2003, the Partnership incurred
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auditing fees with respect to only PricewaterhouseCoopers, LLP,
which firm was then serving as the Partnership's auditors.
- Reporting and transfer agent costs - Costs associated with the
Partnership's transfer agent and the financial printer for preparing
and submitting the Partnership's periodic filings with the
Securities and Exchange Commission ("SEC") were $14,134 for the
first six months of 2004, compared to $6,071 for the same period of
2003. The increase of approximately 133% is due principally to the
increase in the Partnership's compliance costs.
- Miscellaneous expenses - The Partnership incurred $15,550 in
miscellaneous expenses during the first six months of 2004, compared
to $4,117 incurred during the same period of 2003. The increase is
due in part to the cost of the appraisal of the real estate assets
owned by the Partnership in Boiling Spring Lakes, and in part by
expenses relating to clearing and mowing of certain land, and
wetlands assessment tests in respect of such land, prior to the sale
of the land. Since the sale did not close, the Partnership expensed
all of such costs. No such expenses were incurred during the same
period of 2003.
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30,
2003
- REVENUE
Revenue from property sales, and the amount and type of property sold for
the three months ended June 30, 2004 and June 30, 2003 are set forth in
the table below.
Three Months Ended June 30,
---------------------------
2004 2003
---------- ----------
PROPERTY SOLD
Boiling Spring Lakes, NC:
Individual undeveloped lots 24 7
Commercial land (acres) -- 3.63
REVENUE
Boiling Spring Lakes, NC:
Individual undeveloped lots $307,301 $ 62,765
Commercial land -- 20,500
-------- --------
Total Revenue $307,301 $ 83,265
======== ========
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- Boiling Spring Lakes, NC
During the three months ended June 30, 2004, the Partnership sold 17 more
individual undeveloped lots than were sold during the same period of 2003,
for an increase of 243%. Management attributes the increase to the
improvement in the real estate market in Brunswick County, North Carolina.
Revenue from the sale of individual undeveloped lots increased 390%,
reflecting not only the relative strength of the market but also the
higher average sales price per lot - $12,804 for the second quarter of
2004 as compared to $8,966 for the same period of 2003. The higher average
sales price per lot reflects 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 which are not suitable for on-site septic systems.
During the second quarter of 2004, the Partnership sold no commercial
land, whereas the Partnership sold approximately 4 acres in the same
period of 2003 for aggregate revenue of $20,500. The Partnership
experiences great volatility in sales from year to year as to revenue and
acreage, and often the Partnership records no sales of commercial land in
a fiscal year. The price per acre of commercial land that the Partnership
realizes depends upon numerous factors, including, among others, the size
of the tract and its location.
Rental income for the three months ended June 30, 2004 was substantially
unchanged from the same period of 2003, reflecting the scheduled lease
payments.
Interest income and finance charges decreased 97%. Management attributes
the decrease substantially to the fact that, during the second quarter of
2003, the Partnership recognized the sale of the assets of Fox
Squirrel/The Lakes, which included recognizing the interest collected on
the note receivable from the closing of the transaction in March 2001 to
June 2003. Prior to June 2003, the Partnership recorded principal and
interest in respect of the note receivable as an increase in the deposit
on the sale contract, in accordance with SFAS No. 66, "Accounting for
Sales of Real Estate."
- DIRECT COSTS OF PROPERTY SOLD
Direct costs of property sold for the three months ended June 30, 2004
were $11,627, compared to $2,014 for the same period of 2003. Management
attributes the increase in costs principally to the greater amount of land
sold during the second quarter of 2004 compared to the same period of
2003.
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- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $123,970 for the three
months ended June 30, 2004, compared to $81,434 for the same period of
2003. The principal components of the approximately 52% increase are as
follows:
- Income tax - The Partnership expensed $23,025 in North Carolina and
South Carolina state income taxes due in respect of 2003 for limited
partners, whereas only $5,500 in such taxes was expensed in 2003.
- Accounting fees - Accounting fees were $18,111 for the second
quarter of 2004, compared to $7,858 for the same period of 2003. The
increase of approximately 131% is due in part to the increased work
relative to the Partnership's quarterly filings in 2004 compared to
2003 performed by the Partnership's auditors and accountants. The
increase in costs is also due in part to the need to have the
Partnership's annual report on Form 10-K for the fiscal year ended
December 31, 2003 reviewed by both its current and former auditors,
Lynch & Howard PA, and PricewaterhouseCoopers, LLP, respectively,
and the expensing of some of such costs in 2004. During 2003, the
Partnership incurred auditing fees with respect to only
PricewaterhouseCoopers, LLP, which firm was then serving as the
Partnership's auditors.
- Reporting and transfer agent costs - Costs associated with the
Partnership's transfer agent and the financial printer for preparing
and submitting the Partnership's periodic filings with the
Securities and Exchange Commission ("SEC") were $13,103 for the
second quarter of 2004, compared to $4,315 for the same period of
2003. The increase of approximately 204% is due principally to the
increase in the Partnership's compliance costs.
- Miscellaneous expenses - The Partnership incurred $8,016 in
miscellaneous expenses during the second quarter of 2004, compared
to $2,874 incurred during the same period of 2003. The increase is
due principally to expenses relating to clearing and mowing of
certain land, and wetlands assessment tests in respect of such land,
prior to the sale of the land. Since the sale did not close, the
Partnership expensed all of such costs. No such expenses were
incurred during the same period of 2003.
Inflation has had only a minor impact on the Partnership's operations
during the first six months of 2004 and 2003.
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Capital Resources and Liquidity
Operating activities provided $101,169 of net cash during the first six
months of 2004, compared to $462,914 of net cash provided by operating
activities during the same period of 2003. The change is primarily
attributable to the payment of $51,000 of water assessments by the City of
Boiling Spring Lakes during the first six months of 2004 and to higher
costs associated with accounting and financial reporting, and the
recognition of the sale of the assets of Fox Squirell/The Lakes in the
first six months of 2003.
Investing activities used net cash of $5,630 during the first six months
of 2004, compared to $31,593 of net cash used in investing activities
during the same period of 2003. The change is primarily attributable to
the relative amount spent on repairs made to a dam during the first six
months of 2004, which was less than was spent during the same period of
2003.
Financing activities provided $23,703 of net cash during the first six
months of 2004, compared to $22,913 of net cash used in financing
activities during the same period of 2003. The change is primarily
attributable to the $23,750 increase in the amounts owed to the General
Partner and its affiliates during the first six months of 2004, whereas
during the same period of 2003 the Partnership reduced the amounts owed to
such persons.
During the second quarter of 2003, the Partnership renegotiated the terms
of its loan from a local financial institution to provide for a lower
interest rate. As of April 2, 2003, the note had a balance outstanding of
$107,038, bore interest at a fixed rate of 5.65%, and provided for equal
monthly payments of $1,020 through March 2006, with a final balloon
payment due on the maturity date of April 2, 2006. In August 2003, the
Partnership elected to repay the existing balance of the note. After
giving effect to such repayment, the Partnership has no long-term debt.
Throughout the balance of 2004, the Partnership may make one or more real
estate-related investments in and around Boiling Spring Lakes with a view
towards enhancing the value of the Partnership's assets. The Partnership
may utilize its own cash balances as well as seek to borrow from local
financial institutions or others to fund such investment(s). Management
expects that any effort to obtain financing will be successful but there
can be no assurances that the Partnership will be able to obtain borrowed
funds on acceptable terms or at all. Management will evaluate and
determine on a continuing basis, depending upon market conditions and
other factors the General Partner deems relevant, the most efficient and
practical use of the Partnership's cash.
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Off Balance Sheet Arrangements
The Partnership does not utilize off balance sheet arrangements, and there
were none during the first six months of 2004 or 2003.
ITEM 3. 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 stable, the market for real estate increases. The Partnership does not
enter into derivative contracts for its own account to hedge against the
risk of changes in interest rates.
The Partnership's interest-bearing assets at June 30, 2004 are as follows:
- Cash, substantially all of which is deposited at a local financial
institution. The interest rate earned on the cash balance is
variable. During the second quarter of 2004, cash balances averaged
$834,553.
- The note receivable from the buyer of the assets of Fox Squirrel/The
Lakes. The stated interest rate on the note was 9.5% until June 17,
2003, when the terms of the note were modified to provide, among
other things, for an annual interest rate equal to the higher of (i)
8.75% and (ii) 2% over the Bank's prime rate. Subsequent to the
modification of the note's terms, the interest rate has not exceeded
8.75%.
Had the average level of interest rates during the first six months of
2004 been higher or lower by 100 basis points or one percent (1%), the
Partnership would have earned approximately $3,826, more or less, on its
cash balances, based upon average quarterly balances.
As of June 30, 2004, the note receivable from the buyer of the assets of
Fox Squirrel/The Lakes was stated on the Partnership's balance sheet at
$144,403, the principal amount of the note receivable, which approximates
its market value. The interest rate on the note receivable cannot decline
below 8.75% and will increase to 2% above the Bank's prime rate if the
Bank's prime rate were to exceed 6.75%. This note receivable, like all
variable rate
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instruments, is largely insulated from interest rate risk, and will not
decline in value if market interest rates increase, however, should
interest rates decline from what are already historically low rates, the
market value of the note receivable will likely increase. A hypothetical
100 basis point (1%) increase or decrease in market interest rates from
levels at June 30, 2004 would not cause the fair value of the note
receivable to change by a material amount.
During the third quarter of 2003, the Partnership repaid the remaining
unpaid balance, or approximately $104,991, of long-term debt secured by a
mortgage on an improved residential lot. As a result, during the first six
months of 2004, the Partnership had no long term debt outstanding, and at
June 30, 2004, the Partnership has no interest-bearing liabilities.
ITEM 4. 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
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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 quarterly report on Form 10-Q,
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 second fiscal quarter of 2004 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.
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PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31 Rule 13a-14/15d-14(a) Certifications as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 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*.
* Exhibit 32 is to be treated as "furnished" rather than
"filed" as part of this report.
(b) Reports on Form 8-K:
No reports were filed on Form 8-K for the quarter ended June 30,
2004.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
REEVES TELECOM LIMITED PARTNERSHIP
By: Grace Property Management Inc.
General Partner
By: /s/ DAVIS P. STOWELL
--------------------------------
Davis P. Stowell
President and Sole Director
of General Partner
(Principal Executive Officer,
Principal Financial Officer,
Principal Accounting Officer)
Dated: August 11, 2004
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