ITEM 1. BUSINESS
BACKGROUND
Reeves Telecom Limited Partnership (the "REGISTRANT" or the "PARTNERSHIP") is a South Carolina Limited Partnership 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 units were registered under the Securities Act of 1933 by the filing of a Registration Statement pursuant to Form S-14 (File No. 2-66452) which became effective April 8, 1980 and pursuant to which a Proxy Statement/Prospectus dated April 14, 1980 was mailed to all shareholders. Reference is made to said Registration Statement and said Proxy Statement/Prospectus for a description of the liquidation of the Corporation and the formation of the Partnership. 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.
BUSINESS OF REGISTRANT
GENERAL
The Partnership's business may be categorized into two industry segments: (i) owning, developing, selling, leasing, or otherwise dealing in real estate, and (ii) owning and operating a golf course and country club. See the audited financial statements for financial information about each segment. The principal asset of the Partnership is real estate for development located in the City of Boiling Spring Lakes, in Brunswick County, North Carolina (see Item 2, "Properties").
Prior 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. Were it not for cash generated from activities other than the sale of real estate during those years, the Partnership would likely have become insolvent.
Beginning in June 1993, Management has focused on the sale of individual lots on an all-cash basis and other means of generating revenue. The Partnership also became increasingly involved in the management and operation of the golf course and country club.
The golf course and country club were sold in March 2001. For financial reporting purposes, the assets that were sold remain on the Partnership's balance sheet at December 31, 2002 and are classified as assets held for sale or disposal, and the operations of the golf course and country club are classified as discontinued operations through the date of sale (see ""Fox Squirrel Country Club/The Lakes Country Club"").
BOILING SPRING LAKES
- REAL ESTATE SALES
Boiling Spring Lakes began as a 14,000-acre development commenced by the Corporation in 1962. Most of the land has been sold and that which remains lies within the City of Boiling Spring Lakes, North Carolina.
During fiscal 2000, the Partnership sold approximately 5,127 acres of land to The Nature Conservancy in two transactions. 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 individual undeveloped lots, small tracts and certain land suitable for commercial development for an aggregate of $774,150 and closed in September 2000. Reference is made to the more detailed information on both transactions set forth on Form 8-K filed with the Securities and Exchange Commission on June 29, 2000.
The revenue from real estate sales and type of land sold in Boiling Spring Lakes for each of the last five fiscal years ended December 31, other than from the two transactions with The
Nature Conservancy described above, is shown on Table 1, below (see "Pimlico Plantation," below, for revenue from real estate sales in Pimlico Plantation).
TABLE 1: REVENUE FROM REAL ESTATE SALES AND TYPE OF PROPERTY SOLD BOILING SPRING LAKES*
* Excludes the two transactions with The Nature Conservancy in 2000, which generated gross revenue of $2,400,000.
As used in Table 1 and throughout this Annual Report on Form 10-K: (i) the term "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); (ii) the term "unimproved lot" refers to an individual lot on which construction of a house has not yet been started; (iii) the term "improved lot" refers to an individual lot on which the construction of a house has been started and, in some cases, completed; (iv) the term "commercial land" refers to land zoned or otherwise intended by the
Partnership for commercial use; and (v) the term "other land" refers to all other types of unimproved land of varying sizes.
The one individual improved lot sold during 1999 generated a profit of approximately $11,200. The one individual improved lot sold during 1998 generated a profit of approximately $13,700.
Since the 1970's, health standards at Boiling Spring Lakes have become increasingly stringent regarding septic tanks and on-site sewage disposal. It is estimated that 70% to 75% of the property in Boiling Spring Lakes which would have complied with applicable rules and regulations a number of years ago no longer meet present health standards. This has had a detrimental effect on the real estate operations of the Partnership. In a few cases the problem could be cured by the use of drains, or by the scraping away of hard pan and adding fill dirt. In most instances, however, health departments have declared a majority of the areas as irremediable by ordinary measures. In such cases, the only solution would be to install area-wide sewer systems. While the Partnership does not have the resources to install a sewer system covering most or all of the land remaining in the Partnership's inventory, a small multi-user system has been installed on certain lots zoned for commercial use. 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 similar multi-user systems in other areas of the development in the future but currently has no plans to do so.
- FOX SQUIRREL COUNTRY CLUB / THE LAKES 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"). The Promissory Note has an initial principal amount of $712,500, bears interest at an annual rate of 9.5%, and matures on March 9, 2004. WW-Golf is obligated to make payments of principal and interest as follows: (i) monthly payments of $6,641 per month commencing April 9, 2001 up to and including February 9, 2004, and (ii) a final payment of $677,642 on March 9, 2004. The Partnership has a security interest in all of the assets sold until the Promissory Note has been paid in full. WW-Golf may extend the maturity of the Promissory Note if the Partnership has not completed remediation of certain environmental contamination from an
underground storage tank formerly located on the golf club grounds. The Partnership believes that all necessary remediation work has been completed as of December 31, 2001, although the North Carolina Department of Environment and Natural Resources ("NCDENR") has required that Partnership to continue monitoring and testing the subsurface groundwater. The results of tests conducted during 2002 and the first two months of 2003 show that the detectable concentrations of hydrocarbon contamination are substantially below standards. As a result, the Partnership is waiting for a closure letter from NCDENR, although it is possible that NCDENR may require the Partnership to conduct further monitoring and testing.
Shortly after acquiring Fox Squirrel/The Lakes, WW-Golf changed the name of the golf course and country club to The Lakes Country Club. For consistency and to avoid confusion, the golf course and country club are referred to herein as Fox Squirrel/The Lakes.
The Partnership's revenue and operating loss from Fox Squirrel/The Lakes for the last five fiscal years are shown on Table 2, below.
TABLE 2: REVENUE AND OPERATING LOSS FOX SQUIRREL COUNTRY CLUB / THE LAKES COUNTRY CLUB
The Partnership sold 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 Fiscal 2001 shown in Table 2 are for the period from January 1, 2001 until March 9, 2001. Since Revenue and Operating Loss for each of Fiscal 1998, 1999 and 2000 are for twelve-month periods, a comparison of Revenue and Operating Loss for Fiscal 2001 to prior years does not present an accurate portrayal of the comparative performance of Fox Squirrel/The Lakes.
In November 1995, the Partnership hired a new manager and golf pro of Fox Squirrel/The Lakes, replacing the former manager, who resigned. The new manager also leased the kitchen and dining area in the club house from the Partnership, which paid for certain improvements to the kitchen and dining area. Although the lease provided for the payment to the Partnership of monthly lease payments in varying amounts, the Partnership waived most lease payments to enable the dining service to become financially established. In February 1998, the manager and the Partnership agreed to the termination of the manager's employment agreement and related agreement to lease the kitchen and dining area. The Partnership agreed, among other things, to purchase certain assets from, and
assume certain liabilities of, the manager in exchange for cash consideration to the manager of $49,404. As a result of the foregoing, in February 1998, the Partnership became the operator of the dining service and continued to operate the dining service until Fox Squirrel/The Lakes was sold in March 2001.
- OTHER
From time to time the Partnership generates revenue from sources other than real estate sales and Fox Squirrel/The Lakes, including, for example, the sale of timber and pine straw on certain unsold lots. The amount of revenue generated from such sources during the last five fiscal years is shown on Table 3, below.
TABLE 3: OTHER REVENUE AND OTHER INCOME BOILING SPRING LAKES
During Fiscal 2001, the Partnership received $8,920 from the North Carolina Department of Environment and Natural Resources as reimbursement for a portion of the costs of removing an underground storage tank. The tank was removed during Fiscal 2000 in connection with the then-anticipated sale of Fox Squirrel/The Lakes. The Partnership recorded the reimbursement as Other Revenue since the reimbursement was received subsequent to the year in which the expense was incurred.
During Fiscal 2002, 2001 and 2000, the Partnership earned $3,766, $2,550 and $3,400, respectively, in net rental income. The Partnership recorded such income as Other Income.
During Fiscal 1999, the Partnership earned $1,266 from the sale of pine straw and timber. While additional revenue from such sources continues to be sought as a means of supplementing revenue from lot sales, such activities have not been a material source of revenue during the past five years due principally to the harvesting of seasoned timber performed in past years.
PIMLICO PLANTATION
Pimlico Plantation began as a development in South Carolina commenced by the Corporation. Virtually all of the land was sold in past years. Revenue from lot sales and the number of lots sold are set forth in Table 4, below.
TABLE 4: REVENUE FROM REAL ESTATE SALES AND TYPE OF PROPERTY SOLD PIMLICO PLANTATION
During the first quarter of 2002, the Partnership donated two park/recreational lots to the Pimlico Civic Club. These two lots had no realizable value and were carried on the Partnership's balance sheet at no cost. Consequently, the Partnership recorded no gain or loss from the donation. As of December 31, 2002, the Partnership owns one individual unimproved lot at Pimlico Plantation, comprising approximately 3/8-acre. The individual unimproved lot was sold in March 2003 for approximately $27,000. After such sale, the Partnership owns no assets in Pimlico Plantation.
SEASONALITY
The sale of real estate in North Carolina is seasonal. The Partnership has generally experienced slower than average lot sales in the period from November to January, inclusive.
MARKETING AND ADVERTISING
The Partnership's marketing and advertising plan emphasizes the print media to promote the sale of its land and, when available for sale, improved individual lots.
DEPENDENCE UPON CUSTOMERS
For the year ended December 31, 2000, $2,400,000 in revenue from property sales was attributable to one buyer. 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.
COMPETITION
The real estate market in Brunswick County, North Carolina is extremely competitive. Prospective residential property owners may buy from real estate developers, who generally sell lots suitable for building but who may also sell improved properties, from existing homeowners looking to relocate, and from 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 county water (as opposed to well water) and sewer service (as opposed to septic systems). Management believes that some of the Partnership's land has been and/or will be bought by other real estate developers, who may compete with the Partnership for land sales or sale of improved properties.
Many real estate developments in the market in which the Partnership operates 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, and the golf courses are, in some instances, the sites of professional championship tournaments. 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
As a result of the economic climate in 2002, the real estate market in which the Partnership operates significantly softened. Despite low interest rates, demand for buildable residential lots declined significantly, as indicated by the number of lots sold shown in Table 1, above. Through March 7, the core market continued to be weak. Market prices for buildable lots have generally declined from peak levels in the period 2000 to 2002. Management believes that demand for buildable lots and market prices for such lots in the southern coastal region of North Carolina will continue to be weak into the second quarter of 2003.
GOVERNMENT REGULATION
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, 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. 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. 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.
ENVIRONMENTAL LAWS AND REGULATIONS
The Partnership is subject to various federal, state and local laws, ordinances and regulations regarding environmental matters. Under these laws, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property, 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 is imposed whether or not the owner or operator 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 real estate 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 owner or operator of real estate may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. In connection with its ownership of real estate, the Partnership potentially may be liable for the foregoing costs.
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.
AVAILABILITY OF WATER AND SEWER SERVICES
The unavailability of Brunswick County 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. Extension of water and sewer services to the development has been discussed but there are currently no firm plans to do so. Moreover, 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. Since the Partnership does not have the resources to bear such costs, extension of water distribution and sewer lines to the Partnership's land is not likely to occur in the reasonable future.
EMPLOYEES
The Partnership has two full-time employees. Officers and employees of the General Partner and one or more of its affiliates devote a portion of their time to the management and affairs of the Partnership but such persons have other responsibilities and will devote only so 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, 2002, the Partnership held $301,924 in cash. Accounts payable and accrued expenses, including accrued expenses owed to affiliates, as of this date totaled $138,657.
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 Fiscal 1998, reserves totaling $650,000 had been established. In Fiscal 1998, reserves totaling $200,000 were established to fund, principally, certain capital improvements at Fox Squirrel/The Lakes and certain capital projects within the development, including a multi-user septic system installed on eight lots zoned for commercial use. During 1999, a reserve of $150,000 was established to purchase and refurbish a residential property for resale. Also during 1999, a reserve of $50,000 was established for certain capital improvements at Fox Squirrel/The Lakes. During Fiscal 2000, reserves of $175,000 were established to fund certain capital improvements within the development. During Fiscal 2001, reserves totaling $100,000 were established to fund repairs to a dam and certain road repair and improvement work within the development. During Fiscal 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.
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for further discussion of factors affecting liquidity.
CERTAIN RISK FACTORS
In addition to the risk factors described above, the Partnership's business is subject to the following principal risks:
- INCREASED OPERATING COSTS.
The Partnership is responsible for maintaining certain roads, most of which are unpaved, certain road rights-of-way, and one dam within the City of Boiling Spring Lakes. In recent years, the Partnership has not spent significant amounts toward maintaining such roads, rights-of-way and dam, and the amount required to maintain them may increase substantially, or the failure by the Partnership to provide proper maintenance in the future may subject the Partnership to substantially greater risk of litigation from persons adversely affected by such failure.
- ZONING AND OTHER REGULATIONS.
The Partnership owns approximately 244 acres of undeveloped, unplatted land intended for residential use and approximately 244 additional acres of undeveloped, unplatted land intended for commercial use. Should the Partnership be unable to subdivide all or a substantial portion of such acreage due to changes in zoning or other regulations, the ability of the Partnership to continue generating revenue from real estate sales or to effect a bulk sale of all or substantially all of its assets may be significantly adversely affected. In addition, the Partnership's operations and ability to effect a bulk sale of all or substantially all of its assets may be adversely affected in the event of a change in zoning of significant portions of land owned by the Partnership, and/or may require significant changes to or the abandonment of the phased development project described in Item 2, "Properties - Boiling Spring Lakes" or substantially greater expenditures by the Partnership than currently expected to complete the phased development project.
- NEW PROJECTS.
The Partnership may undertake one or more new projects within the development, including, without limitation, construction of a house on a lot owned by the Partnership. Management may fail to accurately gauge conditions prior to undertaking a new project, and therefore 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.
- FINANCIAL COVENANTS ON INDEBTEDNESS.
Required payments on the Partnership's indebtedness generally is not reduced if the Partnership's economic performance declines. If the Partnership's economic performance declines, cash flow from operations will be reduced. Under such circumstances, the Partnership may not be able to sell some of its assets quickly enough to avoid default on its indebtedness. If debt service payments cannot be made, the Partnership may sustain a loss, suffer foreclosure by a mortgagee, or suffer judgments against the Partnership.
- REAL ESTATE ASSETS ARE ILLIQUID.
Real estate generally cannot be sold quickly. It may not be possible to sell land on favorable terms when it is to the Partnership's economic advantage to do so.
- 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.
- 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.
ITEM 2.
ITEM 2. PROPERTIES
BOILING SPRING LAKES
Boiling Spring Lakes began as a 14,000-acre development commenced by the Corporation in 1962. Part of the tract is now within the City of Boiling Spring Lakes, which has approximately 2,270 residents. The city is in Brunswick County, 25 miles south of Wilmington, North Carolina, and 8 miles west 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 985 acres. As of December 31, 2002, the Partnership owns the following: (1) approximately 433 acres divided into 1,316 plotted lots, both recorded and unrecorded; (2) approximately 304 acres of undeveloped land, including 60 acres that are divided into six 10-acre tracts; (3) approximately 247 acres designated for commercial use, including five platted commercial lots comprising in aggregate approximately 3 acres; (4) a single family residence comprising 1,648 sq. ft. that is rented out by the Partnership; (5) 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 (6) a sales office comprising approximately 1,269 sq. ft. Although the Partnership sold the assets of Fox Squirrel/The Lakes in a transaction that closed on March 9, 2001, Fox Squirrel/The Lakes is treated for accounting purposes as a discontinued operation until such time as the total consideration received by the Partnership for such sale equals 25% of the aggregate sale price of $862,500. Based upon the original principal amount and the terms of the Promissory Note taken back by the Partnership at the closing of the transaction, the Partnership will not receive total consideration equal to 25% of the aggregate sale price until March 9, 2004, the maturity date of the Promissory Note. Therefore, as of December 31, 2002, the Partnership may be deemed to be the owner of Fox Squirrel/The Lakes, which is comprised of a surveyed 18- hole sprinklered golf course, club house and maintenance building situated on approximately 163 acres.
During 1988, the Partnership reduced the carrying value of the Boiling Spring Lakes property as a result of an appraisal obtained in December 1988 (see Note 3 of the audited financial statements). During 1993, 1995, 1998 and 2000, the Partnership received updated appraisals of the Boiling Spring Lakes property. Based upon the updated appraisals, no additional reduction to the carrying value was made. The Partnership expects to obtain an updated appraisal of the Boiling Spring Lakes property during Fiscal 2003.
Management intends to emphasize the sale of individual lots at Boiling Spring Lakes, concentrating on lots situated on existing paved roads and rocked roads. The Partnership intends to continue selling its land on an all-cash basis.
To increase lot sales, in 1995 Management initiated a project involving the construction of a house on a lot owned by the Partnership and the immediate marketing of the house and lot for sale, with the cost of construction financed with a line of credit from a local bank. After initial success in 1996, the Partnership continued the project in 1997, with the sale of two improved lots during the year; the first was sold for $115,000 and generated a profit of
approximately $20,000, and the second was sold for $128,000 and generated a profit of approximately $17,100. In Fiscal 1998, the Partnership sold one improved lot for $117,300, generating a profit of approximately $13,700. During Fiscal 1999, the Partnership sold one improved lot for approximately $130,800, generating a profit of approximately $11,200. In view of rising construction costs and decreased margins, the Partnership elected to suspend the project in 2000 and did not construct any houses during Fiscal 2000, 2001, or 2002. Management may resume the project during Fiscal 2003.
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 house is sold, construction will begin immediately on an additional house.
PIMLICO PLANTATION
Pimlico Plantation is situated in Berkeley County, near Charleston, South Carolina. Pimlico was developed by the Corporation and its predecessors, and as a result of land sales has been largely wound down. As of December 31, 2002, the Partnership owns only one residential lot, comprising approximately 3/8-acre, at this location. This individual unimproved lot was sold by the Partnership in March 2003. Consequently, after such sale, the Partnership owns no assets in Pimlico Plantation.
ITEM 3.
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.
In the past, litigation has been filed against the Partnership claiming breach of contract because lots guaranteed in the sales contract as being "high, dry and suitable for building" will not pass current county health department requirements regarding the installation of septic tanks and on-site sewage disposal systems. Management contends this language does not constitute a
guarantee of soil conditions for sewer purposes and that even if it did, installation and use of septic tanks on these lots would have been permitted under county regulations in effect prior to August 1976 and that it had no way of knowing that stricter regulations would later be enacted. In the event litigation is filed which results in an unfavorable ruling, possible remedies could include: refunding the purchase price of the lots; building nitrification fields with fill dirt that would allow installation of sewage disposal systems on the lots; providing the litigants with lots that will pass current county health department requirements; and paying monetary damages. If mandated, the cost of such remedial action in the aggregate could be substantial. No provision for this contingent liability has been made in the accompanying financial statements; however, at December 31, 2002, no suits or claims are pending against the Partnership related to this matter.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNIT HOLDERS
No matters were submitted to a vote of unit holders during Fiscal 2002.
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PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S PARTNERSHIP UNITS AND RELATED SECURITY MATTERS
The partnership units are not registered on any exchange, 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.
As of December 31, 2002 there were 1,943 registered holders of partnership units, including 592 registered holders of an aggregate of 67,129 shares of Corporation common stock which have yet to be exchanged for partnership units. The total number of record holders is not substantially changed from December 31, 2001.
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, in the absence of enhanced prospects for the development as a whole, a bulk sale of assets for cash is extremely difficult to achieve. See Part I, Item 2, "Properties - Boiling Spring Lakes." Absent such a sale, Management believes that the best use of the current cash balance and cash surpluses, if any, generated in future fiscal years is to preserve or improve the overall value of the Partnership's assets by (i) undertaking certain infrastructure and other improvements in the development, (ii) undertaking on a limited scale home construction on lots owned by the Partnership to demonstrate the viability of larger scale building programs, (iii) making certain other real estate-related investments in or near Boiling Spring Lakes, and (iv) keeping expenses as low as possible. 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. There can be no assurance, however, that sufficient cash will be generated from operations to successfully implement Management's plan.
Consistent with such plan and in view of the costs associated with a distribution to all partners, Management believes it would be impractical and imprudent to make a general distribution prior to the sale of all or substantially all of the Partnership's assets, or such time as the Boiling Spring Lakes development, as a whole, has been established to operate at a level sufficient to consistently generate revenues in excess of expenses and capital expenditures. However, from time to time, in accordance with applicable securities laws, the Partnership may utilize excess cash by repurchasing partnership units, although there are currently no plans to do so. Since the amount of excess cash available for such purpose cannot be estimated at this time due to the highly variable nature of the Partnership's cash flow, there can be no assurance as to the number of partnership units which will actually be repurchased, if any such repurchases will, in fact, occur, or the prices at which such repurchases, if any, will be made. As of the date of this Annual Report on Form 10-K, none of the Partnership, the General Partner, or any affiliate of either of the foregoing has made any filing with the Securities and Exchange Commission with respect to any planned repurchases of partnership units.
ITEM 6.
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
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
ITEM 7.
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 attached to this report. Certain amounts in prior years have been reclassified to conform to the presentation in the current year.
CRITICAL ACCOUNTING POLICIES
The Partnership's discussion and analysis of its financial condition and results of operations are based upon the Partnership's financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The Partnership believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its financial statements.
- PROPERTY SALES AND REALIZABILITY OF CARRYING VALUE OF PROPERTIES HELD FOR SALE.
Property sales represent primarily individual building lots sold for cash and the gross sales price of residential houses built or acquired by the Partnership for resale. 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. The Partnership obtains appraisals periodically 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.
- ACCOUNTING FOR SALE OF FOX SQUIRREL/THE LAKES.
The Partnership closed a sale agreement for Fox Squirrel/The Lakes on March 9, 2001. Under the agreement, the Partnership received $150,000 in cash and a note receivable for $712,500. The note receivable accrues interest at 9.75% per annum, payable monthly, maturing on March 9, 2004. The note receivable is collateralized by a first mortgage on the country club. Since the cash down payment represents less than 25% of the total consideration paid for the assets, the transaction is 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: (a) the sold assets remain on the Partnership's balance sheet as assets held for sale or disposal, (b) cash received from the buyer be shown as a deposit on contract, and (c) payments received from the buyer in respect of the note receivable be treated as an increase in the deposit.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
For the year ended December 31, 2002, revenue from the sale of real estate was $315,864, all of which is attributable to land sales in Boiling Spring Lakes. For the year ended December 31, 2001, revenue from the sale of real estate was $440,847, which is comprised of $420,743 that is attributable to land sales in Boiling Spring Lakes, and $20,104 that is attributable to land sales in Pimlico Plantation, SC.
With respect to Boiling Spring Lakes, Management attributes the 25% decrease in revenue from land sales principally to weaker demand for buildable residential lots during 2002 as compared to 2001, which, in turn, is due primarily to poorer economic conditions generally.
Revenue from the sale of individual unimproved lots was $250,454 for 2002, compared to $347,832 for 2001. The 28% decrease is due to a smaller number of lots sold during 2002 than during 2001. The number of individual unimproved lots sold during 2002 and 2001 was 19 and 68, respectively, a decrease of 72%. An increase in the average price per lot sold was more than offset by the overall decrease in total lots sold. Revenue from the sale of commercial land for 2002 and 2001 was $65,410 and $0, respectively. Revenue from the sale of other land for 2002 and 2001 was $0 and $72,911, respectively.
For the year ended December 31, 2002, direct cost of property sold was $8,643, all of which relates to land sold in Boiling Spring Lakes. For the year ended December 31, 2001, direct cost of property sold was to $31,757, of which amount $31,507 relates to land sold in Boiling Spring Lakes and $250 relates to land sold in Pimlico Plantation, SC. With respect to Boiling Spring Lakes, Management attributes the 73% decrease in direct cost of property sold principally to a smaller number of lots sold during 2002 than during 2001.
Selling, general and administrative expenses for 2002 were $311,525, compared to $376,384 for 2001. Management attributes the 17% decrease principally to lower legal fees, which is due primarily to the conclusion during 2001 of certain litigation and the payment during 2001 of legal fees in connection with the litigation, and that no such legal fees were incurred during 2002; lower general partner's fees, which reflect the fact that following the sale of Fox Squirrel/The Lakes in 2001, the General Partner has had to devote less time to the affairs of the Partnership than in the past; and to lower real estate taxes, which reflect the land sales during 2001.
Depreciation was $2,571 for 2002, compared to $2,462 in 2001. Management attributes the 4% increase principally to capital expenditures incurred during 2001 and 2002.
Interest expense was $10,308 for 2002, compared to $9,801 in 2001. Management attributes the 5% increase in interest expense primarily to a slightly higher average amount of interest-bearing liabilities outstanding during 2002 than during 2001.
For the years ended December 31, 2002 and 2001, other income was $3,766 and $2,550, respectively. Management attributes the 48% increase to higher rental income received in respect of the house owned by the Partnership.
Fox Squirrel/The Lakes is classified as a discontinued operation. The Partnership's financial results for Fiscal 2002 include none of the operations of Fox Squirrel/The Lakes, since the assets were sold during 2001, and the financial results for Fiscal 2001 reflect the operations of Fox Squirrel/The Lakes only for the period from January 1, 2001 through March 9, 2001, the closing date of the sale. In addition, the results for 2001 include certain post-closing adjustments totaling $4,390, comprised of $1,580 in adjustments to revenue (reflecting a revision to the allocation of revenue made at closing) and $2,810 in adjustments to selling, general and administrative expenses (reflecting a revision to the allocation of expenses made at closing).
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
For the year ended December 31, 2001, revenue from the sale of real estate was $440,847, which is comprised of $420,743 that is attributable to land sales in Boiling Spring Lakes, and $20,104 that is attributable to land sales in Pimlico Plantation, SC. For the year ended December 31, 2000, revenue from the sale of real estate was $2,835,169, all of which is attributable to land sales in Boiling Spring Lakes.
With respect to Boiling Spring Lakes, Management attributes the 85% decrease principally to the sale of land to The Nature Conservancy in two separate transactions during 2000 as described in Part I, Item 1, "Business of Registrant - Boiling Spring Lakes." Other than from such transactions, revenue from the sale of real estate in Fiscal 2000 was $435,169. Management attributes the 3% decrease in revenue principally to the relative mix of unimproved 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. The Partnership sold a larger number of unimproved lots in 2001 than in 2000, 68 as compared to 55, but the average sales price per lot in 2001 was $5,115, compared to $6,886 for 2000. During the year ended December 31, 2002, the Partnership sold 23 acres of unplatted land for $72,911, compared to only 2 acres of unplatted land for $56,437 during the year ended December 31, 2000. The Partnership's sales of unplatted land are sporadic, highly variable, and largely beyond the Partnership's control. The average sales price per acre of unplatted land varies widely. As such, year-to-year comparisons may not accurately depict the Partnership's on-going real estate operations.
Selling, general and administrative expenses for 2001 were $376,384, compared to $511,864 in 2000. Management attributes the 26% decrease principally to lower general partner's fees, which reflect the fact that following the sale of Fox Squirrel/The Lakes, the General Partner has had to devote less time to the affairs of the Partnership than in the past; and lower real estate taxes, which reflect the land sales during 2001.
For the year ended December 31, 2001, direct cost of property sold was to $31,757, of which amount $31,507 relates to land sold in Boiling Spring Lakes and $250 relates to land sold in Pimlico Plantation, SC. For the year ended December 31, 2000, direct cost of property sold was $367,259, all of which relates to land sold in Boiling Spring Lakes. With respect to Boiling Spring Lakes, Management attributes the 91% decrease principally to the sale of land to The Nature Conservancy during 2000.
Depreciation was $2,462 in 2001, compared to $2,681 in 2000. Management attributes the 8% decrease principally to more assets being fully depreciated in 2001 than in the prior year.
Interest expense was $9,801 in 2001, compared to $72,929 in 2000. Management attributes the 87% decrease in interest expense primarily to a lower average outstanding balance of indebtedness during 2001 to the General Partner and its affiliates. The General Partner and its affiliates charge the Partnership interest on accrued but unpaid expenses.
Fox Squirrel/The Lakes is classified as a discontinued operation. The Partnership's financial results for Fiscal 2001 reflect the operations of Fox Squirrel/The Lakes only for the period from January 1, 2001 through March 9, 2001, the closing date of the sale. In addition, the results for 2001 include certain post-closing adjustments totaling $4,390, comprised of $1,580 in adjustments to revenue (reflecting a revision to the allocation of revenue made at closing) and $2,810 in adjustments to selling, general and administrative expenses (reflecting a revision to the allocation of expenses made at closing). As a result, the Partnership's financial results for 2001 reflect operations of Fox Squirrel/The Lakes for a significantly shorter period of time than do the results for 2000. For Fiscal 2001 and 2000, revenues and expenses for Fox Squirrel/The Lakes are set forth in Table 7, below.
TABLE 7: FOX SQUIRREL COUNTRY CLUB / THE LAKES COUNTRY CLUB SUMMARY OF REVENUES AND EXPENSES - 2001 AND 2000
Liquidity and Capital Resources
The Partnership requires cash primarily for the payment of overhead, operating expenses and capital expenditures incurred in connection with real estate sales and, until the sale of Fox Squirrel/The Lakes in March 2001, the operation of Fox Squirrel/The Lakes. Historically, the Partnership has met its liquidity requirements by accruing general partners 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, by 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 increase the amount of its credit facility, negotiate additional 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. From time to time, the bank will 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 either 2001 or 2002, and so no lines of credit were utilized and no debt incurred in connection with any such construction during those years. In 2003 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 residential lot. The Partnership has leased 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 but may elect to sell the property, at which time the remaining balance on the financing will be repaid. As of December 31, 2002, the unpaid principal on such financing was $108,282.
During Fiscal 2002, the Partnership used $8,409 of cash in operating activities, compared to $10,366 of cash used in operating activities during 2001. Management attributes the 19% decrease principally to the payment of certain accrued expenses in respect of 2002.
Cash used in investing activities was $6,410 in Fiscal 2002, compared to $165,264 of cash provided in Fiscal 2001. The amount for 2002 includes $79,697 received from WW-Golf in principal and interest paid on the Promissory Note. The amount for 2001 includes $209,773 received from WW-Golf as part of the consideration for the sale of Fox Squirrel/The Lakes. Management attributes the change in cash provided by (used in) investing activities to the receipt during 2001 of $150,000 of the initial down payment from WW-Golf in the transaction involving Fox Squirrel/The Lakes.
Cash provided by financing activities in Fiscal 2002 was $19,750, compared to $81,918 of cash used in 2001. Management attributes the change in cash provided by (used in) financing activities principally to the timing of payments of accrued expenses to affiliates.
During Fiscal 2003 Management expects capital expenditures to include approximately $20,000 to complete repairs being made to a dam, the maintenance of which is the Partnership's responsibility, and up to approximately $40,000 to improve certain roads within the development. Such capital expenditures are expected to be funded from existing cash balances. Other capital projects may be undertaken, depending upon, among other factors, the Partnership's cash position and Management's expectations of return on investment.
IMPACT OF INFLATION
Generally, demand for real estate is adversely affected by increases in interest rates. To the extent that a significant increase in the rate of inflation leads to a significant increase in interest rates, the Partnership's ability to sell real estate may be significantly adversely affected.
Inflation has had only a minor impact on the Partnership's operations during the fiscal years ended December 31, 2002, 2001 and 2000. Moderate increases in costs and expenses incurred as a result of inflation have, Management believes, largely been offset by moderate increases in the sales prices of land sold.
ITEM 7A.
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 stable, the market for real estate increases. The Partnership does not enter into derivative contracts for its own account to hedge against the risk of changes in interest rates.
At December 31, 2002, the Partnership had cash of $301,924, substantially all of which is deposited in interest-bearing accounts at a local financial institution, and owed $108,282 to that same institution in the form of long-term debt secured by a mortgage on an improved residential lot purchased in 1999. The interest rate earned on the cash balance is variable. The interest rate on the outstanding principal amount of the loan is fixed at 8.65%. Had the average level of interest rates during 2002 been higher or lower by 100 basis points or one percent (1%), the Partnership would have earned approximately $3,000 more or less, respectively, on its cash balances. Since the interest rate on the Partnership's outstanding debt is fixed, there would have been no change in interest expense.
The fair value of the Partnership's long-term debt has been estimated by discounting the future cash flows using the current rates offered for debt issues with similar characteristics. In particular, the Partnership has been advised by its lender that the interest rate on a 15-year fixed rate mortgage in Brunswick County, North Carolina generally as of December 31, 2002 was 6.75%. Based on such 6.75% borrowing rate, at December 31, 2002, the fair value of the Partnership's long-term debt is $112,347, compared to the carrying value of $108,282.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part III, Item 14, "Exhibits, Financial Statement Schedules, and Reports on Form 8-K," for response to this item.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements between the Partnership and PricewaterhouseCoopers LLP on accounting and financial matters.
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PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF GENERAL PARTNER
Grace Property Management, Inc. is a Delaware corporation engaged in the business of real estate management. It is owed 90% by Natalie Brinckerhoff, as trustee for John S. Grace; 5% by the Bank of Butterfield Executor & Trustee Company, as trustee for John S. Grace, and 5% by the Estate of Oliver R. Grace, Mr. Grace being a former director of Registrant's predecessor.
The Partnership knows of no late or delinquent Form 3, 4 or 5 filings.
INDEMNIFICATION OF EXECUTIVE OFFICERS
None.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The total compensation paid to the General Partner during each of the last three fiscal years is set forth in Table 8, below.
TABLE 8: SUMMARY COMPENSATION TABLE
Prior to Fiscal 2000, except for $25,000 paid in April 1990, the Partnership had not paid the General Partner its general partner's fee since January 1986, although they have been provided for in the Partnership's financial statements. During Fiscal 2000, the Partnership paid to the General Partner $1,018,500, representing unpaid general partner's fees through June 30, 2000. During 2001, the Partnership paid to the General Partner $143,750, representing unpaid general partner's fees from July 1, 2000 through September 30, 2001. During 2002, the Partnership paid to the General Partner $60,000, representing unpaid general partner's fees from October 1, 2001 through June 30, 2002. As of December 31, 2002, general partner's fees accrued but not paid to Grace Property Management totaled $40,000. The Partnership has no ongoing plan or arrangement with respect to future remuneration to Grace Property Management other than to accrue interest (at an annual rate of 10%, compounded quarterly) on the unpaid balance when cash flow is insufficient to pay general partner's fees.
As of December 31, 2002, 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 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.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 2002, the Partnership has 1,812,062 partnership units issued and outstanding. Information with respect to the principal holders of record known to the Partnership to beneficially own more than five percent (5%) of the outstanding voting securities is set forth in Table 9, below.
TABLE 9: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Estate of Oliver R. Grace beneficially owns 421,680 units (including 39,950 units held in trusts of which the Estate of Oliver R. Grace is the trustee). In addition, other members of the family beneficially own an additional 218,665 units, which represents approximately 12.0% of the units issued and outstanding. The Estate of Oliver R. Grace disclaims beneficial ownership with respect to these additional units as well as the 39,950 units held in certain trusts.
The General Partner owns 25,100 partnership units, representing approximately 1.4% of all units issued and outstanding.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For fiscal years 2002, 2001, and 2000, the General Partner and its affiliates charged the Partnership for general partner's fees, legal services, office space used by various members of the Partnership's management, and interest on unpaid balances at an annual rate of 10%, compounded quarterly, as set forth in Table 10, below (see Item 11, "Executive Compensation"). All of such charges have been provided for in the Partnership's financial statements.
TABLE 10: CHARGES BY GENERAL PARTNER AND ITS AFFILIATES
Amounts paid by the Partnership to the General Partner and its affiliates during 2002 reflect amounts previously accrued and unpaid and are $11,250 for rent and $60,000 for general partner's fees. In addition, an affiliate of the General Partner was paid $337 for consulting fees in connection with the sale of Fox Squirrel/The Lakes, as further described later in this section. At December 31, 2002, amounts accrued and unpaid to the General Partner and its affiliates are $7,500 for rent, $40,000 for general partner's fees, and $594 for interest, all of which amounts will be paid by the end of the First Quarter of Fiscal 2003.
Amounts paid by the Partnership to the General Partner and its affiliates during 2001 reflect amounts previously accrued and unpaid and are $11,500 for legal fees, $18,750 for rent, $143,750 for general partner's fees, and $4,517 for interest. In addition, an affiliate of the General Partner was paid $3,982 for consulting fees in connection with the sale of Fox
Squirrel/The Lakes, as further described later in this section. At December 31, 2001, amounts accrued and unpaid to the General Partner and its affiliates are $3,750 for rent and $20,000 for general partner's fees, and such amounts were paid in the First Quarter of Fiscal 2002.
Amounts paid by the Partnership to the General Partner and its affiliates during 2000 reflect amounts previously accrued and unpaid, and are $135,228 for legal fees, $101,404 for rent, $30,000 for commissions, $1,018,500 for general partner's fees, and $722,678 for interest. In addition, an affiliate of the General Partner was paid $240,000 for consulting fees in connection with the sale of land to The Nature Conservancy, which amount was included in direct costs of property sold.
In connection with the sale of the assets of Fox Squirrel/The Lakes in March 2001, an affiliate of the General Partner was paid consulting fees of $3,750 at closing. The Partnership made further payments of consulting fees to such affiliate equal to 2 1/2% of the principal payments received in respect of the promissory note issued by WW-Golf to the Partnership, as and when such principal payments were collected by the Partnership. During 2002 and 2001, such additional consulting fee payments totaled $337 and $232, respectively. Assuming that all future payments of principal on the promissory note are received in a timely manner, the Partnership will pay additional consulting fees to such affiliate of $370 in Fiscal 2003, and $16,873 in Fiscal 2004. During the First Quarter of Fiscal 2003, the Partnership paid consulting fees totaling $89.
Except for the preceding items, there were no transactions between Management (or the immediate families of Management) and the Partnership during the fiscal year ended December 31, 2002 or thereafter. Further, there were no other related party transactions and there existed no indebtedness to the Partnership from Management (or any member of the immediate family of Management).
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this annual report on Form 10-K, the General Partner, under the direction of John S. Grace and Davis P. Stowell, President and Vice President, respectively, of the General Partner (since the Partnership has no executive officers, Messrs. Grace and Stowell carry out the responsibilities of the chief executive officer and chief financial officer, respectively, of the Partnership), carried out an evaluation of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, Messrs. Grace and Stowell concluded that the Partnership's disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in the Partnership's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in the
Partnership's internal controls or in other factors that could significantly affect internal controls subsequent to the date that evaluation was carried out.
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PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The documents filed as part of this report are listed in the Index to Financial Statements and Supplemental Schedules set forth in Table 11, below.
TABLE 11: INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
All other required supplemental financial schedules are either contained within the notes to the financial statements or are not applicable.
REPORTS ON FORM 8-K
No current reports on Form 8-K were filed during the fourth quarter of the fiscal year ended December 31, 2002.
INDEX TO EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A complete listing of exhibits, including those incorporated by reference, is shown on Table 12, below. All other exhibits or financial statement schedules are not applicable.
TABLE 12: LIST OF EXHIBITS
NOTES: [a] Incorporated herein by reference.
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
By: /s/ JOHN S. GRACE ----------------------- John S. Grace President
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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, John S. Grace, certify that:
1. I have reviewed this annual report on Form 10-K of Reeves Telecom Limited Partnership;
2. Based on my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual reports (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes to internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 /s/ JOHN S. GRACE -------------------------------- John S. Grace President of Grace Property Management, Inc., General Partner Principal Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Davis P. Stowell, certify that:
1. I have reviewed this annual report on Form 10-K of Reeves Telecom Limited Partnership;
2. Based on my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual reports (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes to internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 /s/ DAVIS P. STOWELL --------------------------------- Davis P. Stowell Vice President of Grace Property Management, Inc., General Partner
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Partners of Reeves Telecom Limited Partnership:
Our audits of the financial statements referred to in our report dated February 20, 2003, and appearing on page 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.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina February 20, 2003
REEVES TELECOM LIMITED PARTNERSHIP FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001
REEVES TELECOM LIMITED PARTNERSHIP INDEX
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Reeves Telecom Limited Partnership:
In our opinion, the accompanying balance sheets and the related statements of operations, of partners' capital (deficit), and of cash flows present fairly, in all material respects, the financial position of Reeves Telecom Limited Partnership (the "Partnership") at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 12 to the financial statements, 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. 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 February 20, 2003 Raleigh, North Carolina
REEVES TELECOM LIMITED PARTNERSHIP BALANCE SHEETS DECEMBER 31, 2002 AND 2001
The accompanying notes are an integral part of these financial statements.
REEVES TELECOM LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
The accompanying notes are an integral part of these financial statements.
REEVES TELECOM LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' CAPITAL/(DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
The accompanying notes are an integral part of these financial statements.
REEVES TELECOM LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
The accompanying notes are an integral part of these financial statements.
REEVES TELECOM LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS
1. PLAN OF LIQUIDATION
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, at the discretion of the Board of Directors, be transferred 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. These financial statements have been prepared on a basis of going concern.
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 cash to its stockholders of $.90 per share on February 29, 1980 and $2.30 per share on May 15, 1980.
Remaining assets relate primarily to land held for sale and cash, generated primarily from the sale of timber, real estate and operation of a golf club (Note 3). During the first quarter of 2001, the Partnership sold the golf club (Note 13). The Partnership intends to continue to sell lots in the normal course of business as a plan of liquidation 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 change its plans from the current longer-term liquidation approach to a bulk sale and/or abandonment, the net amount realized could be less than the carrying value, which could result in liabilities exceeding the Partnership's assets.
The Partnership's Managing General Partner is Grace Property Management, Inc.
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.
REEVES TELECOM LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
PROPERTY SALES
Property sales represent individual building lots sold for cash and the gross sales price of residential houses built or acquired by the Partnership for resale. 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 an impairment may have occurred in accordance with the provisions of Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets".
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Partnership considers cash as cash on hand, cash deposited in financial institutions and money market accounts with maturities of less than ninety days at the date of purchase. Cash equivalents are stated at cost, which approximates market value.
CONCENTRATIONS
The Partnership's cash is placed in a major domestic bank. At December 31, 2002, the amounts on deposit exceeded the FDIC insurance limit by approximately $225,000.
ADVERTISING COSTS
Advertising costs of $17,817, $19,570 and $33,018 were expensed as incurred during the years ended December 31, 2002, 2001 and 2000, respectively.
REEVES TELECOM LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS
3. PROPERTIES HELD FOR SALE AND PROPERTY AND EQUIPMENT
During December 2000, the Partnership obtained an appraisal of the properties held for sale and the country club. Based upon the appraisal, the valuation allowance established in previous years was considered adequate.
A summary of properties held for sale and property and equipment at December 31, 2002 and 2001 is as follows:
REEVES TELECOM LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS
4. ACCRUED EXPENSES, AFFILIATES
A summary of accrued expenses owed to affiliates at December 31, 2002 and 2001 is as follows:
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 by the Partnership, which interest is accrued by the Partnership as being owed to such entities. See Note 6 for additional information regarding related party transactions.
5. LONG-TERM DEBT
Long-term debt at December 31, 2002 and 2001 consists of the following:
Principal maturities of long-term debt for the years subsequent to December 31, 2002 are as follows:
2003 $ 5,138 2004 5,601 2005 97,543 --------- $108,282 =========
REEVES TELECOM LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS
6. RELATED PARTY TRANSACTIONS
The General Partner and its affiliates charged the Partnership for services and office space for the years ended December 31, 2002, 2001 and 2000 as follows:
7. LITIGATION
In the past, litigation has been filed against the Partnership claiming breach of contract because lots guaranteed in the sales contract as being "high, dry and suitable for building" will not pass current county health department requirements regarding the installation of septic tanks and on-site sewage disposal systems. Management contends this language does not constitute a guarantee of soil conditions for sewer purposes and that even if it did, installation and use of septic tanks on these lots would have been permitted under county regulations in effect prior to August 1976 and that it had no way of knowing that stricter regulations would later be enacted. In the event litigation is filed which results in an unfavorable ruling, possible remedies could include: refunding the purchase price of the lots; building nitrification fields with fill dirt that would allow installation of sewage disposal systems on the lots; providing the litigants with lots that will pass current county health department requirements; and paying monetary damages. If mandated, the cost of such remedial action in the aggregate could be substantial. No provision for this contingent liability has been made in the accompanying financial statements; however, at December 31, 2002 no suits or claims are pending against the Partnership related to this matter.
8. INCOME TAXES
Results of operations of the Partnership are taxable to the partners and no recognition of Federal and state income tax is included in the financial statements.
9. LEASES
The Company leased certain office and golf course equipment under operating leases related to Fox Squirrel Country Club. In connection with the sale of the Country Club, the leases were transferred to buyer (Note 13).
Equipment rental and lease expense for the years ending December 31, 2002, 2001 and 2000 was $0, $6,894 and $38,305, respectively.
REEVES TELECOM LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS
10. 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 following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value:
LONG-TERM DEBT
The fair value of long-term debt has been estimated by discounting the future cash flows using the current rates offered for debt issues with similar characteristics. Based on the borrowing rates available to the Partnership at December 31, 2002 and 2001, the fair value of long-term debt is $112,347 and $115,411, respectively, compared to the carrying value of $108,282 and $112,876, respectively.
11. 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 Company's products and services, the geographic areas in which the Company operates and its major customers. The adoption of this pronouncement has resulted in a revision of the Company's operating segments footnote disclosures, but did not have an impact on the financial statements.
REEVES TELECOM LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS
The Partnership operates two business segments: property sales and a country club. Revenues and direct costs are separately stated in the financial statements. Substantially all revenues during the years ended December 31, 2002, 2001 and 2000 for both segments have been generated in the state of North Carolina; the exception to the foregoing is $20,105 in revenue from property sales in 2001 generated in the state of South Carolina. Operating income (loss), net income (loss), depreciation, identifiable assets and capital expenditures by business segment are summarized as follows:
REEVES TELECOM LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS
12. LIQUIDITY AND GOING CONCERN ISSUES
Cash generated from individual lot sales may not be sufficient to meet future operating costs, debt service and other cash requirements. If the Partnership's cash flow is less than management's expectations, capital programs presently planned may be either postponed, scaled back, or eliminated, and certain operating expenditures may be either deferred or, in the case of payments to affiliates of the General Partner, accrued. Despite such contingency plans by management, the above mentioned factors indicate that the Partnership may be unable to continue in existence while attempting to complete the sale and liquidation of the Partnership's remaining assets. The Partnership intends to continue to sell lots in the normal course of business as a plan of liquidation 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 change its plans from the current longer-term liquidation approach to a bulk sale and/or abandonment, the net amount realized could be less than the carrying value, which could result in liabilities exceeding the Partnership's assets. The financial statements have been prepared assuming the Partnership will continue as a going concern. 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.
13. DISPOSAL OF BUSINESS SEGMENT
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 accrues interest at 9.75% per annum, payable monthly, maturing on March 9, 2004. The note is collateralized by a first mortgage on the country club. Since the cash down payment represents less than 25% of the total consideration paid for the assets, the transaction is 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: (a) the sold assets remain on the Partnership's balance sheet as assets held for sale or disposal, (b) cash received from the buyer be shown as a deposit on contract, and (c) payments received from the buyer in respect of notes receivable be treated as an increase in the deposit. At December 31, 2002 and 2001 the assets held by the Partnership covered by the agreement were held at a net book value of approximately $443,000. The operations of Fox Squirrel Country Club through March 9, 2001 are recorded as discontinued operations.
Country Club revenues were $32,511 and $332,462 for the years ended December 31, 2001 and 2000, respectively.
The promissory note maturity date may be extended if the Partnership has not completed remediation of certain environmental contamination from an underground storage tank formerly located on the golf club grounds. The Partnership believes that all necessary remediation work has been completed as of December 31, 2001, although the North Carolina Department of Environment and Natural Resources ("NCDENR") has required the Partnership to continue monitoring and testing the subsurface groundwater. The results of tests conducted during 2002 and the first two months of 2003 show that detectable concentrations of hydrocarbon contamination are substantially below standards. As a result, the Partnership is waiting for a closure letter from NCDENR, although it is possible that NCDENR may require the Partnership to conduct further monitoring and testing.
REEVES TELECOM LIMITED PARTNERSHIP
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
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.
REEVES TELECOM LIMITED PARTNERSHIP
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
NOTES:
1. All building lots and land held for sale are unimproved.
2. The amounts shown for Boiling Spring Lakes do not reflect valuation allowance of $596,027 at December 31, 2002. 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.
SCHEDULE III, CONTINUED
RECONCILIATION OF GROSS AND NET BOOK VALUE AND ACCUMULATED DEPRECIATION
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NOTES:
1. Cost of real estate sold does not reflect valuation allowances. See Schedule II, "Valuation and Qualifying Accounts."