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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(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, 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: 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
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 (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [ X ]
On March 23, 2005, 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 2004. As of March 23,
2005, 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...................................................................................................... 19
Item 3. Legal Proceedings............................................................................................... 21
Item 4. Submission of Matters to a Vote of Unit Holders................................................................. 21
PART II...................................................................................................................... 22
Item 5. Market for Registrant's Common Equity, Related Unit Holder Matters, and Issuer Purchases of Equity Securities... 22
Item 6. Selected Financial Data......................................................................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................................................... 36
Item 8. Financial Statements and Supplementary Data..................................................................... 37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................ 37
Item 9A. Controls and Procedures......................................................................................... 37
Item 9B. Other Information............................................................................................... 38
PART III..................................................................................................................... 39
Item 10. Directors and Executive Officers of Registrant.................................................................. 39
Item 11. Executive Compensation.......................................................................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unit Holder Matters.................. 41
Item 13. Certain Relationships and Related Transactions.................................................................. 43
Item 14. Principal Accountant Fees and Services......................................................................... 44
PART IV...................................................................................................................... 47
Item 15. Exhibits and Financial Statements Schedules..................................................................... 47
SIGNATURES................................................................................................................... 50
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.
Beginning in 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. At that time 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
2004 2003 2002 2001 2000
---------- -------- ------------ -------- ------------
REVENUE
Individual lots:
Unimproved $1,114,147 $228,849 $ 155,680 [a] $347,832 $ 378,732 [e]
Improved - - - - -
Commercial land 59,821 230,013 65,410 - -
Other land - - 94,774 [b] 72,911 56,437
---------- -------- ------------ -------- ------------
Total revenue $1,173,968 $458,862 $ 315,864 $420,743 $ 435,169 [e]
========== ======== ============ ======== ============
TYPE OF PROPERTY SOLD
Individual lots:
Unimproved 86 27 17 [c] 68 55
Improved - - - - -
Commercial land (acres) 3 7 6 - -
Other land (acres) - - 20 [d] 23 2 [e]
Notes:
[a] In the Partnership's Annual Reports on Form 10-K for the years ended
December 31, 2002 and 2003, such amount was shown as $250,454, which
includes $94,774 of revenue from the sale of two 10-acre tracts. See
Note(b).
[b] In the Partnership's Annual Reports on Form 10-K for the years ended
December 31, 2002 and 2003, such revenue was included with revenue from
the sale of unimproved individual lots.
[c] In the Partnership's Annual Reports on Form 10-K for the years ended
December 31, 2002 and 2003, the number of lots sold was shown as 19,
which includes two 10-acre tracts sold in 2002. See Note (d).
[d] In the Partnership's Annual Reports on Form 10-K for the years ended
December 31, 2002 and 2003, two 10-acre tracts were counted as two
unimproved individual lots sold.
[e] 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.
Page 3
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 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 July 15, 2008. Assuming that the interest rate on
the Promissory Note remains at 8.75%, the Promissory
Page 4
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
$125,733 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.
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. Although the Partnership completed remediation
work by December 31, 2001, the North Carolina Department of Environment and
Natural Resources ("NCDENR") required the Partnership to continue monitoring and
testing the subsurface groundwater into early 2004. The written test results of
sampling of subsurface groundwater taken in February 2004 were submitted to
NCDENR and on May 4, 2004 NCDENR issued a Notice of No Further Action that, in
effect, ends the matter. See "Description of Business - Risk Factors -
Environment Matters - Underground Storage Tank."
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
2004 2003 2002 2001 2000
---------- ---------- ------------ ---------- ------------
Revenue $ - $ - $ - $ 32,511 $ 332,462
Operating loss - - - (67,326) (214,975)
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 2000 are for a twelve-month period, a comparison of Revenue and
Operating Loss for 2001 to 2000 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. 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
2004 2003 2002 2001 2000
---------- ---------- ------------ ---------- ------------
Other revenue [a] $ - $ - $ - $ 8,920 $ -
Rental income - net [b] 1,267 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. 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
2004 2003 2002 2001 2000
---------- ---------- ------------ ---------- ------------
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. The
last lot owned by the Partnership in the development was sold in 2003;
consequently, the Partnership no longer owns any 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.
- PATENTS, TRADEMARKS, LICENSES, FRANCHISES, AND CONCESSIONS HELD.
Other than a real estate brokerage license issued by the State of North
Carolina Board of Realtors to the Partnership's General Manager, who acts as the
Partnership's real estate sales person, the Partnership's business is not
dependant in any material respect on any patent, trademark, license, franchise,
or concession.
Page 7
- DEPENDENCE UPON CUSTOMERS
From time to time, the Partnership sells tracts of land and/or blocks of
lots to developers or others. Generally, however, the Partnership is not
dependent in any respect upon one or a few customers, the loss of any one of
which might significantly affect the financial results of the Partnership.
During the year ended December 31, 2004, the Partnership sold individual
undeveloped lots in Boiling Spring Lakes to two separate buyers for an aggregate
of $307,485, or approximately 26% of total revenue from property sales in 2004.
During the year ended December 31, 2003, the Partnership sold undeveloped
commercial land in Boiling Spring Lakes to three separate buyers for an
aggregate of $230,013, or approximately 48% of total revenue from property sales
in 2003. During the year ended December 31, 2000, the Partnership sold
approximately 80% of the total acreage it then owned in Boiling Spring Lakes to
one buyer for an aggregate of $2,400,000, or approximately 85% of the total
revenue from property sales in 2000.
- 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 2001. Not until late 2003 did the
combination of low interest
Page 8
rates and a generally improving national and regional economy lead to a
perceptible increase in demand for buildable residential lots in Boiling Spring
Lakes. Through early March 2004, the core market gained strength. For the last
nine months of 2004, the real estate market was strong. While continued low
interest rates helped to fuel property sales, Management believes that the
principal driving force in the local real estate market was the strong real
estate markets in the nearby North Carolina beach communities, such as Carolina
Beach, Kure Beach, Oak Island, and Wrightsville Beach, which had the dual effect
of diverting potential home buyers from those communities to less expensive
communities, such as Boiling Spring Lakes, and of allowing homeowners in those
communities to sell their properties at extremely favorable prices and to buy a
new home in a less expensive, inland community, such as Boiling Spring Lakes.
Management believes that the Partnership's sales performance in 2004 was
the result of convergent factors which are unlikely to be replicated in 2005.
While the local real estate market remained strong early into 2005, Management
believes that demand for buildable lots and market prices for such lots in
Boiling Spring Lakes will likely abate in the second quarter of 2005 as interest
rates continue to increase gradually, and that, as a result, the number of
individual lots sold and revenues from the sale of such lots in 2005 will likely
fall well short of 2004's levels.
- 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 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 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 the Interstate Land Sales Full Disclosure Act,
which generally requires registration with the U.S. Department of Housing and
Urban Development of any project that consists of 100 or more lots. Should the
Partnership's registration be suspended or terminated for any reason, the
Partnership will be restricted to selling not more than 12 lots during any 12
consecutive months until such time as the suspension is lifted or a new
registration goes into effect.
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.
Page 9
- EMPLOYEES
The Partnership has two full-time employees, both of whom are located in
the sales office in Boiling Spring Lakes, North Carolina. The General Partner
has no full-time employees. The Officers of the General Partner 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, 2004, the Partnership held $1,210,038 in cash and cash
equivalents, and had $294,950 invested in short-term U.S. Treasury securities
having a maturity of more than 90 days. Accounts payable and accrued expenses,
including accrued expenses owed to affiliates, as of such date totaled $189,377.
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 2000, reserves totaling $1,050,000 had been
established. During 2000, reserves of $175,000 were established to fund certain
capital improvements within 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. During 2004, reserves
totaling $200,000 were established to fund certain road repair and improvement
work within the development, and the possible installation of a multi-user
septic system for certain commercial land. Also during 2004, the Partnership
established a $1,000,000 reserve relating to the extension of sewer service to
land owned by the Partnership. Since the timing of, and costs associated with,
the extension of sewer service to the Partnership's land cannot presently be
estimated with any certainty, Management views the $1,000,000 reserve as an
initial reserve, with additional amounts - as yet undetermined - likely to be
reserved in future years.
Page 10
- 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 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 adverse changes in the economy cause a decrease
in revenues from the sale of the Partnership's real estate. As a result, if the
growth rate for the 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.
- 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.
Page 11
The Partnership currently invests most of its cash in a money market
account at a local financial institution and in U.S. Treasury securities having
a maturity of one year or less. The Partnership has exposure to changes in
interest rates in that: (a) at the time any such Treasury security matures, if
the market interest rate is lower than that on the maturing Treasury security,
future interest income will decrease due to the lower interest rate; and (b)
interest rates paid on money market balances fluctuate with changes in market
interest rates, therefore, interest earned on balances held in a money market
account will decrease if market interest rates decrease.
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. Other than for individual
lots, the Partnership experiences great volatility in the sale of its land, and
often the Partnership records no sales of such land in a fiscal year. It may not
be possible to sell property 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,
Page 12
floods, unusually heavy or prolonged rain, and droughts, could have a material
adverse effect on 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
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
Page 13
leaked into the subsurface groundwater. The Partnership undertook remediation by
removing 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." As
requested by NCDENR, the Partnership continued to monitor and sample the
groundwater and to submit the test results to NCDENR periodically. The written
test results of sampling of subsurface groundwater taken in February 2004,
showing that the concentration of hydrocarbon compounds in the subsurface
groundwater were either below detection limits or were substantially below
standards, were submitted to NCDENR. On May 4, 2004, NCDENR issued a Notice of
No Further Action, stating that NCDENR determined that the Partnership need not
continue the monitoring and sampling of groundwater. Such determination shall
apply unless NCDENR makes a later determination that the concentration of
hydrocarbon compounds that resulted from the release of diesel fuel from the now
removed underground storage tank once again poses an unacceptable risk or a
potentially unacceptable risk to human health or the environment.
Management believes that the Partnership will not be incurring any further
costs associated with release of diesel fuel from the now removed underground
storage tank. If, however, NCDENR should request the Partnership to conduct
additional monitoring and testing or to conduct additional remediation,
Management 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
Page 14
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.
- ZONING AND OTHER REGULATIONS
At December 31, 2004, the Partnership owns approximately 244 acres of
undeveloped, unplatted land intended for residential use and approximately 220
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 began to phase in municipal water service to certain
portions of the development 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. Management cannot
estimate with any certainty the amount of any future assessment by the City for
installation of water or by the County for installation of sewer lines, nor can
it predict with any certainty when any such assessments may be made or, once
made, become due. If the Partnership is liable for any such assessment and has
insufficient funds to pay such assessment when due or is unable to obtain
financing on terms Management believes to be acceptable, the Partnership may be
unable to continue operating and may become insolvent.
Page 15
- COSTS ASSOCIATED WITH BUILDING AND MAINTAINING ROADS
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. The Partnership may complete some or all of the roads, or a
portion of some or all of the roads, but there is no contractual obligation to
do so. The Partnership has not set aside any money or entered into any bond,
escrow, or trust agreement to assure completion of the roads. It may be
difficult or impossible for the Partnership to sell lots located on uncompleted
roads, and the sales price of a lot situated on an uncompleted road would likely
be substantially less than what the Partnership might otherwise obtain. The City
of Boiling Spring Lakes will not assume any road that is not paved with asphalt,
and the City need not assume any paved road. Accordingly, unless and until the
Partnership completes a road and has it paved with asphalt, and the road has
been assumed by the City, the Partnership will be responsible for maintaining
such road and the right-of-way. Since 2001, the Partnership has spent a total of
approximately $66,000 for rocking and paving roads. Otherwise, in recent years,
the Partnership has not spent significant amounts toward building or maintaining
roads and rights-of-way, and the cost to maintain them may increase
substantially. The failure by the Partnership to provide proper maintenance of
the roads and rights-of-way which have not been assumed by the City may subject
the Partnership to substantially greater risk of litigation from persons
adversely affected by such failure.
During the 1960's, the Partnership sold a number of five- and ten-acre
timber tracts. In some cases, the Partnership provided an easement across its
land to the buyer of such a tract for access to and egress from the tract, and
the buyer was responsible for building a road across such easement. In cases
where the purchase contract was silent on the issue, local laws required only
that the Partnership provide the buyer with access to and egress from a tract
but it was not clear who was responsible for building a road to and from the
tract. Management maintains that the Partnership's only obligation in such cases
was to provide an easement for access to and egress from the tract, and if at
some subsequent time the buyer wanted a road across such an easement, the
Partnership was not obligated to build it. There has been no litigation
involving the Partnership in a dispute over whose responsibility it is to build
a road in such a case. If such litigation were to be initiated, Management
believes that the Partnership would prevail but that the cost of defending the
case could be material, and should the Partnership not prevail, the cost of
building any such road could be material.
- INCREASED OPERATING OR CAPITAL COSTS RELATING TO DAM
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 severe storm approximately nine years ago. Since 2001,
the Partnership has spent a total of approximately $113,000 to repair the dam.
The Partnership intends to deed the dam to the City of Boiling Spring Lakes
during 2005. The City has indicated that it will accept the title once it is
comfortable that the dam has been fully repaired and has successfully retained
water following a
Page 16
period of heavy rain. 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 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 effect 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 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
Page 17
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, 2004, 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,
2004, the Partnership maintained cash balances $612,042 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 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.
Page 18
ITEM 2. PROPERTIES
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, North Carolina, 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 924 acres. As of December 31, 2004, the
Partnership owns the following:
- approximately 410 acres, divided into 1,205 platted unimproved individual
lots, both recorded and unrecorded, intended for residential use;
- approximately 294 acres of undeveloped land, including 50 acres that are
divided into five 10-acre tracts, intended for residential use;
- approximately 220 acres of undeveloped land intended for commercial use;
- a single family residence comprising 1,648 sq. ft. that the Partnership
rents to third parties;
- 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 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
Page 19
report, a copy of which was filed with the Securities and Exchange Commission as
an exhibit to the Partnership's Annual Report on Form 10-K for the year ended
December 31, 2003 (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 and in view of current market
conditions, the Partnership and its accountants believe that the valuation
allowance at December 31, 2004 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. From time to time, the Partnership will add to its inventory of
lots situated on paved roads and rocked roads by paving or rocking roads that
are currently unpaved or unrocked. 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. The Partnership achieved some success
through 1999, selling five properties and earning a profit on each sale;
however, the Partnership elected to suspend the project in 2000 in view of
rising construction costs and decreased margins. The Partnership has not
constructed any houses since 2000, though Management may resume the project
during 2005.
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
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.
Following the sale in 2003 of its last lot in Pimlico Plantation in South
Carolina, the Partnership owns no properties outside of Boiling Spring Lakes.
Page 20
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 UNIT HOLDERS
No matters were submitted to a vote of unit holders during the fourth
quarter of 2004.
Page 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED UNIT HOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
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, 2004 there were 1,955 registered holders of partnership
units. The total number of record holders has not changed substantially from
December 31, 2004 to March 23, 2005, 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: (a)
undertaking certain infrastructure and other improvements in the development;
(b) making certain other real estate-related investments in or near Boiling
Spring Lakes; and (c) pursuing limited scale home construction on lots owned by
the Partnership as market conditions may allow. 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
highly 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: (a) the
Partnership knows with reasonable certainty the amount and timing of any
assessments relating to installation of water and sewer lines affecting the
Partnership's properties, and (b) the Partnership's business 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.
Page 22
There were no purchases of partnership units by the Partnership, the
General Partner, or any affiliate of either of the foregoing, during 2004. 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.
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,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ---------- ---------- ---------- -----------
Revenues:
Property sales $ 1,173,968 $ 483,407 $ 315,864 $ 440,847 $ 2,835,169
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 20,984 3,559 5,399 7,867 10,887
Other revenue - - 379 8,920 -
----------- ---------- ---------- ---------- -----------
Total revenues 1,194,952 1,505,356 321,642 457,634 2,846,056
Operating expenses:
Direct costs of property sold 41,062 462,256 8,643 31,757 367,259
Selling, general & admin. expenses 484,363 443,135 311,525 376,384 511,864
Depreciation 1,730 1,468 2,571 2,462 2,681
Interest - 4,702 10,308 9,801 72,929
----------- ---------- ---------- ---------- -----------
Total operating expenses 527,155 911,561 333,047 420,404 954,733
----------- ---------- ---------- ---------- -----------
Operating income (loss) 667,797 593,795 (11,405) 37,230 1,891,323
Rental income - net 1,267 1,375 3,766 2,550 3,400
----------- ---------- ---------- ---------- -----------
Income (loss) from continuing ops. $ 669,064 $ 595,170 $ (7,639) $ 39,780 $ 1,894,723
Loss from discontinued operations - - - (67,326) (214,975)
----------- ---------- ---------- ---------- -----------
Net income (loss) $ 669,064 $ 595,170 $ (7,639) $ (27,546) $ 1,679,748
=========== ========== ========== ========== ===========
Page 23
TABLE 5: SELECTED INCOME STATEMENT DATA (CONTINUED)
Year Ended December 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ---------- ---------- ---------- -----------
Per Unit Data
Net income (loss) $ 0.37 $ 0.33 $ - $ (0.02) $ 0.92
Distributions $ - $ - $ - $ - $ -
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,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ---------- ---------- ---------- -----------
Cash, prepaid expenses and other
current assets $ 1,504,988 $ 823,274 $ 320,661 $ 312,485 $ 242,772
Properties held for sale and
property and equipment, net 521,128 489,777 921,485 846,591 855,491
Note receivable 142,457 146,265 - - -
Total assets 2,168,573 1,459,316 1,242,146 1,159,076 1,098,263
Accounts payable and accrued expenses 189,377 149,184 138,657 123,051 222,620
Deposit on contract - - 280,245 200,548 -
Long-term debt - - 108,282 112,876 117,454
Total liabilities 189,377 149,184 527,184 436,475 340,074
Partners' capital 1,979,196 1,310,132 714,962 722,601 758,189
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. Business - 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.
Page 24
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 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. Business - 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
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:
Page 25
- 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.
- 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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.
- PROPERTY SALES
Property sales represent individual building lots and other undeveloped
land sold for cash and the gross sales price of residential houses built or
acquired by the Partnership for resale. The revenue from these sales is
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 and U.S. Treasury securities 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.
Page 26
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 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 (a) 8.75%
and (b) 2% over the Bank's prime rate, and the maturity date was extended to
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. 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,
Page 27
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
==========
[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, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
- REVENUES
Overall, revenues decreased 21% to $1,194,952 in 2004, compared to
$1,505,356 in 2003. The principal components of revenues and Management's
explanations for year-to-year changes are set forth below.
- PROPERTY SALES
Revenue increased 143% to $1,173,968 in 2004, compared to $483,407 in
2003. Revenue in 2003 includes $458,862 from land sales in Boiling Spring Lakes,
and $24,545 from land sales in Pimlico Plantation. Revenue in 2004 is
attributable entirely to land sales in Boiling Spring Lakes.
BOILING SPRING LAKES
Revenue from the sale of unimproved individual lots was $1,114,146 in 2004,
compared to $228,849 in 2003. The number of lots sold during 2004 and 2003 was
86 and 27, respectively. Management attributes the 219% increase in the number
of lots sold to a strong increase in the local real estate market generally
during 2004, fueled, in part, by historically low interest rates and, in part,
by strong real estate markets in nearby beach communities, which had the effect
of diverting potential home buyers from those communities to less expensive
communities, such as Boiling Spring Lakes, and of allowing homeowners in those
communities to sell their properties at extremely favorable prices and to buy a
new home in a less expensive, inland community, such as Boiling Spring Lakes.
Management attributes the 387% increase in revenue to an increase in the average
sales price per lot. For 2004 and 2003, the average sales price per lot was
$12,955 and $8,476, respectively. Management
Page 28
attributes the 53% increase in the average sales price per lot primarily a
strong local real estate market that allowed for price increases, but also 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 fell 74%, to $59,821 in 2004 from
$230,013, in 2003. 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 3 acres of commercial
land sold in 2004 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 typically 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 development
was sold at an average of approximately $5,000 per acre in 2003 and
approximately $20,000 per acre in 2004. 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 2004.
- 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
Page 29
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 2004 was $20,984, compared to
$3,559 in 2003. The 490% increase is due principally to higher interest-bearing
cash balances in 2004 than in 2003, and to interest earned on U.S. Treasury
securities in 2004, whereas no such interest income was earned in 2003.
- DIRECT COSTS OF PROPERTY SOLD
Direct costs of property sold fell 92% to $41,062, compared to $462,256 in
2003. 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. Based upon such lower amount, direct costs of property sold
increased 109% in 2004 over 2003. The increase is due principally to the
increase in the number of individual lots sold.
- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses rose 9% to $484,363, compared
to $443,135 in 2003. The amount for 2003 includes $78,692 relating to the sale
of the assets of Fox Squirrel/The Lakes. Excluding such amount, expenses in 2004
rose 33% over the $364,443 for 2003. Management attributes the increase
principally to incentive bonuses paid to the Partnership's employees in respect
of 2004 and to state income taxes paid during 2004. During 2004 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 for taxes due in respect of 2002. As a limited partnership, the
Partnership generally passes income tax liability through to its partners. With
respect to 2004 and 2003, 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.
Page 30
- DEPRECIATION
Depreciation expense increased 18% to $1,730 in 2004, compared to $1,468
in 2003. Management attributes the increase principally to capital expenditures
made during 2003 and 2004 which increased the asset base being depreciated.
- INTEREST
Interest expense was $0 for 2004, compared to $4,702 for 2003. The 100%
decrease is due to the early repayment of long-term debt by the Partnership in
2003, after which repayment the Partnership has no long-term debt outstanding.
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.
Page 31
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 typically 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 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.
Page 32
- 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.
- 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.
Page 33
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 2004 or 2003, and
so no lines of credit were utilized and no debt incurred in connection with any
such construction during those years. In 2005 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. 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 2004, the Partnership generated $759,400 of net cash from operating
activities, compared to $1,114,588 of net cash from operating activities during
2003. The amount for 2003
Page 34
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. Excluding the effects of
recording the sale of the assets of Fox Squirrel/The Lakes, net cash provided by
operating activities in 2003 was $330,780, and the increase in 2004 over 2003
was $428,620. The 130% increase is due principally to the substantially higher
revenue from property sales in 2004 than in 2003.
- CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities was $371,783 in 2004, compared to
$465,026 in 2003. 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 was $38,516.
The change is due primarily to the investment of some cash in short-term U.S.
Treasury securities in 2004 and the payment in 2004 of $51,000 in assessments
relating to access to municipal water for land owned by the Partnership. Such
amount is treated as a capital expenditure.
- CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used in financing activities in 2004 was $96, compared to
$128,969 in 2003. 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 2005
The Partnership plans to rock some roads at an estimated cost of $40,000
during 2005. Such costs will be treated as a capital expenditure and will have
the effect of increasing the cost basis of the individual lots adjoining the
roads. Other capital projects may be undertaken, depending upon, among other
factors, the Partnership's cash position and Management's expectations of return
on investment.
Page 35
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, 2004, 2003, and 2002. Moderate
increases in costs and expenses incurred as a result of inflation have,
Management believes, largely been offset by 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, 2004, the Partnership had cash of $712,092, substantially
all of which is deposited in an account at a local financial institution bearing
interest at a variable rate. In addition, the Partnership held $497,946 in U.S.
Treasury securities having a maturity at the time of purchase of 90 days or
less, which the Partnership treats for accounting purposes as cash equivalents,
and a further $294,950 in U.S. Treasury securities with a maturity of one year
or less. During 2004, the Partnership owed no interest-bearing debt. Had the
average level of interest rates during 2004 been higher or lower by 100 basis
points or one percent (1%), the Partnership's net income would have been
approximately $8,979 more or less, respectively. The foregoing estimate of the
change in net income is based upon quarterly average balances.
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
Page 36
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 the interest
rate was 100 basis points or one percent (1%) high or lower that the actual,
lower interest rate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, "Item 15. Exhibits and Financial Statement Schedules," for
the response to this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The dismissal of PricewaterhouseCoopers LLP as the Partnership's
independent accountants on December 22, 2003 and the Partnership's engagement of
Lynch & Howard, P.A. in that capacity were disclosed in the Partnership's Annual
Report on Form 10-K for the year ended December 31, 2003.
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
Page 37
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
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.
ITEM 9B. OTHER INFORMATION
None.
Page 38
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, 48, 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.
Mr. Peter Metz resigned as Secretary and Director of the General Partner
during 2004.
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, 2004. To the Partnership's knowledge, during the fiscal year
ended December 31, 2004, all reporting persons complied with all Section 16(a)
filing requirements applicable to them.
Page 39
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.
There has been no change to or amendment of the Code of Ethics during 2004. 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., 2004 $80,000
General Partner
2003 80,000
2002 80,000
Notes:
[1] Excludes payments made to affiliates of the General Partner as described in
"Item 13. Certain Relationships and Related Transactions."
During 2004, payments made by the Partnership to the General Partner
totaled $80,000, representing general partner fees for the first three quarters
of 2004 as well as the fourth quarter of 2003. 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. As of December 31, 2004,
general partner fees accrued but not paid to Grace Property Management, Inc.
totaled $20,000, representing general partner fees for the fourth quarter of
2004. Such amount was paid during the first quarter of 2005. 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
Page 40
(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, 2004, the Partnership had a group life insurance plan
in place covering the full-time employees of the Partnership located in Boiling
Spring Lakes. The 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 AND
RELATED UNIT HOLDER MATTERS
As of March 23, 2005, the Partnership has 1,812,062 partnership units
issued and outstanding. Information as of March 23, 2005 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
Page 41
directors and executive officers of Grace Property Management, Inc. as a group
is set forth in Table 8, below.
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 (resigned as a director in 2004)[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.
Page 42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For 2004, 2003, and 2002, 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 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 2004, 2003, and 2002 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
2004 2003 2002
--------- ---------- ---------
General partner fee $ 80,000 $ 80,000 $ 80,000
Rent for office space 15,000 15,000 15,000
Consulting fees 95 13,587 337
Reimbursement of travel expenses 2,752 1,398 -
Interest on unpaid balances - - 594
An affiliate of the General Partner charges the Partnership for office
space used by officers of the General Partner. The amounts charged for 2004,
2003, and 2002 are set forth in Table 9, above. The amount paid by the
Partnership during 2004 was $15,000, which represents rent for the first three
quarters of 2004 as well as the last quarter of 2003. 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. At December 31, 2004, the
amount of accrued but unpaid rent was $3,750, which amount was paid during the
first quarter of 2005.
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 2004, 2003, and 2002 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 $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.
Page 43
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 2004, 2003, and 2002 are set forth in Table
9, above. At March 23, 2005 and December 31, 2004, the Partnership owed nothing
in respect of reimbursement of travel expenses.
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 2004, 2003, and 2002 are set forth in Table
9, above. The amount of interest paid during 2004, 2003, and 2002 were $0, $0,
and $594, respectively.
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, 2004 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. In addition, in connection with
the Partnership's 2003 and 2004 financial statements, PricewaterhouseCoopers,
LLP reissued its report for the year ended December 31, 2002. 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
were 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. The
engagement of Lynch & Howard, P.A. has been continued, and such firm has audited
the Partnership's financial statements for the fiscal year ended December 31,
2004, and will 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, 2005; June 30, 2005; and September 30, 2005. As of December 31, 2004,
the Partnership has not been billed by Lynch & Howard, P.A., in respect of its
audit of the Partnership's financial statements for the fiscal year
Page 44
ended December 31, 2004; however, the Partnership has accrued the fees that the
Partnership expects to pay to Lynch & Howard, P.A. during 2005 in connection
with such audit. Through March 23, 2005, there have been progress billings
totaling $7,500, which amounts have been paid during the first quarter of 2005.
TABLE 10: AGGREGATE AMOUNTS BILLED BY PRINCIPAL ACCOUNTANTS
2003-2004
2004 2003
--------- ----------
PricewaterhouseCoopers, LLP:
Accounting fees $ 2,978 $ 22,000 [a]
Expenses 100 1,968 [b]
--------- ----------
Total $ 3,078 $ 23,968
Lynch & Howard, P.A.
Accounting fees $ 21,000 [c] - [d]
Expenses - -
--------- ----------
Total $ 21,000 -
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, 2004 for fees relating to the audit of
the Partnership's 2004 financial statements but no amounts were billed as
of December 31, 2004. Through March 23, 2005, progress billings totaled
$7,500.
[d] $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.
AUDIT-RELATED FEES
There have been no billings in either 2004 or 2003 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.
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
Page 45
billings in either 2004 or 2003 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 2004 or 2003 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 46
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS
The documents filed as part of this report are listed in the Index to
Financial Statements set forth in Table 11, below.
TABLE 11: INDEX TO FINANCIAL STATEMENTS
Document Page
- ------------------------------------------------------------------- -------
The following financial information is contained within the Audited
Financial Statements:
Report of Lynch & Howard, P.A., independent registered F-1
public accounting firm
Report of PricewaterhouseCoopers, LLP, independent
registered public accounting firm F-2
Balance Sheets as of December 31, 2004 and 2003 F-3
Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 F-4
Statements of Changes in Partners' Capital for the
years ended December 31, 2004, 2003 and 2002 F-5
Statements of Cash Flows for the years
ended December 31, 2004, 2002 and 20032 F-6
Notes to Financial Statements F-7 -18
FINANCIAL STATEMENT SCHEDULES
The financial statement schedules filed as part of this report are listed
in the Index to Financial Statement Schedules set forth in Table 12, below. All
other required supplemental financial schedules are either contained within the
notes to the financial statements or are not applicable.
Page 47
TABLE 12: INDEX TO FINANCIAL STATEMENT SCHEDULES
Document Page
- ------------------------------------------------------- ----
Report of Lynch & Howard, P.A., independent registered
public accounting firm on Financial Statement
Schedules 69
Report of PricewaterhouseCoopers, LLP, independent
registered public accountung firm on Financial
Statement Schedules 70
Valuation and Qualifying Accounts 71
Real Estate and Accumulated Depreciation 72-73
EXHIBITS
A complete listing of exhibits, including those incorporated by reference,
is shown on Table 13, below. All other exhibits are not applicable.
TABLE 13: 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]
Page 48
TABLE 13: LIST OF EXHIBITS (CONTINUED)
Exhibit No. Description of Exhibit
- ----------- -----------------------------------------------------------------
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. Such agreement was filed as
Exhibit 10.6 to Form 10-K filed on March 30, 2004. [a]
10.7 Modification to Indemnification Agreement dated June 17, 2003
between the Partnership and WW-Golf & Services, LLC. Such
agreement was filed as Exhibit 10.7 to Form 10-K filed on
March 30, 2004. [a]
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.
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. Such appraisal was
filed as Exhibit 99.1 to Form 10-K filed on March 30, 2004. [a]
Notes:
[a] Incorporated herein by reference.
[THE REST OF THIS PAGE IS BLANK]
Page 49
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 30, 2005
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/ DAVIS P. STOWELL President and Director of March 30, 2005
------------------------ General Partner
Davis P. Stowell (Principal Executive Officer,
Principal Financial Officer,
Principal Accounting Officer)
[THE REST OF THIS PAGE IS BLANK]
Page 50
REEVES TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
REPORT ON AUDIT
YEAR ENDED DECEMBER 31, 2004
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners
Reeves Telecom Limited Partnership
Boiling Spring Lakes, North Carolina
We have audited the accompanying balance sheets of Reeves Telecom Limited
Partnership as of December 31, 2004 and 2003, and the related statements of
operations, changes in partners' capital and cash flows for the years then
ended. 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 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 audits in accordance with the standards of the Public Company
Accounting Oversight Board (U.S.). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Reeves Telecom Limited
Partnership as of December 31, 2004 and 2003, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ Lynch & Howard, P.A.
Raleigh, North Carolina
February 8, 2005
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
Reeves Telecom Limited Partnership:
In our opinion, the accompanying statements of operations, of partners' capital
and of cash flows for the year ended December 31, 2002 (appearing on pages F-4
through F-6 of the Reeves Telecom Limited Partnership 2004 Annual Report on Form
10-K) present fairly, in all material respects, the results of operations and
cash flows of Reeves Telecom Limited Partnership for the year 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
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides 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 Annual Report on Form 10-K (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 Annual Report on Form
10-K. 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, 2004 AND DECEMBER 31, 2003
2004 2003
---------- ----------
ASSETS
Cash $1,210,038 $ 822,517
Prepaid expenses and other current assets - 757
U.S. Treasury securities 294,950 -
Note receivable 142,457 146,265
Properties held for sale and property and equipment:
Properties held for sale 350,177 327,840
Sales property and equipment - net 170,951 161,937
---------- ----------
$2,168,573 $1,459,316
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued expenses $ 155,398 $ 115,109
Accrued expenses - affiliates 33,979 34,075
---------- ----------
Total Liabilities $ 189,377 $ 149,184
---------- ----------
PARTNERS' CAPITAL:
Issued and outstanding 1,812,062 units
at December 31, 2004 and 2003 $1,979,196 $1,310,132
---------- ----------
COMMITMENTS AND CONTINGENCIES
$2,168,573 $1,459,316
========== ==========
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
-------------------------------------
2004 2003 2002
---------- ---------- -----------
REVENUES:
Property sales $1,173,968 $ 483,407 $ 315,864
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 20,984 3,559 5,399
Other revenue - - 379
---------- ---------- -----------
Total Revenues $1,194,952 $1,505,356 $ 321,642
---------- ---------- -----------
OPERATING EXPENSES:
Direct costs of property sold $ 41,062 $ 462,256 $ 8,643
Selling, general and administrative expenses 484,363 443,135 311,525
Depreciation 1,730 1,468 2,571
Interest - 4,702 10,308
---------- ---------- -----------
Total Operating Expenses $ 527,155 $ 911,561 $ 333,047
---------- ---------- -----------
OPERATING INCOME (LOSS) $ 667,797 $ 593,795 $ (11,405)
Rental income - net 1,267 1,375 3,766
---------- ---------- -----------
NET INCOME (LOSS) $ 669,064 $ 595,170 $ (7,639)
========== ========== ===========
Income per partnership unit $ 0.37 $ 0.33 $ -
========== ========== ===========
Weighted average partnership units outstanding 1,812,062 1,812,062 1,812,062
========== ========== ===========
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
-----------------------------------
2004 2003 2002
---------- ---------- ---------
PARTNERS' CAPITAL AT BEGINNING OF YEAR $1,310,132 $ 714,962 $ 722,601
Net income (loss) 669,064 595,170 (7,639)
---------- ---------- ---------
PARTNERS' CAPITAL AT END OF YEAR $1,979,196 $1,310,132 $ 714,962
========== ========== =========
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
---------------------------------------
2004 2003 2002
----------- ----------- ---------
OPERATING ACTIVITIES:
Net income (loss) $ 669,064 $ 595,170 $ (7,639)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation 9,643 9,381 2,571
Changes in operating assets and liabilities:
Prepaid and other assets 757 17,980 (3,245)
Property held for sale - net 39,647 18,256 8,642
Golf club property and equipment - net - 442,587 -
Accounts payable and accrued expenses 40,289 31,214 (8,738)
----------- ----------- ---------
Net Cash Provided By (Used In) Operating Activities $ 759,400 $ 1,114,588 $ (8,409)
----------- ----------- ---------
INVESTING ACTIVITIES:
Purchase of land improvements and equipment $ (80,641) $ (38,516) $ (86,107)
Increase (decrease) in deposit on contract - (280,245) 79,697
Principal payment on note receivable 3,808 1,492 -
Purchase of US Treasury securities (294,950) - -
Note received from sale of golf club - (147,757) -
----------- ----------- ---------
Net Cash Used In Investing Activities $ (371,783) $ (465,026) $ (6,410)
----------- ----------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt $ - $ (108,282) $ (4,594)
Increase (decrease) in accrued expenses - affiliates (96) (20,687) 24,344
----------- ----------- ---------
Net Cash Provided By (Used In) Financing Activities $ (96) $ (128,969) $ 19,750
----------- ----------- ---------
NET INCREASE IN CASH $ 387,521 $ 520,593 $ 4,931
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 822,517 301,924 296,993
----------- ----------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 1,210,038 $ 822,517 $ 301,924
=========== =========== =========
Interest paid $ - $ 5,296 $ 9,714
=========== =========== =========
The Notes to Financial Statements are an integral part of this statement.
F-6
REEVES TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(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 liquidation 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, U.S. Treasury securities 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 10).
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 affect 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 TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(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 and other undeveloped
land sold for cash and the gross sales price of residential houses built
or acquired by the Partnership for resale. The revenue from these sales
is 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 10
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 TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(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 and U.S. Treasury securities 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 $10,964, $16,173 and $17,817 were expensed as
incurred during the years ended December 31, 2004, 2003 and 2002,
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 11 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, 2004 and 2003 is as follows:
F-9
REEVES TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(3) PROPERTIES HELD FOR SALE AND PROPERTY AND EQUIPMENT - CONTINUED
2004 2003
--------- ---------
Properties held for sale:
Boiling Spring Lakes land held for sale $ 755,983 $ 737,897
Residential house held for sale - net 142,434 150,347
--------- ---------
$ 898,417 $ 888,244
Less: Valuation allowance (548,240) (560,404)
--------- ---------
Total Properties Held for Sale $ 350,177 $ 327,840
--------- ---------
Sales property and equipment:
Land and land improvements $ 174,657 $ 162,502
Buildings 49,844 49,844
Equipment 10,184 10,184
--------- ---------
$ 234,685 $ 222,530
Less: Accumulated depreciation (63,734) (60,593)
--------- ---------
Total Sales Property and Equipment - Net $ 170,951 $ 161,937
--------- ---------
Total Properties Held for Sale and Property and
Equipment - Net $ 521,128 $ 489,777
========= =========
F-10
REEVES TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(4) INVESTMENTS
Investments consist of debt instruments that are direct obligations of or
guaranteed by the U.S. government recorded at cost. The fair market value
of the investments may fluctuate depending on changes in interest rates.
Fair market value at December 31, 2004 and 2003 was $294,950 and $0,
respectively. At December 31, 2004, 2003 and 2002, the net unrealized
gains were $1,974, $0 and $0, respectively. Cost at December 31, 2004 and
2003 was $292,976 and $0, respectively.
Investments recorded in cash and cash equivalents were $497,946 and $0 for
December 31, 2004 and 2003, respectively.
These unrealized gains would be realized if the investments were sold
before the maturity date. It is the policy of the Partnership to hold the
investments to maturity, resulting in no realized gain or loss.
(5) ACCRUED EXPENSES - AFFILIATES
A summary of accrued expenses owed to affiliates at December 31, 2004 and
2003 is as follows:
2004 2003
------- -------
General Partner's fees $20,000 $20,000
Rent 3,750 3,750
Fees to a former general partner 6,668 6,668
Consulting fee 3,561 3,657
------- -------
$33,979 $34,075
======= =======
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.
F-11
REEVES TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(6) RELATED PARTY TRANSACTIONS
The General Partner and its affiliates charged the Partnership for
services and office space for the years ended December 31, 2004, 2003 and
2002 as follows:
2004 2003 2002
--------- --------- --------
General Partner fees $ 80,000 $ 80,000 $ 80,000
Office space 15,000 15,000 15,000
Consulting fees 95 13,587 337
Reimbursement of travel expenses 2,752 1,398 -
Interest at 10% - - 594
--------- --------- --------
$ 97,847 $ 109,985 $ 95,931
========= ========= ========
(7) INCOME TAXES
No provision has been made for federal income taxes since income or loss
is includable in the partners' returns as they report to tax authorities
in their respective capacities as partners. During 2004 and 2003, the
Partnership expensed $23,025 and $5,500 of state income taxes paid.
Management believes that the administrative cost of allocating such
liability among the partners would be time consuming and complex.
Management, therefore, elected to pay such taxes, and reduce each
partner's pro rata share of income.
(8) 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.
F-12
REEVES TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
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:
U.S. TREASURY SECURITIES
The fair value of the U.S. Treasury securities has been estimated at
the quoted market price. The fair value of the U.S. Treasury
securities at December 31, 2004 and 2003 was estimated to be
$294,950 and $0, respectively.
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,
2004 and 2003 was estimated to be $142,457 and $146,265,
respectively.
(9) 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 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.
F-13
REEVES TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(9) BUSINESS SEGMENT DATA - CONTINUED
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, 2004, 2003 and 2002 for both segments have been
generated in the State of North Carolina; the exception to the foregoing
is $24,545 in revenue from property sales in 2003, generated in the State
of South Carolina. As of December 31, 2004, 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:
2004 2003 2002
----------- ----------- -----------
Operating income (loss):
Property and sale of golf club $ 667,797 $ 593,795 $ (11,405)
Golf club operations - - -
----------- ----------- -----------
667,797 593,795 (11,405)
=========== =========== ===========
Net income (loss):
Property and sale of golf club $ 669,064 $ 595,170 $ (7,639)
Golf club operations - - -
----------- ----------- -----------
669,064 595,170 (7,639)
=========== =========== ===========
Depreciation:
Property and sale of golf club $ 9,643 $ 9,381 $ 2,571
Golf club operations - - -
----------- ----------- -----------
9,643 9,381 2,571
=========== =========== ===========
Identifiable assets:
Property and sale of golf club $ 2,168,573 $ 1,459,316 $ 780,822
Golf club operations - - 461,324
----------- ----------- -----------
2,168,573 1,459,316 1,242,146
=========== =========== ===========
Capital expenditures:
Property and sale of golf club $ 80,641 $ 38,516 $ 86,107
Golf club operations - - -
----------- ----------- -----------
$ 80,641 $ 38,516 $ 86,107
=========== =========== ===========
F-14
REEVES TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(10) 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 is 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 July 15, 2008. The remaining balance on
the note receivable as of December 31, 2004 was $142,457.
Golf club revenues, prior to the sale, were $32,511 for 2001.
F-15
REEVES TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(11) 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. In a letter dated May 4, 2004,
NCDENR issued the final closing letter releasing the Partnership from
future monitoring and testing.
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 nine years ago and the Partnership has spent
approximately $113,000 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 began to phase in 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 TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(11) COMMITMENTS AND CONTINGENT LIABILITIES - CONTINUED
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, accordingly, the
Partnership has 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 effect on the Partnership and these
financial statements could be substantial.
ENDANGERED / PROTECTED SPECIES
Portions of Boiling Spring Lakes and surrounding area are known as 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.
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
F-17
REEVES TELECOM LIMITED PARTNERSHIP
BOILING SPRING LAKES, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(11) COMMITMENTS AND CONTINGENT LIABILITIES - CONTINUED
WATER LEVEL OF LAKES - CONTINUED
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 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.
BUILDING AND MAINTAINING ROADS
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. The Partnership may complete some or all of the
roads, but there is no contractual obligation to do so. The Partnership
has not set aside any money or entered into any bond, escrow, or trust
agreement to assure completion of the roads. It may difficult or
impossible for the Partnership to sell lots located on uncompleted roads.
The City of Boiling Springs Lakes will not assume any road that is not
paved with asphalt, and the City need not assume any paved road.
Accordingly, unless and until the Partnership completes a road and has it
paved with asphalt, and the road has been assumed by the City, the
Partnership will be responsible for maintaining such road and the
right-of-way. Since 2001, the Partnership has spent a total of
approximately $66,000 for rocking and paving roads. The failure by the
Partnership to provide proper maintenance of the roads and rights-of-way
which have not been assumed by the City may subject the Partnership to
substantially greater risk of litigation from persons adversely affected
by such failure. If such litigation were to be initiated, management
believes that the Partnership would prevail but that the cost of defending
the case could be material, and should the Partnership not prevail, the
cost of building any such road could be material.
F-18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003 and for the years then ended as referred to in our
report dated February 8, 2005, 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 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
February 8, 2005
Page 69
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON
FINANCIAL STATEMENT SCHEDULES
To the Partners of
Reeves Telecom Limited Partnership:
Our audit of the financial statements referred to in our report dated February
20, 2003 appearing in the 2004 Annual Report on Form 10-K of Reeves Telecom
Limited Partnership 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 70
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, 2004 $ 560,404 $ - $ (12,164) $ - $ 548,240
RE valuation allowance
For year ended December 31, 2003
RE valuation allowance 596,027 - (35,623) - 560,404
For year ended December 31, 2002
RE valuation allowance 600,170 - (4,143) - 596,027
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 71
REEVES TELECOM LIMITED PARTNERSHIP
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
Life Upon
Which
Cost Gross Depreciation
Capitalized Amount in Latest
Initial 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 $ 101,052 $ 755,983 $ - $ 755,983 May 1980 N/A
Improved lot held for resale - 130,047 28,213 158,260 15,826 142,434 April 1999 N/A
------------ ------------ ----------- ---------- ------------ ---------
$ - $ 784,978 $ 129,265 $ 914,243 $ 15,826 $ 898,417 N/A
Pimlico Plantation, SC:
Building lots and land - - - - - -
------------ ------------ ----------- ---------- ------------ ---------
Total at December 31, 2004 $ - $ 784,978 $ 129,265 $ 914,243 $ 15,826 $ 898,417
============ ============ =========== ========== ============ =========
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 $548,240 at
December 31, 2004. 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.
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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, 2004:
Balance at beginning of period $ 888,247 $ - $ 888,247
Additions during period:
Acquisitions - - -
Improvements 69,887 - 69,887
Deductions during period:
Cost of real estate sold (51,804) (7,913) (59,717)
----------------- --------------- -------------
Balance at end of period $ 906,330 $ (7,913) $ 898,417
================= =============== =============
YEAR ENDED DECEMBER 31, 2003:
Balance at beginning of period $ 950,039 $ - $ 950,039
Additions during period:
Acquisitions - - -
Improvements - - -
Deductions during period:
Cost of real estate sold (53,879) (7,913) (61,792)
----------------- --------------- -------------
Balance at end of period $ 896,160 $ (7,913) $ 888,247
================= =============== =============
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 (12,783) - (12,783)
----------------- --------------- -------------
Balance at end of period $ 950,039 $ - $ 950,039
================= =============== =============
NOTE:
(1) Cost of real estate sold does not reflect valuation allowances. See
Schedule II, "Valuation and Qualifying Accounts."
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