Item 1. Business
General
Reeves Telecom Limited Partnership (the “Registrant” or the “Partnership”) is a South Carolina limited partnership that is engaged in owning, developing, selling, leasing, or otherwise dealing in real estate in North Carolina.
Background; Development of Business
Reeves Telecom Corporation (the “Corporation”), the Partnership’s predecessor, was principally engaged in owning and operating commercial radio stations and television stations, and also engaged in real estate development. In 1979, the Corporation’s stockholders approved a plan of liquidation. Pursuant to the plan, as amended, 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 during the twelve-month period ended May 15, 1980, and distributed to its stockholders cash of $0.90 per share on February 29, and $2.30 per share on May 14, 1980. The Corporation’s stockholders were thereafter entitled to receive one limited partnership unit of the Partnership in exchange for each share of the Corporation’s common stock. The Partnership, organized October 25, 1979 for the purpose of accepting from the Corporation the assets that remained unliquidated and certain liabilities, had only nominal assets and no liabilities until May 15, 1980. To reflect a change in South Carolina law, the Partnership’s name was changed from Reeves Telecom Associates to Reeves Telecom Limited Partnership on January 21, 1987.
The Partnership succeeded to the ownership of real estate situated within two developments, Boiling Spring Lakes in North Carolina, and Pimlico Plantation in South Carolina. Substantially all of the real estate in Pimlico Plantation had been sold by 1990 (with the final lot sold in 2003), and, since then, the Partnership’s principal assets have been its real estate in Boiling Spring Lakes and a golf course and country club located within that development. See “Item 2. Properties.”
From its inception to mid-1993, the Partnership had limited financial resources. Management, therefore, focused on holding down costs until the Partnership could sell all or substantially all of its assets in a bulk sale. Local real estate brokers were relied upon to generate individual lot sales, and the golf course and country club were leased to a third party operator. Under this arrangement, lot sales were slow and, generally, operating expenses significantly exceeded revenue from such sales.
Beginning in June 1993, Management has focused on the sale of individual lots on an all-cash basis through the Partnership’s sales office in Boiling Spring Lakes. At that time, the Partnership also became increasingly involved in the management and operation of the golf course and country club.
During 2000, the Partnership sold approximately 5,127 acres of land, or approximately 80% of the total acreage then owned by the Partnership in Boiling Spring Lakes, to The Nature Conservancy. The sale generated gross proceeds of $2,400,000.
During 2001, the Partnership sold the assets of the golf course and country club for total consideration of $862,500, consisting of a combination of cash and a note receivable. In June 2003, the buyer of the assets made a substantial prepayment of principal on the note receivable.
See the Partnership’s audited financial statements and the summary information set forth in Table 4, “Selected Income Statement Data,” and Table 5, “Selected Balance Sheet Data,” for financial information on the Partnership’s business.
Description of Business
■ Real Estate Sales
Boiling Spring Lakes began in 1962 as a 14,000-acre development. Most of the land has been sold and that which remains lies within the City of Boiling Spring Lakes, in Brunswick County, North Carolina. Revenue from real estate sales and the type of land sold for each of the last five fiscal years ended December 31 are shown on Table 1, below.
As used in Table 1 and throughout this Annual Report on Form 10-K:
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“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);
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“unimproved individual lot” refers to an individual lot on which construction of a house has not yet been started;
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“improved individual lot” refers to an individual lot on which the construction of a house has been started, even if at the time of sale construction was not completed;
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“commercial land” refers to land zoned or otherwise intended by the Partnership for commercial use; and
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“other land” refers to all other types of unimproved land of varying sizes.
The City of Boiling Spring Lakes has no central sewer system. As a result, homes and most commercial buildings within the development use septic tanks. Since the 1970’s, health standards in Brunswick County have become increasingly stringent regarding septic tanks and on-site sewage disposal. Management estimates that 70% to 75% of the property in Boiling Spring Lakes that would have complied with applicable regulations in the 1970’s does not meet present health standards. This has had a detrimental effect on the Partnership’s real estate operations, primarily by substantially reducing the price that the Partnership can realize for land that is not suitable for the installation of an individual on-site septic system. In limited cases, the problem can be cured by the use of drains, or by the scraping away of hard pan and adding fill dirt. In most cases, however, the only solution to the inability to install an on-site septic system on individual lots is to install a sewer system covering multiple lots, portions of a section, or larger areas. In 1997, the Partnership installed a small multi-user system on certain commercial land it then held for sale. All of that commercial land was subsequently sold. 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, in the future, consider installing one or more similar multi-user systems on land owned by the Partnership in other areas of the development but currently there are no plans to do so. The Partnership has no plans to install a sewer system covering most or all of the land remaining in the Partnership’s inventory. Brunswick County has plans for an area-wide sewer system for Boiling Spring Lakes; however, there is no firm date for the County to begin installing such a system and the Partnership believes that installation is at least several years in the future. The City of Boiling Spring Lakes has had some preliminary discussions for a municipal sewer system to serve a portion of Boiling Spring Lakes; however, there is no firm date for the City to begin installing such a system and the Partnership believes that, should any such system be installed, the installation is at least several years in the future. A private contractor may install a sewer system to serve land that he owns, and land owned by others, including the Partnership, may be able to connect to such system if built; however, to date no such private sewer system has been built in the development and obstacles would have to be overcome for any such system to be built in the future.
■ Other Revenue and Rental Income
From time to time, the Partnership has generated revenue from sources other than real estate sales, such as rental income. The amount of revenue generated from such sources during the last five fiscal years ended December 31 is shown on Table 2, below.
■ Seasonality
The sale of real estate in North Carolina is seasonal. The Partnership has generally experienced slower than average lot sales in the period from November to January, inclusive.
■ Marketing and Advertising
The Partnership’s marketing and advertising plan emphasizes the print media to promote the sale of its land and, when available for sale, improved individual lots.
■ Patents, Trademarks, Licenses, Franchises, and Concessions Held
Other than a real estate brokerage license issued by the State of North Carolina Board of Realtors to the Partnership’s General Manager, who acts as the Partnership’s real estate sales person, the Partnership’s business is not dependant in any material respect on any patent, trademark, license, franchise, or concession.
■ Dependence Upon Customers
From time to time, the Partnership sells tracts of land or blocks of lots to developers or others. Generally, however, the Partnership is not dependent in any respect upon one or a few customers, the loss of any one of which might significantly affect the financial results of the Partnership.
During the year ended December 31, 2007, the Partnership sold individual undeveloped lots in Boiling Spring Lakes to one buyer for an aggregate of $282,360, or approximately 57% of total revenue from property sales in 2007, and to a second buyer for an aggregate of $124,564, or approximately 25% of total revenue from property sales in 2007. During the year ended December 31, 2006, the Partnership sold individual undeveloped lots in Boiling Spring Lakes to one buyer for an aggregate of $119,256, or approximately 13% of total revenue from property sales in 2006. During the year ended December 31, 2005, the Partnership sold individual undeveloped lots in Boiling Spring Lakes to one buyer for an aggregate of $657,689, or approximately 26% of total revenue from property sales in 2005.
■ Competition
The real estate market in Brunswick County, North Carolina is extremely competitive. The Partnership competes against other real estate developers, real estate brokers, property owners acting without brokers, and others. Property values are dependent upon, among other factors, proximity to and the nature and quality of recreational facilities, retail shopping, commercial sites and schools, and the availability of municipal water (as opposed to well water) and sewer service (as opposed to septic systems). Management believes that other real estate developers have bought some of the Partnership’s land in past years and that other developers may buy land from the Partnership in the future, and that such developers may compete with the Partnership for land sales or sale of improved properties within the City of Boiling Spring Lakes.
Many real estate developments in Brunswick County provide recreational facilities, such as a golf course, lakes and/or swimming pools, and tennis courts. In many cases, depending upon the financial resources of the particular developer, such facilities are more extensive and/or more varied than the facilities in Boiling Spring Lakes. Lots associated with such facilities generally command higher sales prices than lots owned by the Partnership.
Some real estate developers in Brunswick County provide some form of seller financing to buyers. The terms of such financing may be more favorable to buyers than are generally available from financial institutions. The Partnership typically sells its properties for cash, and buyers who require financing to complete their purchase typically obtain financing from financial institutions. On occasion, the Partnership fails to complete the sale of a property due to the inability of the potential buyer to obtain financing.
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, and other sellers of real estate principally on the basis of price.
■ Recent Real Estate Market Conditions
In April 2006, the market for undeveloped land within the City of Boiling Spring Lakes slowed considerably, primarily due to efforts by the U.S. Fish and Wildlife Service (“Fish and Wildlife”) to protect the habitat of the endangered red-cockaded woodpecker (Picoides borealis). Management believes that certain restrictions that went into effect in 2006 on building within proximity to known or suspected nesting or foraging areas of the red-cockaded woodpecker will have the effect of reducing the Partnership’s real estate sales for 2008, and possibly thereafter, from what might otherwise be realized in the absence of such restrictions. The Partnership is currently pursuing a program to study tree density in known foraging areas to demonstrate the potential for coexistence where sufficient tree density exists, that is, that houses can be built on lots now owned by the Partnership while retaining a sufficiently vibrant foraging area for the woodpeckers. Management believes that this program may reduce the amount of the Partnership’s land that is subject to restrictions on development because of the red-cockaded woodpecker, although there can be no assurance that any such reduction will occur or, if it occurs, that such reduction will have a material affect on the Partnership’s business. The Partnership is also participating in a citywide program to study the possibility of relocating the nests of the red-cockaded woodpecker to nearby lands. The State of North Carolina has recently allocated resources to a community board to fund the development of this citywide habitat conservation plan, although there can be no assurance that relocation of nests will, in fact, occur as a result of this study or otherwise.
In recent months, local financial institutions have tightened credit requirements, in part due to concerns over the subprime lending market, that is, real estate loans extended to borrowers with poor credit. Management believes that these more restrictive lending practices by area banks have contributed, in part, to a slowing of the local real estate market.
The southeastern coastal region of North Carolina, where the City of Boiling Spring Lakes is situated, is currently experiencing protracted drought or near-drought conditions, which have resulted in a lowering of the water level of the lakes within the City of Boiling Spring Lakes substantially below normal. In addition, the water level of Boiling Spring Lake, the largest lake in the community, was intentionally lowered early in 2007 by the City so that repairs could be made to the lake’s dam. Such conditions resulted in one or more sinkholes in the bed of Boiling Spring Lake. Remedial measures will have to be taken by the City before the water level in the lake can rise substantially. Sinkholes in a lake bed can usually be remedied, for example, by the injection of clay or concrete into the sinkhole, but the cost of such remedies can be substantial and there can be no assurance that such measures will, in fact, remedy the situation or that new sinkholes will not develop. Management believes that, to the extent that the lakes within the City of Boiling Spring Lakes are recreational and scenic attractions to potential buyers of land from the Partnership, the low water levels in the community’s lakes have contributed, in part, to lower real estate sales in Boiling Spring Lakes generally.
Residential
The real estate market in Brunswick County, following national trends, was significantly slower in 2007 than in 2005 or 2006. The North Carolina Association of Realtors reported that the prices of single-family homes sold in December 2007 were 29% lower than those sold in December 2006. Management believes that a slowing economy and the tightening of credit markets, fueled in part by the turmoil involving subprime mortgages, were the principal reasons for the declines. In addition, the real estate market in the City of Boiling Spring Lakes in 2007 continued to be adversely affected by efforts, beginning in April 2006, by Fish and Wildlife to protect the habitat of the endangered red-cockaded woodpecker. Management believes that certain restrictions that went into effect in 2006 on building within proximity to known or suspected nesting or foraging areas of the red-cockaded woodpecker had the effect of further reducing the Partnership’s real estate sales for 2007.
The recent lowering of interest rates, which were already low by historical standards, and other actions taken by the U.S. Federal Reserve System in recent months appear to have resulted in a slight increase in activity in Brunswick County’s housing market early in 2008, though it is unclear at this time if the market in Boiling Spring Lakes has seen any improvement or will see any improvement during 2008. Management expects that the Partnership’s real estate sales in 2008 will not be significantly greater than in 2007 and may be significantly lower, due principally to economic conditions generally and to continued restrictions on building within proximity to known or suspected nesting or foraging areas of the red-cockaded woodpecker within the city limits.
See “Item 1A.
Item 1A. Risk Factors
The Partnership’s business faces numerous risks, including those set forth below. If any of the following risks and uncertainties develops into an actual event, the Partnership’s business, financial condition or results of operations could be materially adversely affected. The risks described below are not the only ones the Partnership faces. Additional risks not presently known to Management or that Management currently deems immaterial may also have a material adverse affect on the Partnership’s business, financial condition, or results of operations.
■ Economic Conditions and the Real Estate Market
The Partnership’s ability to generate revenues is directly related to the real estate market, primarily in North Carolina, and to the economy in general. Real estate markets, generally, are sensitive to changes in economic conditions and other factors, such as the level of employment, consumer confidence, consumer income, availability of financing, and interest rate levels. Adverse changes in any of these conditions generally, or in the markets where the Partnership operates, could decrease demand and pricing for real estate in these areas or result in customer cancellations of pending contracts, which could adversely affect the amount of land the Partnership can sell or reduce the prices the Partnership can charge for real estate, either of which could result in a decrease in the Partnership’s revenues and earnings. Significant expenditures associated with investment in real estate, such as real estate taxes and infrastructure maintenance costs, cannot generally be reduced if adverse changes in economic conditions or other factors cause a decrease in revenues from the sale of the Partnership’s real estate. As a result, if the growth rate for the economy declines or if a recession occurs, the Partnership’s profitability could be materially adversely affected.
■ Continuation of Slowdown in Real Estate Market
Beginning in fiscal 2006, throughout fiscal 2007, and into the first quarter of fiscal 2008, the Partnership experienced a slowdown in real estate sales. Management believes this slowdown is attributable in part to a decline in consumer confidence, an overall softening of demand for new homes, an oversupply of homes available for sale, the inability of some potential customers to sell their current home, and the turmoil in the mortgage loan market. If these conditions continue over an extended period of time, or worsen, they could adversely affect the Partnership’s financial condition.
■ Concentration of Business in North Carolina
The economic growth and health of the State of North Carolina, particularly in Brunswick County and the southern coastal region where the Partnership’s land is located, are important factors in sustaining demand for the Partnership’s real estate. As a result, any adverse change to the economic growth and health of North Carolina, particularly Brunswick County, could materially adversely affect the Partnership’s financial results. The future economic growth of Brunswick County may be adversely affected if its infrastructure, such as roads, airports, medical facilities, and schools, are not improved to meet increased demand. There can be no assurance that these improvements will occur.
■ Changes in Interest Rates
The Partnership’s business is sensitive to changes in interest rates. Generally, demand for real estate decreases when interest rates are high or increasing, and demand for real estate increases when interest rates are low or decreasing. Interest rates increased somewhat during 2007 yet remain low by historical standards. An increase in interest rates could reduce the demand for land that the Partnership sells or develops. Any such reduction in demand could adversely affect the amount of land the Partnership can sell or reduce the prices the Partnership can charge for real estate, either of which could result in a decrease in the Partnership’s revenues and earnings.
Many buyers of real estate from the Partnership finance their purchases through mortgages obtained from local banks or other financial institutions. Some buyers have chosen adjustable rate, interest only mortgages or mortgages that involve initial lower monthly payments. As a result, real estate has become more affordable for many people who could not otherwise purchase real estate. Increases in interest rates or decreases in availability of mortgage financing, however, could reduce the market for real estate. Potential purchasers may be less willing or able to pay the increased monthly costs or to obtain mortgage financing that exposes them to interest rate changes. Lenders may further increase the qualifications needed for mortgages or adjust their terms to address any increased credit risk as a result of current and future changes in lending practices arising from subprime financing practices of certain mortgage companies. Even if potential customers do not need financing, changes in interest rates and mortgage availability could make it harder for them to sell their current homes to potential buyers who need financing. These factors could adversely affect the sales or pricing of the Partnership’s land.
The Partnership currently invests most of its cash in a money market account at a local financial institution and in U.S. Treasury securities having a maturity of one year or less that are held to maturity. The Partnership has exposure to changes in interest rates in that: (a) at the time any such Treasury security matures, if the interest rate is lower for newly purchased Treasury securities than that on the maturing Treasury security, future interest income will decrease due to the lower interest rate; and (b) interest rates paid on money market balances fluctuate with changes in market interest rates, therefore, interest earned on balances held in a money market account will decrease if market interest rates decrease.
The Partnership currently has no long-term debt; however, if the Partnership were to incur debt in the future, the Partnership would have exposure to changes in market rates. If the Partnership were to incur fixed rate debt, the Partnership would have exposure to changes in market rates at the time such debt matures in that a market interest rate higher than that on the maturing debt: (a) may lower the amount of proceeds secured from a refinancing, and (b) will decrease cash flow from future operations due to the higher interest rate. If the Partnership were to incur floating rate debt, the Partnership would also have exposure to changes in market rates in that with increases in market interest rates, interest costs on such debt would increase and cash flow from future operations would decrease while such floating rate debt is outstanding.
■ Unavailability of Financing and Affect on Demand for Real Estate
In general, the sale of real estate is negatively affected by the unavailability of construction and mortgage financing as a result of declining customer credit quality, tightening of loan underwriting standards, or other factors. Most individual buyers of undeveloped real estate finance their purchases of land and the construction of a home on that land through third-party lenders. Over the last several months, many third-party lenders have significantly increased underwriting standards and increased interest rates on construction and mortgage financing. In addition, many subprime and other alternate mortgage products are no longer available in the marketplace. If these trends continue, and construction and/or mortgage loans continue to be difficult to obtain, the ability and willingness of prospective buyers to finance purchases of real estate or to sell their existing homes will be adversely affected, which will adversely affect the Partnership’s results of operations through reduced sales revenue, gross margin, and cash flow. Such effect may be material.
■ Changes in Federal Income Tax Laws and Affect on Demand for Real Estate
Changes in federal income tax laws may affect demand for real estate. Various proposals have been publicly discussed to limit mortgage interest deductions and to limit the exclusion of gain from the sale of a principal residence. Enactment of such proposals may have an adverse effect on the homebuilding industry in general and, in turn, on the businesses that sell undeveloped real estate, such as the Partnership. No meaningful prediction can be made as to whether any such proposals will be enacted and, if enacted, the particular form such laws would take.
■ Real Estate Operations are Cyclical
The sale and development of real estate is cyclical and highly sensitive to changes in general and local economic conditions, such as employment levels and job growth, consumer confidence and income, availability of financing for home builders and home buyers, interest rate levels, and housing demand. Sales of undeveloped land are also affected by the supply of alternatives to new homes, such as rental properties and used homes, including foreclosed homes. These economic variables could have an adverse effect on consumer demand for, and the pricing of, our property held for sale, which could cause our sales and revenues to decline, fluctuate significantly from quarter to quarter and from year to year, and to differ materially from the expectations of Management and investors.
■ Real Estate Assets are Illiquid
Real estate generally cannot be sold quickly. Other than for individual lots, the Partnership experiences great volatility in the sale of its land, and often the Partnership records no sales of commercial land and tracts in a fiscal year. It may not be possible to sell property on favorable terms when it is to the Partnership’s economic advantage to do so.
■ Laws and Regulations Governing the Real Estate Industry
The real estate industry is governed by various federal, state and local laws and regulations, including the Fair Housing Act, the Real Estate Settlement Procedures Act, state and local real estate broker licensing laws, federal and state laws prohibiting unfair and deceptive acts and practices, and federal and state advertising laws. Failure to comply with these requirements may result in, among other things, revocation of required licenses, indemnification liability to contract counterparties, administrative enforcement actions, and civil and criminal liability.
For the Partnership to sell real estate directly to purchasers, the Partnership is required to have an individual licensed broker of record. Currently, the general manager of the Partnership’s sales office in Boiling Spring Lakes, North Carolina is the licensed broker of record. If such person’s real estate brokerage license were to lapse, be suspended, or otherwise cease to be in effect, or if the Partnership were to lose the services of its designated broker, the Partnership may be unable to sell real estate directly to purchasers and/or may be subject to fines or legal penalties until the individual’s license is renewed or made current, or the designated broker has been replaced.
■ Taxes and Government Fees
Increases in real estate taxes and other local government fees, such as fees imposed on developers to fund schools, open space, road improvements and/or provide low and moderate income housing, could increase the Partnership’s costs and have an adverse effect on the Partnership’s operations. Also, increases in local real estate taxes could adversely affect potential customers who may consider those costs in determining whether to reside in Boiling Spring Lakes or elsewhere. In addition, any changes in the income tax laws that would reduce or eliminate tax deductions or incentives to homeowners, such as changes limiting the deductibility of interest on home mortgages, could make housing less affordable or otherwise reduce the demand for housing, which in turn could reduce the Partnership’s sales and income from operations.
■ Natural Disasters
The hurricane season was unprecedented in the United States. Hurricane Katrina, in particular, caused severe devastation in New Orleans and the Mississippi Gulf Coast in August, which led to increased costs and shortages of construction labor and building supplies throughout the entire southeastern United States. Another active hurricane season could negatively affect the Partnership’s real estate sales by decreasing demand for housing - and, therefore, the real estate on which new houses are built - in areas prone to hurricanes and could also lead to further increased costs and shortages of construction labor and building supplies.
More generally, the southern coastal region of North Carolina has historically experienced natural disasters, such as fires, hurricanes, floods, unusually heavy or prolonged rain, and droughts. In the past, the Partnership’s operations have been affected by such occurrences through lower real estate sales and higher operating and capital costs associated with clean-up and repairs in the aftermath of such occurrences. The occurrence of natural disasters, such as fires, hurricanes, floods, unusually heavy or prolonged rain, and droughts, could have a material adverse effect on the Partnership’s ability to develop and sell properties or realize income from projects, and could result in higher than expected operating and capital costs.
Due to drought or near-drought conditions for much of 2007 in the southern coastal region of North Carolina, nearly all of the lakes within the City of Boiling Spring Lakes have a water level that is substantially below normal. These conditions resulted in a lowering of the water table, and one or more sink holes developed in the bed of Boiling Spring Lake, the largest lake in the community, which resulted in a further lowering of the water level of that lake. A series of remedial measures taken by the City seem to have solved the issue of the sink holes; however, the lack of normal rainfall has prevented the lakes, including Boiling Spring Lake, from returning to approximately normal levels. A continuation or a return of protracted drought or near-drought conditions in the coastal region of North Carolina could result in a reoccurrence of substantially lower water levels, including in Boiling Spring Lake, and the reoccurrence of one or more sink holes. The occurrence of such eventualities could have a material adverse effect on the Partnership’s ability to develop and sell properties or realize income from projects.
■ Competitors
The real estate business is highly competitive. The Partnership competes with a large number of companies and individuals, many of whom are believed to have substantially greater financial and other resources than the Partnership. Some of the competitors are active in markets in other regions or throughout the entire United States. The Partnership’s ability to weather downturns in the local real estate market or respond to changing trends in the real estate business may be substantially less than some or many of its larger competitors.
■ Environmental Matters - General
The Partnership is subject to various federal, state and local laws, ordinances and regulations regarding environmental matters. Under these laws, the Partnership may be required to investigate and clean up hazardous or toxic substances or petroleum product releases on land currently or formerly owned by it, and may be held liable to a governmental entity or to third parties for property damage and the cost of investigation, removal and decontamination incurred by such parties. The penalty may be imposed whether or not the Partnership was aware of, or responsible for, the hazardous or toxic substances, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The costs of investigation, removal and decontamination of such substances could be substantial. If such substances are found on land currently owned by the Partnership, or there is a failure to properly remove or decontaminate the area, the property could be difficult to sell, rent or develop. Some environmental laws create a lien on a contaminated site in favor of the government for damages and costs it incurs in connection with such contamination. The Partnership may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site.
■ Environmental Matters - Underground Storage Tank
In 2000, the Partnership removed an underground storage tank located adjacent to the club house building of Fox Squirrel Country Club, now known as The Lakes Country Club (“Fox Squirrel/The Lakes”). Fox Squirrel/The Lakes was owed by the Partnership until it was sold to a third party in 2001. Soil samples taken shortly after the removal showed a certain amount of contamination of soil and indications that diesel fuel may have leaked into the subsurface groundwater. The Partnership undertook remediation by removing approximately 15 tons of contaminated soil, and adding fill to the affected area. Test wells were placed near the former site of the underground storage tank to measure the level of subsurface groundwater contamination, and the test results were submitted to the North Carolina Department of Environment and Natural Resources (“NCDENR”). Initial test results showed levels of groundwater contamination to be just above the standards. From time to time during 2002 and 2003, additional tests were performed on subsurface groundwater samples, and the test results were submitted to NCDENR. With one exception, all of the additional test results showed that the concentration of hydrocarbon compounds in the subsurface groundwater were either below detection limits or were substantially below standards; the one exception was the testing in May 2003, which showed that “C11-C22 aromatic concentration is non-compliant.” As requested by NCDENR, the Partnership continued to monitor and sample the groundwater and to submit the test results to NCDENR periodically. The written test results of sampling of subsurface groundwater taken in February 2004, showing that the concentration of hydrocarbon compounds in the subsurface groundwater were either below detection limits or were substantially below standards, were submitted to NCDENR. On May 4, 2004, NCDENR issued a Notice of No Further Action, stating that NCDENR determined that the Partnership need not continue the monitoring and sampling of groundwater. Such determination shall apply unless NCDENR makes a later determination that the concentration of hydrocarbon compounds that resulted from the release of diesel fuel from the now removed underground storage tank once again poses an unacceptable risk or a potentially unacceptable risk to human health or the environment.
Management believes that the Partnership will not be incurring any further costs associated with release of diesel fuel from the now removed underground storage tank. If, however, NCDENR should request the Partnership to conduct additional monitoring and testing or to conduct additional remediation, Management believes that the cost of any such additional monitoring and testing or remediation is not likely to be material.
In connection with the sale of the assets of Fox Squirrel/The Lakes, the Partnership entered into an indemnification agreement with WW-Golf, the buyer of the assets. Pursuant to such indemnification agreement, as amended, the Partnership’s liability related to testing and remediation involving the underground storage tank terminated on June 17, 2005. However, should NCDENR require additional testing and/or remediation, and should WW-Golf be unable to bear the entire cost of such testing and/or remediation, it is possible that the Partnership will be required to bear some or all of such costs.
■ Endangered/Protected Species
Portions of Boiling Spring Lakes and the surrounding area are known or believed to be the habitat of various species of flora and fauna which have been identified as endangered or protected species, including, among others, the red-cockaded woodpecker. Development of the Partnership’s land is subject to various laws and regulations intended to limit disturbance of endangered and protected species. The Partnership may be subject to common law claims by third parties based on damages and costs resulting from the presence of endangered or protected species on or near land owned by the Partnership.
■ U.S. Fish and Wildlife Service Initiatives
The red-cockaded woodpecker is one of several species of flora and fauna on the endangered species list that inhabit or are believed to inhabit portions of Boiling Spring Lakes and the surrounding area. The Partnership understands that Fish and Wildlife notified the City of Boiling Spring Lakes in February 2006 of that agency’s concern about the rapid development within the City’s borders and the loss of mature long-leaf pines that the endangered woodpecker prefers, and of the possibility that the City could be liable for violating federal laws intended to protect the endangered woodpecker if the City issued building permits for lots with nests. Under such federal laws, (a) building and tree cutting within 200 feet of a nest tree are restricted without a federal permit, and (b) to provide a foraging area for the woodpeckers, within a ½-mile radius around each nest site, development is restricted and cutting of long-leaf pine trees with a diameter of 10 inches or more is prohibited. The Partnership understands that Fish and Wildlife would like for the City to undertake a conservation plan, which typically takes one to two years to develop.
The Partnership believes that not more than approximately 180 acres, or approximately 22%, of the Partnership’s land currently may be affected by restrictions relating to the red-cockaded woodpecker. That approximately 180 acres is comprised of approximately 300 individual undeveloped lots, approximately 70 acres of unplatted, undeveloped land intended for residential use, and approximately 10 acres of undeveloped land intended for commercial use. Most of such approximately 180 acres does not meet, or is believed by the Partnership to not meet, current health codes for installing septic systems and, therefore, is not suitable for building until a tie-in to a sewer system becomes available. As land in Boiling Spring Lakes is developed, however, the remaining undeveloped land within the City must be able to support the habitat of the red-cockaded woodpecker; therefore, if land owned by others is developed more quickly than land currently owned by the Partnership, then the remaining undeveloped land owned by the Partnership that is not currently affected by restrictions may become affected. Since mature long-leaf pines are typically located on land that meets current health codes for installing septic systems, it is possible than an increasing percentage of the Partnership’s land that is currently suitable for septic systems will become subject to restrictions on development. Management believes that the Partnership’s land sales will continue to be reduced compared to past years until the City has developed a conservation plan to protect the habitat of the red-cockaded woodpecker or until other means of addressing the concerns of Fish and Wildlife can be implemented.
■ Zoning and Other Regulations
At December 31, 2007, the Partnership owned approximately 244 acres of undeveloped, unplatted land intended for residential use and approximately 219 additional acres of undeveloped, unplatted land intended for commercial use. Changes in zoning or other regulations may prevent the Partnership from subdividing all or a substantial portion of such acreage, which, in turn, may adversely affect the Partnership’s ability to continue generating revenue from real estate sales and/or its ability to effect a bulk sale of all or substantially all of its assets. Rezoning commercial land for residential use may not be possible or, if possible, may be prohibitive due to time and cost. The inability to obtain a rezoning of commercial land may prevent the Partnership from realizing any value in a sale of such land. In addition, changes in zoning or other regulations may require substantially greater expenditures by the Partnership than expected to complete one or more new projects.
Purchasers of land from the Partnership may be subject to periodic delays or may be precluded entirely from developing in certain portions of Boiling Spring Lakes due to building moratoriums or “slow-growth” or “no-growth” initiatives that could be implemented in the future. Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. A project for which a purchaser of land from the Partnership, or the Partnership, itself, has received land use and development entitlements or approvals may still require a variety of other governmental approvals and permits during the development process. Such a project can also be adversely affected by unforeseen health, safety, and welfare issues, which can further delay the project or prevent its development. As a result, the sales of homes and undeveloped real estate could decline and costs increase, which could negatively affect the Partnership’s results of operations.
■ Availability of Water and Sewer Services
The lack of municipal water and public sewer services has been a major inhibiting factor in the Partnership’s efforts to sell and/or develop land in Boiling Spring Lakes. Prior to 2004, virtually all residents in the development were forced to rely upon well water and individual septic systems. The City of Boiling Spring Lakes began to phase in municipal water service to certain portions of the development in 2004. The extension of water service to other portions of the development will depend on, among other factors, the ability to control costs of laying pipelines and the demand for such water service; however, Management believes that land owned by the Partnership is not likely to be affected by additional development phases of the municipal water service in the foreseeable future. Brunswick County has plans for an area-wide sewer system for Boiling Spring Lakes; however, there is no firm date for the County to begin installation of such a system and the Partnership believes that such installation is at least several years in the future. The City of Boiling Spring Lakes has had some preliminary discussions for a municipal sewer system to serve a portion of Boiling Spring Lakes; however, there is no firm date for the City to begin installing such a system and the Partnership believes that, should any such system be installed, the installation is at least several years in the future. A private contractor may elect to install a sewer system to serve a portion of Boiling Spring Lakes where he is looking to develop commercial and/or residential land that he owns; however, there is no certainty that any such private sewer system will be installed or, if installed, that land owned by the Partnership may connect to such private sewer system. A significant portion of the cost of water distribution and sewer lines to land owned by the Partnership must be borne by the Partnership or by subsequent purchasers of the land. Management cannot estimate with any certainty the amount of any future assessment by the City for installation of water or by the County or a private contractor for installation of sewer lines, nor can it predict with any certainty when any such assessments may be made or, once made, become due. If the Partnership is liable for any such assessment and has insufficient funds to pay such assessment when due or is unable to obtain financing on terms Management believes to be acceptable, the Partnership may be unable to continue operating and may become insolvent.
■ Costs Associated with Building and Maintaining Roads
The Partnership is responsible for maintaining certain roads, most of which are unpaved, and certain road rights-of-way within the City of Boiling Spring Lakes. The Partnership may complete some or all of the roads, or a portion of some or all of the roads, but there is no contractual obligation to do so. It may be difficult or impossible for the Partnership to sell lots located on uncompleted roads or on roads that are not rocked or paved with asphalt, and the sales price of a lot situated on an uncompleted road or a road that is neither rocked nor paved with asphalt would likely be substantially less than what the Partnership might otherwise obtain. The Partnership has not set aside any money or entered into any bond, escrow, or trust agreement to assure completion of the roads, or to fund the rocking or paving of roads with asphalt.
The costs to complete a road, and to rock or pave a road with asphalt are capitalized and added to the Partnership’s cost basis of land held for sale. When the Partnership sells land situated on a completed road, or a road that has been rocked or paved with asphalt, the direct cost of land sold will reflect the capitalized costs. As a result, the Partnership will likely achieve a higher sales price for land situated on a completed road, or a road that has been rocked or paved with asphalt, but the direct cost of such land sold will also be higher than for a lot which does not reflect such capitalized costs.
The City of Boiling Spring Lakes will not assume any road that is not paved with asphalt, and the City need not assume any paved road. Accordingly, unless and until the Partnership completes a road and has it paved with asphalt, and the road has been assumed by the City, the Partnership will be responsible for maintaining such road and the right-of-way. Since 2001, the Partnership has spent a total of approximately $193,000 for rocking and paving roads. Otherwise, in recent years, the Partnership has not spent significant amounts toward building or maintaining roads and rights-of-way, and the cost to maintain them may increase substantially. The failure by the Partnership to provide proper maintenance of the roads and rights-of-way which have not been assumed by the City may subject the Partnership to substantially greater risk of litigation from persons adversely affected by such failure.
During the 1960’s, the Partnership sold a number of five- and ten-acre timber tracts. In some cases, the Partnership provided an easement across its land to the buyer of such a tract for access to and egress from the tract, and the buyer was responsible for building a road across such easement. In cases where the purchase contract was silent on the issue, local laws required only that the Partnership provide the buyer with access to and egress from a tract but it was not clear who was responsible for building a road to and from the tract. Management maintains that the Partnership’s only obligation in such cases was to provide an easement for access to and egress from the tract, and if at some subsequent time the buyer wanted a road across such an easement, the Partnership was not obligated to build it. There has been no litigation involving the Partnership in a dispute over whose responsibility it is to build a road in such a case. If such litigation were to be initiated, Management believes that the Partnership would prevail but that the cost of defending the case could be material, and should the Partnership not prevail, the cost of building any such road could be material.
■ Increased Operating or Capital Costs Relating to Dam
The Partnership is responsible for the maintenance and repair of a dam designed to retain water in one of the lakes. The dam was breeched and partially washed out following a severe storm in 1996. The Partnership has spent a total of approximately $184,000 since 2001 to repair the dam. The Partnership intends to deed the dam to the City of Boiling Spring Lakes after the repairs have been completed. The City has indicated that it will accept the title after completion of certain additional work. Until such time as the title is transferred, there can be no assurance that the City will not require the Partnership to undertake and complete additional work on the dam, or decide not to accept title, notwithstanding additional work on the dam by the Partnership. The occurrence of a hurricane, flood, or unusually heavy or prolonged rain could result in damage to the dam. In such an eventuality before the transfer of title to the dam, the Partnership would be responsible for the repair costs, which could be substantial, and until such repair is completed, the Partnership’s ability to develop and sell properties or realize income from projects could be materially adversely affected.
■ Dams Owned by Others
The City of Boiling Spring Lakes has many lakes and ponds, some of which were created or enhanced by using earthen dams to raise the water level behind the dams. Of the numerous dams in Boiling Spring Lakes, only one is owned and maintained by the Partnership; all of the other dams are, to the Partnership’s knowledge, owned and maintained by either the City of Boiling Spring Lakes or the owner of Fox Squirrel/The Lakes. From time to time, a dam owned by others may need repair, for example, as a result of a “wash out” of a portion of a dam following a hurricane, flood, or period of unusually heavy or prolonged rain, and it may become necessary for the owner of such dam to lower the water level behind the dam for an extended period of time. During such time, the Partnership may be unable to sell land near the lake or pond with reduced water levels, or the price that the Partnership could realize upon a sale of such land may be substantially less than would be the case if the water level was not reduced.
■ New Projects
The Partnership may undertake one or more new projects within or nearby the development. Management may fail to accurately gauge conditions prior to undertaking a new project, and therefore the Partnership may not achieve anticipated results in the new project. If this were to occur, the Partnership may experience lower cash flow from operations. To the extent that the Partnership incurs debt to finance a portion of the capital costs of a new project, the cash flow from the new project may be inadequate to cover the debt service.
■ Need for Additional Capital
To date, the Partnership has financed its operations with cash primarily from the sale of property, by accruing amounts owed to the General Partner and its affiliates, and from time to time borrowing from the General Partner and its affiliates or from local banks. If the Partnership does not generate enough cash from its operations to finance its business in the future, it may need to raise additional funds through private financing. If the Partnership borrows funds, it may be required to agree to restrictions limiting its operating flexibility. If the Partnership requires additional funds and is not able to obtain such funds, it would have a material adverse effect on the Partnership’s operations.
■ Insurance Risks; Uninsured Damage to Property
The Partnership maintains comprehensive liability and fire insurance policies on its assets. However, the Partnership may suffer losses that are not covered by such policies. For example, losses resulting from war or from environmental liabilities generally are not covered by insurance. If an uninsured loss or a loss in excess of insured limits should occur, the Partnership could lose capital invested in its property, as well as future revenue from the sale of such property.
Due in large part to the terrorist activities of September 11, 2001, insurance companies have re-examined many aspects of their business and have taken certain actions in the wake of these terrorist activities, including increasing premiums, mandating higher self-insured retentions and deductibles, reducing limits, restricting coverages, imposing exclusions (such as sabotage and terrorism), and refusing to underwrite certain risks and classes of business. Significantly increased premiums, mandated exclusions, or changes in limits, coverages, terms, and conditions could adversely affect the Partnership’s ability to obtain appropriate insurance coverages. However, at this time the only impact on the Partnership has been an increase in premiums.
■ Financial Covenants on Indebtedness
At December 31, 2007, the Partnership had no debt outstanding. Should the Partnership incur indebtedness in the future, required payments on such future indebtedness generally would not be reduced if the Partnership’s economic performance declines. If the Partnership’s economic performance declines, cash flow from operations would be reduced. Under such circumstances, the Partnership might not be able to sell some of its assets quickly enough to avoid default on any such future indebtedness. If debt service payments could not be made, the Partnership might sustain a loss, suffer foreclosure by a mortgagee, or suffer judgments against the Partnership.
■ Appraised Value of the Partnership’s Land
From time to time, typically every two years, the Partnership obtains an appraisal of its real estate assets located in Boiling Spring Lakes, North Carolina. Each appraisal is based upon, among other factors, recent sales of real estate and the then-current market conditions for real estate generally, as well as in North Carolina, Brunswick County, and Boiling Spring Lakes, in particular. The appraised value of the appraised assets set forth in an appraisal report may vary significantly from the appraised value set forth in any previous or future appraisal report for one or more reasons, including, among others, a change in market conditions and a change in the assets being appraised. There is no guarantee that the Partnership could obtain the appraised value upon a sale of the appraised assets, and, in the event of a sale of the appraised assets, the actual sale price could be higher or lower than the appraised value set forth in any appraisal report.
■ FDIC Insurance Risk
The Partnership maintains its cash primarily at a bank insured by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC, an independent agency of the United States government, insures deposits up to $100,000 per depositor, per bank, subject to certain conditions. At December 31, 2007, the Partnership maintained cash balances $219,847 in excess of FDIC-insured amounts. In the event that the bank where the Partnership maintains its accounts becomes insolvent, the Partnership may lose some or all of such excess.
■ SIPC Insurance Risk
The Partnership purchases and holds U.S. Treasury securities through a brokerage account at a securities broker-dealer insured by the Securities Investor Protection Corporation (“SIPC”). The SIPC, a non-profit corporation set up and funded by the brokerage industry, insures investors accounts up to $500,000 per investor, subject to certain conditions, in the event that a member brokerage firm goes bankrupt and cash and securities are missing from customer accounts. At December 31, 2007, the Partnership’s aggregate investment in Treasury bills and other Treasury securities had a value $2,794,945 in excess of SIPC-insured amounts. In the event that the broker-dealer where the Partnership maintains its securities becomes insolvent and securities are missing from the Partnership’s account, the Partnership may lose some or all of such excess.
■ Structure as a Limited Partnership
The Partnership is treated for federal and state income tax purposes as a limited partnership, and the General Partner has taken such steps as are known to it to perfect such treatment. Changes to laws may adversely affect the treatment of the Partnership as a limited partnership. No assurance can be given that new tax laws will not significantly affect the Partnership’s qualification as a limited partnership or the federal income tax consequences of such qualification. New laws could be applied retroactively, which means that past operations could be found to be in violation, which would have a negative effect on the Partnership’s business. If the Partnership were to lose its status as a limited partnership for federal and state tax purposes, the Partnership would be subject to federal and state income tax on the Partnership’s taxable income at the corporate tax rates.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2.
Item 2. Properties
Boiling Spring Lakes, North Carolina
Boiling Spring Lakes began in 1962 as a 14,000-acre development. Part of the tract is now within the City of Boiling Spring Lakes, North Carolina, which has approximately 3,600 residents. Boiling Spring Lakes is in Brunswick County, miles southwest of Wilmington, North Carolina, and 8 miles northwest of Southport, placing the city in the northern portion of the coastal corridor connecting Wilmington, North Carolina and Myrtle Beach, South Carolina.
The Partnership’s principal asset is its undeveloped land in Boiling Spring Lakes, comprising approximately 819 acres. As of December 31, 2007, the Partnership owned the following:
•
approximately 356 acres, divided into 1,080 platted unimproved individual lots, both recorded and unrecorded, intended for residential use;
•
approximately 244 acres of undeveloped land intended for residential use;
•
approximately 219 acres of undeveloped land intended for commercial use;
•
a building comprising approximately 500 sq. ft. that is leased to the City of Boiling Spring Lakes at a rate of $1 per year for use as a post office; and
•
a sales office comprising approximately 1,269 sq. ft.
Management intends to continue emphasizing the sale of individual lots in Boiling Spring Lakes, concentrating on lots situated on existing paved roads and rocked roads. From time to time, the Partnership will add to its inventory of lots situated on paved roads and rocked roads by paving or rocking roads that are currently unpaved or not rocked. The Partnership intends to continue selling its land on an all-cash basis.
To increase lot sales, in 1995, Management initiated a project involving the construction of a house on a lot owned by the Partnership and the immediate marketing of the house and lot for sale, with the cost of construction financed with a line of credit from a local bank. The Partnership achieved some success through 1999, selling five properties and earning a profit on each sale; however, the Partnership elected to suspend the project in 2000 in view of rising construction costs and decreased margins. The Partnership has not constructed any houses since 2000, though Management may resume the project during 2008.
Pimlico Plantation, South Carolina
The Partnership was previously engaged in selling land in Pimlico Plantation, a development in Berkeley County, South Carolina. The Partnership sold its last lot in Pimlico Plantation in 2003, and the Partnership no longer owns any properties outside of Boiling Spring Lakes.
Appraisal of Real Estate Assets
The Partnership obtained from Robert C. Cantwell and Associates (the “Appraiser”) an independent MAI appraisal report dated March 2, 2008 valuing the Partnership’s real estate assets located in Boiling Spring Lakes at December 31, 2007. Such assets comprised substantially all of the assets of the Partnership on such date other than cash, U.S. Treasury securities, and the promissory note received as partial consideration in the 2001 sale of the assets of Fox Squirrel/The Lakes. The appraisal values the appraised assets at $4,000,000 (the “Appraised Value”). The Appraised Value is the Appraiser’s opinion of the most probable price which the property should bring in a competitive and open market under all conditions requisite to a fair sale, and assumes, among other things, a typically motivated buyer and seller in an “arm’s length” transaction, both parties are well informed or well advised about the assets and each acting in what he considers his own best interest, a reasonable time is allowed for exposure in the open market, payment is made in cash in U.S. dollars, and the price is unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. As such, there is no guarantee that the Partnership could realize the Appraised Value of such assets upon a sale. The actual sale price could be higher or lower than the Appraised Value. The appraisal is not in connection with any requested minimum, maximum or specific appraised value, any pending or proposed sale or other transaction, or approval of any loan involving the appraised assets or the Partnership. The foregoing summary of the appraisal is limited in its entirety by reference to the full appraisal report, a copy of which is filed with the Securities and Exchange Commission as an exhibit to this Annual Report on Form 10-K (the photographs, that appear in the hard copy of the appraisal are excluded from the electronic filing of the exhibit).
During 1988, the Partnership reduced the carrying value of the Boiling Spring Lakes property as a result of an appraisal obtained in December 1988. During 1993, 1995, 1998, 2000, 2004, and 2006, the Partnership obtained updated appraisals of the Boiling Spring Lakes property. Based upon those updated appraisals, no additional reduction to the carrying value was made. As a result of the appraisal dated as of December 31, 2007 and in view of current market conditions, the Partnership and its accountants believe that the valuation allowance at December 31, 2007 is appropriate, and that no adjustment to the valuation allowance need be made.
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.
Item 4.
Item 4. Submission of Matters to a Vote of Unit Holders
No matters were submitted to a vote of unit holders during the fourth quarter of 2007.
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PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Unit Holder Matters, and Issuer Purchases of Equity Securities
■ Market for the Partnership’s Units
There is no established public trading market for the partnership units, and there are only limited or sporadic quotations on the over-the-counter market for the units. It is not anticipated that there will ever be an active public market for the units.
During 2006 and 2007, the partnership units were quoted on the OTC Pink Sheets under the symbol REEV.PK. The following table sets forth the high and low closing bid quotations in each of the four quarters of fiscal 2007 and fiscal 2006. The information was obtained from Pink Sheets LLC. Such over-the counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and do not represent actual transactions.
■ Holders of Units
As of December 31, 2007, there were 1,800 registered holders of partnership units. The total number of record holders has not changed substantially from December 31, 2007 to March 23, 2008, the latest practicable date prior to the filing of this Annual Report on Form 10-K.
■ Distributions
The Partnership has paid no cash distributions to partners since its inception in 1980. Management expects that no such distributions will be paid in 2008, even though the Partnership’s earnings may indicate an ability to do so.
A significant portion of the cost of water distribution and sewer lines to land owned by the Partnership must be borne by the Partnership or by subsequent purchasers of the land. Management cannot estimate with any certainty the amount of any future assessment by the City of Boiling Spring Lakes for installation of water or by Brunswick County or a private contractor for installation of sewer lines, nor can it predict with any certainty when any such assessments may be made or, once made, become due. If the Partnership is liable for any such assessment and has insufficient funds to pay such assessment when due or is unable to obtain financing on terms Management believes to be acceptable, the Partnership may be unable to continue operating and may become insolvent. Furthermore, it is the Partnership’s experience that revenues are highly variable and may not be sufficient in future years to cover expenses and necessary capital expenditures, and that a bulk sale of assets for cash is extremely difficult to achieve.
Management believes that without a sale of all or substantially all of the Partnership’s real estate, it would be imprudent to make a distribution to partners until the Partnership knows with reasonable certainty the amount and timing of any assessments relating to installation of water and sewer lines affecting the Partnership’s properties. Furthermore, the amount and timing of any distributions would be dependant upon the Partnership’s business being established to operate at a level sufficient to consistently generate revenues in excess of expenses and capital expenditures.
Absent a bulk sale of the Partnership’s assets, Management believes that the best use of the current cash balance and cash surpluses, if any, generated in future years is to preserve or improve the overall value of the Partnership’s assets by: (a) investing cash in short-term Treasury securities, (b) undertaking certain infrastructure and other improvements in the development; and (c) making selected other real estate-related investments in or near Boiling Spring Lakes, as market conditions may allow. Management believes that this plan will, in future years, result in, among other things, an increase in the number of lots sold and a higher average sales price per lot than would otherwise be the case. There can be no assurance, however, that sufficient cash will be generated from operations to successfully implement Management's plan.
■ Purchases of Units by the Partnership and Affiliates
Purchases by the Partnership
The Partnership’s limited partnership agreement allows the Partnership to repurchase partnership units; however, the agreement does not require that the Partnership or the General Partner repurchase partnership units on demand of partners, nor does the agreement provide for a minimum purchase price or establish a mechanism for determining a purchase price. Since inception, the Partnership has rarely purchased partnership units. There were no such repurchases during 2007.
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 inability to accurately estimate the amount of any assessments related to water and sewer service and also 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. There were no purchases of partnership units by the Partnership or the General Partner during 2007.
Purchases by Affiliates
There were no purchases of partnership units by affiliates of the Partnership or the General Partner during 2007.
Item 6.
Item 6. Selected Financial Data
The selected financial data set forth in Tables 4 and 5, below, has been derived from the Partnership’s historical audited financial statements. The selected financial data should be read in conjunction with “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 included as part of this Annual Report on Form 10-K. Certain amounts in prior years have been reclassified to conform to the presentation in the current year.
Special Note on Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and other applicable securities laws. These forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, achievements, or events, and may contain forward-looking words or phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “strategies,” “will be,” “will continue,” “will likely result,” and similar terms and their negatives that convey uncertainty of future events or outcomes. These statements represent the Partnership’s (including the General Partner’s) beliefs, expectations, intentions, and plans, and, as such, are not guarantees of future outcomes or future performance, and are subject to risks and uncertainties that are beyond the Partnership’s control and could cause the Partnership’s actual results to differ materially from those reflected in the forward-looking statements.
Readers are cautioned not to place undue reliance upon these forward-looking statements, which reflect Management’s analysis only as to the date hereof. Readers should carefully review the risk factors described in “Item 1A. Risk Factors” and other documents the Partnership has filed and from time to time will file with the Securities and Exchange Commission which could cause the Partnership’s actual results to differ materially from those in these forward-looking statements. The Partnership undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Critical Accounting Policies
A “critical accounting policy” is one that is both important to the portrayal of the Partnership’s financial condition and results and requires Management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Partnership believes that the following of its accounting policies fit this description:
■ Basis of Accounting
The Partnership’s financial statements are prepared using the accrual basis of accounting. The Partnership’s assets have been written down, from time to time, to reflect their fair values based upon appraisals.
■ Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
■ Property Sales
Property sales represent individual building lots and other undeveloped land sold for cash and the gross sales price of residential houses built or acquired by the Partnership for resale. The revenue from these sales is recognized at the closing date unless a deferral is required pursuant to Statement of Financial Standards No. 66, “Accounting for Sales of Real Estate.” Land cost included in direct costs of property sold represents the proportionate amount of the total initial project costs, after recorded valuation allowances, based on the sales value of the lot to the total estimated project sales value plus the value per lot of any capital improvements made subsequent to the initial project costs.
■ Properties Held for Sale and Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is calculated on the straight-line basis over the estimated useful lives of 8 to 31.5 years for buildings and 5 to 20 years for equipment and land improvements.
The Partnership assesses the realizability of the carrying value of its properties held for sale and related buildings and equipment whenever events or changes in circumstance indicate that impairment may have occurred in accordance with the provisions of Statement of Financial Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
■ Cash and Equivalents
For purposes of the Statements of Cash Flows, the Partnership considers cash as cash on hand, cash deposited in financial institutions, money market accounts, and U.S. Treasury securities with maturities of 91 days or less at the date of purchase. Cash equivalents are stated at cost, which approximates market value.
■ Impairment of Long-Lived Assets
The Partnership’s long-lived assets, primarily real estate held for sale, are carried at cost unless circumstances indicate that the carrying value of the assets may not be recoverable. The Partnership obtains appraisals periodically (typically, every two years) for the Boiling Spring Lakes property and evaluates the carrying value of the property based on those appraisals. The Partnership does not expect to reduce the carrying value of the properties in the near future.
The Partnership applies a valuation allowance to land if such land is unsuitable for the installation of an individual septic system as determined by testing conducted by the local health department or, in the absence of such testing, as determined by the Partnership based upon topography. Land that the Partnership believes to be suitable for the installation of an individual septic system based upon topography may, by subsequent testing, be determined to be unsuitable. More typically, land that the Partnership believes to be unsuitable for septic based upon topography may, by subsequent testing, be determined to be suitable. The valuation allowance is allocated among the land held for sale only following each periodic appraisal, while the determination of a particular lot or parcel of land as being suitable or unsuitable for septic may be made at any time prior to the sale of such land. Since the direct cost of land sold is net of the applicable valuation allowance, the direct cost of a lot or parcel of land that the Partnership believes to be suitable for septic that, on the basis of testing, is subsequently determined to be unsuitable may, therefore, exceed the sales price of such land, in which case the Partnership would realize a loss on the sale of such land. To the best of Management’s knowledge, the Partnership has never realized such a loss, and if such a loss or losses were to occur, Management believes that the aggregate amount of such losses would not materially affect the Partnership’s financial condition or results from operations.
■ Note Receivable
The Partnership closed a sale agreement for the assets of Fox Squirrel/The Lakes on March 9, 2001. Under the agreement, the Partnership received $150,000 in cash and a note receivable (“Promissory Note”) for $712,500. The Promissory Note initially accrued interest at 9.75% per annum, payable monthly, and had a maturity date of March 9, 2004. The Promissory Note was initially collateralized by a first mortgage on the assets of the country club. Since the cash down payment represented less than 25% of the total consideration paid for the assets, the transaction was recorded on the Partnership's financial statements using the deposit method as defined in SFAS No. 66, “Accounting for Sales of Real Estate.” The deposit method requires, among other things, that until the total cash received by the Partnership from the down payment and principal payments on the Promissory Note is at least 25% of the total consideration paid: (a) the sold assets remain on the Partnership's balance sheet as assets held for sale or disposal; (b) the operations of Fox Squirrel/The Lakes prior to the sale be recorded as discontinued operations; (c) cash received from the buyer be shown as a deposit on contract; and (d) payments received from the buyer with respect to the Promissory Note be treated as an increase in the deposit.
In June 2003, in connection with the buyer’s obtaining financing from a bank, WW-Golf, the buyer of the assets, made an early repayment of principal of $534,748, reducing the unpaid principal amount outstanding under the Promissory Note at that time to $147,757. The terms of the Promissory Note were then modified to provide for an annual interest rate equal to the higher of (a) 8.75% and (b) 2% over the bank’s prime rate, and the maturity date was extended to July 15, 2008. In addition to the foregoing modifications to the Promissory Note, the Partnership subordinated its lien priority on the assets sold to WW-Golf to that of the bank. With such prepayment of principal, the cash consideration paid by WW-Golf exceeded 25% of the total consideration paid for the assets. Accordingly, for the fiscal year ended December 31, 2003, the transaction was recorded on the Partnership’s financial statements as a sale of assets and a $341,221 gain on the sale of the assets was recognized.
At December 31, 2007, the principal amount of the Promissory Note was $128,823.
Year Ended December 31, 2007 Compared to Year Ended December 31,
■ Revenues
Overall, revenues decreased 37% to $685,779 in 2007, compared to $1,095,616 in 2006. The principal components of revenues and Management’s explanations for year-to-year changes are set forth below.
Property Sales
Revenue decreased 44% to $499,755 in 2007, compared to $899,411 in 2006.
Revenue from the sale of unimproved individual lots was $449,890 in 2007, compared to $664,974 in 2006. The number of lots sold during 2007 and 2006 was 14 and 25, respectively. Management attributes the 32% decrease in revenue and the 44% decrease in the number of lots sold primarily to a slowing economy and the tightening of credit markets, fueled in part by the turmoil involving subprime mortgages, as well as to efforts, beginning in April 2006, by Fish and Wildlife to protect the habitat of the endangered red-cockaded woodpecker, which efforts slowed home building activity and real estate sales in Boiling Spring Lakes.
For and 2006, the average sales price per lot was $32,135 and $26,599, respectively. Management attributes the 21% increase in the average sales price per lot primarily to the relative mix of lots sold. Lots adjoining or close to the golf course, for example, generally sell for more than lots that are not close to the golf course, and lots which are suitable for the installation of individual on-site septic systems generally sell for more than lots that are not suitable for on-site septic systems.
Revenue from the sale of commercial land was $29,940 in 2007, compared to $234,437 in 2006. The Partnership’s sales of commercial land are sporadic, highly variable, and largely beyond the Partnership’s control.
Revenue from the sale of other land was $19,925 in 2007. No such land was sold in 2006. The Partnership’s sales of other land are sporadic, highly variable, and largely beyond the Partnership’s control.
Management expects that revenue from property sales for 2008 will be approximately the same as or more than for 2007, but could be significantly less than for 2007.
Interest Income
Interest income in 2007 was $181,790, compared to $172,537 in 2006. Management attributes the 5% increase to somewhat higher interest rates generally during 2007 than during 2006.
Other Revenue
Other revenue in 2007 was $4,234, compared to $23,668 in 2006. The decrease of 82% is due substantially to the recognition as income of $15,394 in excess accruals for accounting and tax fees for 2004 and 2005 during 2006. At December 31, 2005, Management overestimated by $15,394 the amount of accounting and tax fees that the Partnership would have to pay during 2006 for services rendered with respect to 2005 and 2004. Excluding such amount, Other Revenue for 2006 was $8,274, comprised primarily of tax refunds received during 2006 for prior years.
■ Direct Costs of Property Sold
Direct costs of property sold increased 32% to $14,598, compared to $11,070 in 2006. Management attributes the increase in costs primarily to the location of the individual undeveloped lots sold. During late 2006 and 2007, the Partnership made capitalized expenditures to improve roads within certain sections, with the amount spent in a section allocated among the lots within such section. This results in individual lots within those sections generally having a higher carrying cost, that is, a higher book value, than lots within sections where the Partnership has not made capital improvements. During 2007, the Partnership sold 12 lots within sections where capital improvements had been made in recent months.
The Partnership's carrying cost of the commercial land and other land sold during 2007 and 2006 was nominal. As a result, the direct cost of such property represented approximately 5% of the total direct cost of property sold during 2007, and less than 1% of the total direct cost of property sold during 2006.
■ Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 4% to $675,214, compared to $652,290 in 2006. Noteworthy changes from 2006 in the components of selling, general and administrative expenses, and the reasons therefor, are as follows:
Real Estate Taxes
Real estate taxes increased 132% to $119,870, compared to $51,571 in 2006. Management attributes the increase to a county-wide reassessment during early 2007 which had the effect of increasing the aggregate assessed value of the Partnership’s land by more than 200%, which more than offset the decrease in the tax rate. Each of the individual platted lots owned by the Partnership -- 1,080 lots at December 31, 2007 -- is assessed individually at its market value as determined by the local taxing authorities, with no significant discount to reflect common ownership. Consequently, Management believes that the Partnership’s real estate tax burden is substantially higher than would be the case if few lots, or no lots, were actually platted. Due to the state law under which the taxes are levied, Management’s efforts to date to obtain relief have not resulted in lowering the Partnership’s real estate tax burden.
Income Taxes
During 2007, the Partnership paid $35,000 in state income taxes to North Carolina relating to fiscal 2006. During 2006, the Partnership paid $150,304 in state income taxes relating to fiscal 2005. The 77% decrease reflects the Partnership’s decrease in profitability from 2005 to 2006. As a limited partnership, the Partnership generally passes income tax liability through to its partners. With respect to 2006 and 2005, however, Management believes that the administrative cost of allocating such liability among the partners, and maintaining records therefor, would be unreasonably time-consuming and complex. Management, therefore, elected to pay such taxes, with the result that each partner’s pro rata share of the Partnership’s income for each such year would be/has been reduced by a pro rata share of such taxes paid.
Salaries, Wages and Related Expenses
During 2007, the Partnership paid a total of $55,569 in salaries, wages, and incentive compensation, compared to $92,669 during 2006, for a net decrease of 40%. The Partnership pays the general manager of its Boiling Spring Lakes office a commission on land sales based upon the gross sales price of land sold. Since the Partnership experienced a 44% decrease in revenue from land sales for 2007 compared to 2006, total commissions paid to the general manager decreased as well.
Miscellaneous Expenses
During 2007, the Partnership incurred $48,698 in connection with studies involving, and consultants’ work relating to, alternatives for addressing Fish and Wildlife’s concerns about protecting the habitat of the red-cockaded woodpecker on and in proximity to land owned by the Partnership. No such expenses were incurred during 2006.
Tender Offer-Related Expenses
During 2006, the Partnership’s units were the object of separate cash tender offers by two unaffiliated parties and an affiliate of the General Partner. The Partnership bore none of the expenses of any of such parties; however, during 2006 the Partnership incurred legal fees and other expenses totaling $29,083 relating to the Partnership’s review and response to the tender offers, including filings with the Securities and Exchange Commission.
Consulting Fees
During 2007, the Partnership paid consulting fees of $100,000 to an affiliate of the general partner in connection with the tender offers for the Partnership’s units made by third parties during 2006. No similar expense was incurred by the Partnership during 2006.
■ Depreciation
Depreciation expense decreased 1% to $3,924 in 2007, compared to $3,969 in 2006. Management attributes the decrease to certain assets becoming fully depreciated during and no material increase in depreciable assets.
Year Ended December 31, 2006 Compared to Year Ended December 31,
■ Revenues
Overall, revenues decreased 57% to $1,095,616, in 2006, compared to $2,567,060 in 2005. The principal components of revenues and Management’s explanations for year-to-year changes are set forth below.
Property Sales
Revenue decreased 64% to $899,411 in 2006, compared to $2,487,651 in 2005.
Revenue from the sale of unimproved individual lots was $664,974 in 2006, compared to $1,899,321 in 2005. The number of lots sold during 2006 and 2005 was 25 and 81, respectively. Management attributes the 65% decrease in revenue and the 69% decrease in the number of lots sold to initiatives undertaken early in 2006 by Fish and Wildlife to protect the habitat of the red-cockaded woodpecker.
For and 2005, the average sales price per lot was $26,599 and $23,448, respectively. Management attributes the 13% increase in the average sales price per lot primarily to a strong local real estate market that allowed for price increases early in 2006, but also to the relative mix of lots sold. Lots adjoining or close to the golf course, for example, generally sell for more than lots that are not close to the golf course, and lots which are suitable for the installation of individual on-site septic systems generally sell for more than lots that are not suitable for on-site septic systems.
The Partnership sold one improved individual lot in 2005 for $167,135. No such lot was sold in 2006. With the sale of the one improved individual lot in 2005, the Partnership no longer owns any such lots. Unless the Partnership acquires one or more improved individual lots or elects to build one or more homes on land that it owns, the Partnership will not generate further revenue from this source.
Revenue from the sale of commercial land was $234,437 in 2006, compared to no revenue in 2005. The Partnership’s sales of commercial land are sporadic, highly variable, and largely beyond the Partnership’s control.
Revenue from the sale of other land was $421,195 in 2005. No such land was sold in 2006. The Partnership’s sales of other land are sporadic, highly variable, and largely beyond the Partnership’s control.
Interest Income
Interest income in 2006 was $172,537, compared to $74,908 in 2005. The 130% increase is due in part to somewhat higher interest rates generally during 2006 than during 2005, and in part to a shift from investments in Treasury Bills having a maturity of 91 days or less into Treasury Bills having a maturity of more than 91 days but not more than a year. The shift into longer maturities resulted in the Partnership earning slightly higher interest rates on its investments in 2006 than in 2005, since, usually, all other things being equal, the longer the time to maturity of a debt security, the higher the interest rate investors receive. In addition, interest income earned on Treasury Bills having a maturity of 91 days or less is typically recognized at maturity, whereas interest income on Treasury Bills having a maturity greater than 91 days is typically accrued during the investment holding period. This accounting treatment had the effect of recognizing $34,053 of interest income during 2006 that would otherwise have been recognized in 2007.
Other Revenue
Other revenue in 2006 was $23,668, compared to $4,501 in 2005. The increase of 426% is due substantially to the recognition as income of $15,394 in excess accruals for accounting and tax fees for 2004 and 2005. At December 31, 2005, Management overestimated by $15,394 the amount of accounting and tax fees that the Partnership would have to pay during 2006 for services rendered with respect to 2005 and 2004. Excluding such amount, Other Revenue for 2006 was $8,274, or an increase of 84% over 2005. The increase was due principally to tax refunds received during 2006 for prior years.
■ Direct Costs of Property Sold
Direct costs of property sold declined 93% to $11,070, compared to $163,091 in 2005. The amount for 2005 includes $111,772 relating to the sale of an improved individual lot in 2005. Excluding such amount, direct costs of property declined 78% from $51,319 in 2005. The decrease is due principally to the sale of fewer lots in 2006 than in 2005.
■ Selling, General and Administrative Expenses
Selling, general and administrative expenses declined 3% to $652,290, compared to $675,135 in 2005. Noteworthy changes from 2005 in the components of selling, general and administrative expenses, and the reasons therefor, are as follows:
Taxes
During 2006, the Partnership expensed $150,304 in North Carolina and South Carolina state income taxes due with respect to 2005 for limited partners, whereas only $55,050 in such taxes was expensed in 2005 for taxes due with respect to 2004. As a limited partnership, the Partnership generally passes income tax liability through to its partners. With respect to these years, however, Management believes that the administrative cost of allocating such liability among the partners, and maintaining records therefor, would be extremely time-consuming and complex. Management, therefore, elected to pay such taxes, with the result that each partner’s pro rata share of the Partnership’s income for each such year would be/has been reduced by a pro rata share of such taxes paid.
Tender Offer-Related Expenses
During 2006, the Partnership’s units were the object of separate cash tender offers by two unaffiliated parties and an affiliate of the General Partner. The Partnership bore none of the expenses of any of such parties; however, during 2006 the Partnership incurred legal fees and other expenses totaling $29,083 relating to the Partnership’s review and response to the tender offers, including filings with the Securities and Exchange Commission.
■ Depreciation
Depreciation expense increased 42% to $3,969 in 2006, compared to $2,791 in 2005. Management attributes the increase principally to capital expenditures made during 2006 and 2005 which increased the asset base being depreciated.
■ Rental income - net
The Partnership generated no rental income during 2006, since the Partnership sold the house in 2005 that generated rental income. For 2005, the Partnership incurred a net loss of $5,553 due to the fact that the Partnership deducted depreciation relating to the rental property from gross rental income to derive net rental income, and to the vacancy of the rental property in the months leading up to the sale.
Liquidity and Capital Resources
■ General
The Partnership requires cash primarily for the payment of operating expenses, overhead, and capital expenditures incurred in connection with real estate sales. Much of the land owned by the Partnership is accessible only by roads that are incomplete, or that are unpaved or lack a rocked surface, or which require repairs. Management believes that the Partnership will be able to sell such land only if incomplete roads are completed, the roads that are now unpaved or that lack a rocked surface are rocked, and that roads in need of repairs are repaired. In addition, Management believes that the Partnership will be able to achieve higher sales prices for many of its lots by paving certain roads with asphalt. The cost of such road improvements is generally substantial. Moreover, the Partnership may have to bear assessments relating to the installation of water and sewer lines installed by the City and others. The total of such assessments is likely to be substantial. The Partnership’s current cash balances and investments in short-term Treasury securities may not be sufficient to meet all of these capital requirements. Historically, the Partnership has met its liquidity requirements by accruing general partner fees and certain other fees and expenses payable to the General Partner and its affiliates, selling certain non-real estate assets, and, from time to time, borrowing from local banks or the General Partner and/or its affiliates. Cash is generated primarily from individual lot sales and may not be sufficient to meet future operating costs, debt service and other cash requirements. The Partnership may seek to supplement its current cash balances and investments in short-term Treasury securities by negotiating credit facilities, issuing debt on such terms and conditions as the General Partner deems prudent, or seeking other forms of debt or equity financing as the General Partner deems appropriate.
■ Cash Flows from Operating Activities
During 2007, the Partnership used $14,436 of net cash in operating activities, compared to $162,101 of net cash generated from operating activities during 2006. The change is due principally to the substantially lower revenue from property sales in 2007 than in 2006 and to the decrease in accrued liabilities owed to the General Partner and its affiliates during 2006.
■ Cash Flows from Investing Activities
Net cash used in investing activities was $4,510 in 2007, compared to $1,349,789 of net cash used in 2006. The change is due primarily to the shift by Management during 2006 from investing the Partnership’s excess cash balances in U.S. Treasury securities having a maturity of less than 91 days to investing in U.S. Treasury securities having a maturity at the time of investment of more than 91 days. For financial reporting purposes, the Partnership treats investments in and maturities of U.S. Treasury securities having a maturity at the time of investment of 91 days or less as changes in cash, whereas investments in and maturities of U.S. Treasury securities having a maturity at the time of investment of more than 91 days are treated as uses of cash for investing activities and sources of cash from investing activities, respectively.
Off-Balance Sheet Arrangements
The Partnership has no off-balance sheet arrangements.
Tabular Disclosure of Contractual Obligations
The Partnership has no contractual obligations of the type required to be disclosed by Item 303(a)(5) of Regulation S-K.
Capital Expenditures During 2008
The Partnership plans to spend $373,000 during 2008 for rocking and/or paving certain roads, and preparing certain land for sale. Management believes that such expenditures will result in the sale of certain individual lots at a sales price per lot substantially higher, and at a pace substantially faster, than could be achieved if such work were not completed. Management expects that such expenditures will be funded out of existing cash balances, from cash generated from real estate sales, and/or from the proceeds of maturing U.S. Treasury securities. Such costs will be treated as a capital expenditure and have the effect of increasing the cost basis of the individual lots in the sections within which the roads are situated. In addition, to address Fish and Wildlife’s concerns of the red-cockaded woodpecker on certain portions of the Partnership’s land, the Partnership plans to spend $37,000 during 2008, with additional amounts, as yet undetermined, likely to be sent in future years. Depending upon market conditions and other relevant factors, Management may decide to spend more or less than such amounts during 2008.
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, 2007, 2006, and 2005. Moderate increases in costs and expenses incurred as a result of inflation have, Management believes, largely been offset by increases in the sales prices of land sold.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Partnership’s principal market risk exposure is to changes in interest rates, which are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond the control of the Partnership. Changes in the general level of interest rates can affect the Partnership’s revenue from property sales, since the market for real estate in general varies to a large degree upon the level and stability of interest rates. Generally, when interest rates are high or are increasing, the market for real estate declines, and when interest rates are low or are decreasing, the market for real estate increases. Management believes that the extent of such risk is neither quantifiable nor predictable because of the variability of future interest rates and because of the highly variable nature of the Partnership’s real estate sales.
The Partnership also has exposure to market risk for changes in interest rates due primarily to the following:
•
Cash: Substantially all of the Partnership’s cash is deposited in an account at a local financial institution bearing interest at a variable rate. If interest rates were to increase, the Partnership would earn more interest income on its cash balances. If interest rates were to decrease, the Partnership would earn less interest income on its cash balances.
•
U.S. Treasury securities: The Partnership invests excess cash in U.S. Treasury securities having a maturity at the time of purchase of more than 91 days but less than one year. All of such securities are classified as trading securities. If interest rates were to increase, upon sale or maturity of the U.S. Treasury securities currently held, the Partnership would earn more interest income upon reinvestment of the proceeds due to a higher interest rate on the securities then purchased. If interest rates were to decrease, upon sale or maturity of the U.S. Treasury securities currently held, the Partnership would earn less interest income upon reinvestment of the proceeds due to a lower interest rate on the securities then purchased. Unrealized gains or losses on U.S. Treasury securities held due to changes in interest rates would not be realized so long as the securities are held to maturity.
•
Note receivable: The interest rate on the note receivable is the higher of (a) 8.75%, and (b) 2% above the prime interest rate of a reference bank. If interest rates were to increase, then (a) prior to the maturity date of the note receivable, the Partnership would earn more interest income only if interest rates were to rise to the point that the stated interest rate on the note receivable were to increase above 8.75%, and (b) upon maturity of the note receivable, the Partnership would earn more interest income upon reinvestment of the proceeds due to a higher interest rate on the securities then purchased. If interest rates were to decrease, then (a) prior to the maturity date of the note receivable, the Partnership’s interest income would not change, since the stated interest rate on the note receivable would not fall below 8.75%, and (b) upon maturity of the note receivable, the Partnership would earn less interest income upon reinvestment of the proceeds due to a lower interest rate on the securities then purchased. Unrealized gains or losses on the note receivable, if any, due to changes in interest rates would not be realized so long as the note receivable is held to maturity.
At December 31, 2007, the Partnership had cash of $320,372. In addition, the Partnership held $3,339,193 in U.S. Treasury securities having a maturity at the time of purchase of more than 91 days but less than one year. Had the average level of interest rates during 2007 been higher or lower by 100 basis points or one percent (1%), the Partnership’s net income would have been approximately $36,172 more or less, respectively. The foregoing estimate of the change in net income is based upon quarterly average balances shown on the Partnership’s balance sheets at March 31, June 30, September 30, and December 31, 2007.
At December 31, 2006, the Partnership had cash of $339,318. In addition, the Partnership held $3,331,269 in U.S. Treasury securities having a maturity at the time of purchase of more than 91 days but less than one year. Had the average level of interest rates during 2006 been higher or lower by 100 basis points or one percent (1%), the Partnership’s net income would have been approximately $19,220 more or less, respectively. The foregoing estimate of the change in net income is based upon quarterly average balances shown on the Partnership’s balance sheets at March 31, June 30, September 30, and December 31, 2006.
The Partnership had no interest-bearing debt outstanding during 2007 or 2006.
The Partnership does not enter into derivative contracts for its own account to hedge against the risk of changes in interest rates.
The principal amount of the note receivable on December 31, 2007 and December 31, 2006 was $128,823 and $133,769, respectively.
Item 8.
Item 8. Financial Statements and Supplementary Data
See Part IV, “Item 15. Exhibits and Financial Statement Schedules," for the response to this item.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
The following report of Management shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section.
The Partnership maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Partnership's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Partnership’s Chief Executive Officer and Chief Financial Officer, or the person performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
The Partnership’s management has the responsibility for establishing and maintaining adequate internal control over the Partnership’s financial reporting. Since the Registrant is a limited partnership, it has no officers or directors. Mr. Davis P. Stowell, president of the General Partner, carries out the functions of the principal executive officer and the principal financial officer of the Partnership, and, accordingly, is deemed to be the Partnership’s “management” for purposes involving the evaluation of the disclosure controls and procedures and the effectiveness thereof. Mr. Stowell has, as of the end of the period covered by this Annual Report on Form 10-K, evaluated the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) and has determined that such disclosure controls and procedures are effective at the reasonable assurance level.
In designing and evaluating the internal controls, including internal control over financial reporting, Management recognized that any internal controls, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and Management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible internal controls. Because of the inherent limitations in all internal control systems, no evaluation of internal controls can provide absolute assurance that all internal control issues and instances of fraud, if any, within the Partnership have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, internal controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the internal control. The design of any system of internal controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any internal control will succeed in achieving its stated goals under all potential future conditions. Over time, an internal control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures related to the internal control may deteriorate. Because of the inherent limitations in a cost-effective internal control system, misstatements due to error or fraud may occur and not be detected.
This Annual Report on Form 10-K does not include an attestation report of the Partnership’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Partnership’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Partnership to provide only Management’s report in this Annual Report on Form 10-K.
There has been no change in the Partnership’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended, that occurred during the last fiscal quarter of 2007 that has materially affected or is reasonably likely to materially affect the Partnership’s internal control over financial reporting. The Partnership does not believe any significant deficiencies or material weaknesses exist in its internal control over financial reporting. Accordingly, no corrective actions have been taken.
Item 9B.
Item 9B. Other Information
None.
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PART III
Item 10.
Item 10. Directors, Executive Officers, and Corporate Governance
General Partner
The Partnership has no officers or directors. Grace Property Management, Inc., the general partner, performs functions generally performed by officers and directors. Grace Property Management, Inc. is a Delaware corporation engaged in the business of real estate management, and has served as general partner since May 15, 1980.
Officers and Directors of the General Partner
Davis P. Stowell, 51, President and Director of the General Partner. Mr. Stowell has been President and a director of Grace Property Management, Inc. since 2003. He was Vice President of the General Partner from 1993 to 2003. He is also an officer of affiliates of Grace Property Management, Inc., most of which positions he has held since 1989.
Audit Committee of the General Partner
The General Partner has no committees, including an audit committee. The Board of Directors of the General Partner functions in the capacity of an audit committee. The Board of Directors of the General Partner has determined that Davis P. Stowell is an “audit committee financial expert” and that he is not “independent” as each such term is defined by the Securities and Exchange Commission.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Securities Exchange Act of 1934, as amended, requires that reports of beneficial ownership of partnership units and changes in such ownership be filed with the Securities and Exchange Commission by Section 16 “reporting persons.” The Partnership is required to disclose in this Annual Report on Form 10-K each reporting person whom it knows to have failed to file any required reports under Section 16 on a timely basis during the fiscal year ended December 31, 2007. To the Partnership’s knowledge, based solely upon a review of all Section 16(a) filings furnished to the Partnership by Section 16(a) reporting persons or written representations that no such reports were required, during the fiscal year ended December 31, 2007, all Section 16(a) reporting persons complied with all Section 16(a) filing requirements applicable to them.
Code of Ethics
In connection with its role as general partner of the Partnership, the General Partner has adopted a Code of Ethics that applies to each person who performs one or more of the following functions: principal executive officer, principal financial officer, and principal accounting officer or controller. There has been no change to or amendment of the Code of Ethics during 2007. The Partnership shall furnish, without charge, a copy of the Code of Ethics to any person who requests a copy in writing sent to the General Partner at the following address: Mr. Davis P. Stowell, President, Grace Property Management, Inc., 55 Brookville Road, Glen Head, NY 11545.
Item 11.
Item 11. Executive Compensation
The total compensation earned by the General Partner during each of the last three fiscal years ended December 31 is set forth in Table 6, below.
TABLE 6: SUMMARY COMPENSATION TABLE
[a]
Excludes payments made to affiliates of the General Partner as described in “Item 13. Certain Relationships and Related Transactions.”
During 2007, payments made by the Partnership to the General Partner totaled $160,000, representing general partner fees for the first, second, and third quarters of 2007 as well as the fourth quarter of 2006. During 2006, payments made by the Partnership to the General Partner totaled $232,500, representing general partner fees for the first, second, and third quarters of 2006 as well as the second, third, and fourth quarters of 2005. During 2005, payments made by the Partnership to the General Partner totaled $57,500, representing general partner fees for the first quarter of 2005 as well as the fourth quarter of 2004. As of December 31, 2007, general partner fees accrued but not paid to Grace Property Management, Inc. totaled $40,000, representing general partner fees for the fourth quarter of 2007. As of December 31, 2006, general partner fees accrued but not paid to Grace Property Management, Inc. totaled $40,000, representing general partner fees for the fourth quarter of 2006. As of December 31, 2005, general partner fees accrued but not paid to Grace Property Management, Inc. totaled $112,500, representing general partner fees for the second, third, and fourth quarters of 2005. Such amount was paid during the first quarter of 2006. The Partnership has no ongoing plan or arrangement with respect to future remuneration to Grace Property Management, Inc. other than to accrue interest (at an annual rate of 10%, compounded quarterly) on the unpaid balance when cash flow is insufficient to pay general partner fees.
As of December 31, 2007, the Partnership had a group life insurance plan in place covering the full-time employees of the Partnership located in Boiling Spring Lakes. The Partnership has no pension or profit sharing plan but does provide for incentive bonus compensation to its employees located in Boiling Spring Lakes for meeting or exceeding predesignated budget targets. The Partnership has no options, warrants, or appreciation rights outstanding. No Management person is indebted to the Partnership. Other than for accrued vacation and accrued travel and other expenses, the Partnership is not indebted to any of its employees.
See “Item 13. Certain Relationships and Related Transactions,” for other payments made to affiliates of the General Partner.
Compensation Committee Interlocks and Insider Participation
Not applicable.
Compensation Committee Report
The General Partner does not compensate its officers and directors. Each of the officers and directors of the General Partner has duties and responsibilities with affiliates of the General Partner and is compensated by one or more of such affiliates. Such compensation is independent of the general partner fees paid by the Partnership to the General Partner.
Performance Graph
No distributions have been made on partnership units, and the partnership units have substantially no liquidity. Therefore, there is no basis for comparison of returns to partners to any other measure.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unit Holder Matters
Security Ownership of Certain Beneficial Owners
As of March 23, 2008, the Partnership has 1,811,562 partnership units issued and outstanding. Information as of March 23, 2008 concerning the number of partnership units beneficially owned by the persons who, to the knowledge of Management, beneficially owned more than 5% of the units issued and outstanding on such date is set forth in Table 7, below.
Security Ownership of Management
Information as of March 23, 2008 concerning the number of partnership units beneficially owned by (1) Grace Property Management, Inc., the General Partner, (2) each director of Grace Property Management, Inc., and (3) the directors and executive officers of Grace Property Management, Inc. as a group is set forth in Table 8, below.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Transactions with Related Persons
For 2007, 2006, and 2005, the General Partner and its affiliates charged the Partnership for general partner fees, rent, consulting fees, legal services, and interest on unpaid balances at an annual rate of 10%, compounded quarterly, as set forth in Table 9, below. All of such charges have been provided for in the Partnership’s financial statements. Amounts paid by the Partnership to the General Partner and its affiliates during 2007, 2006 and 2005 reflect amounts previously accrued and unpaid. See “Item 11. Executive Compensation,” for information on general partner fees paid to the General Partner.
An affiliate of the General Partner charges the Partnership for office space used by officers of the General Partner. The amounts charged for 2007, 2006, and are set forth in Table 9, above. The amount paid by the Partnership during was $19,000, which represents rent for the first, second, and third quarters of 2007 as well as the fourth quarter of 2006. The amount paid by the Partnership during 2006 was $27,750, which represents rent for the first, second, and third quarters of 2006 as well as the second, third, and fourth quarters of 2005. The amount paid by the Partnership during 2005 was $8,250, which represents rent for the first quarter of 2005 as well as the last quarter of 2004. At December 31, 2007, the amount of accrued but unpaid rent was $4,750.
An affiliate of the General Partner was paid $100,000 in consulting fees in connection with the tender offers for the Partnership’s units made by third parties during 2006.
An affiliate of the General Partner is paid consulting fees in connection with the sale of the assets of Fox Squirrel/The Lakes. Such consulting fees are equal to 2½% of the gross purchase price paid in cash at the March 2001 closing and, thereafter, 2½% of the principal payments received by the Partnership on the Promissory Note. All of such consulting fees have been accrued on the Partnership’s financial statements and are paid as and when principal on the Promissory Note is received by the Partnership. Assuming that all future payments of principal are received in a timely manner, the Partnership will pay additional consulting fees to such affiliate of the General Partner of $3,221 in 2008. Given the relatively minor amounts of each monthly payment prior to maturity, the Partnership will pay consulting fees to the affiliate of the General Partner semi-annually in arrears. Interest for late payments in respect of such quarterly payments of consulting fees has been waived.
Officers of the General Partner charge the Partnership for their out-of-pocket expenses incurred when traveling on Partnership business or otherwise incurred in connection with the Partnership. The amounts charged for and paid during 2007, 2006, and 2005 are set forth in Table 9, above. At March 23, 2008 and December 31, 2007, the Partnership owed nothing with respect to reimbursement of out-of-pocket expenses.
The General Partner and its affiliates charge the Partnership late fees on amounts not timely paid, with interest at an annual rate of 10%, compounded quarterly. No amounts were charged for 2007, 2006, and 2005.
Except for the preceding items, there were no transactions between the General Partner or its affiliates (including Management of the General Partner and their immediate families) and the Partnership during the fiscal year ended December 31, 2007 or thereafter. There were no other related party transactions and there existed no indebtedness to the Partnership from the General Partner or its affiliates (including Management of the General Partner and their immediate families).
Review, Approval, or Ratification of Transactions with Related Persons
The General Partner has the ultimate authority to approve all related party transactions.
Director Independence
The Partnership has no directors. The General Partner performs functions generally performed by directors.
Item 14.
Item 14. Principal Accountant Fees and Services
Beginning December 22, 2003, the Partnership engaged Lynch & Howard, P.A., Certified Public Accountants, Raleigh, North Carolina as the Partnership’s independent registered certified public accountants (“Lynch & Howard”). On August 15, 2007, the Partnership was notified that Moore Stephens Frost had acquired Lynch & Howard and that as a result of the acquisition Lynch & Howard would no longer be the auditors for the Partnership. By virtue of the acquisition, Moore Stephens Frost was appointed as the Partnership’s independent registered certified public accounting firm effective August 16, 2007. In addition to performing the year-end audit of the financial statements, the independent registered certified public accountant performs a limited review of the quarterly financial statements, and reviews the Quarterly Reports on Form 10-Q and Annual Report on Form 10-K filed with the Securities and Exchange Commission. All services performed by the independent registered certified public accountants are approved by the General Partner prior to performance.
The General Partner has reaffirmed continuation of Moore Stephens Frost as independent registered certified public accountants for fiscal year 2008.
Table 10, below, details the aggregate fees for professional services and expenses by the Partnership’s Independent Registered Certified Public Accounting firm during 2007.
Audit Fees
Audit fees consist of fees for professional services and expenses rendered for the audit of the Partnership’s financial statements and review of the interim financial information included in the Partnership’s Quarterly Reports on Form 10-Q. The audit fees for 2007 and 2006 were approximately $22,500 and $21,500, respectively.
Audit-Related Fees
During 2007, the Partnership’s principal accountant billed $1,986, including for reimbursement of travel and out-of-pocket expenses, for work in connection with compliance by the Partnership with the Sarbanes-Oxley Act of 2002 and the related rules of the Securities and Exchange Commission. There were no other billings in 2007, and no billings in 2006, for assurance and related services by the Partnership’s principal accountant that are reasonably related to the performance of the audit or review of financial statements that are not reported under “Audit Fees,” above.
Tax Fees
The Partnership relies upon the expertise of an accounting firm other than the principal accountant for tax compliance, tax advice, and tax planning. Therefore, there have been no billings in 2007 or 2006 for professional services rendered by the Partnership’s principal accountant for tax compliance, tax advice, and tax planning.
All Other Fees
There have been no billings in 2007 or 2006 for products or services rendered by the Partnership’s principal accountant other than as set forth under “Audit Fees” and “Audit-Related Fees,” above.
Approval Process
The General Partner has no committees, including an Audit Committee. The Board of Directors of the General Partner is responsible for the appointment, compensation, and oversight of the work of the independent auditors and approves in advance any services, whether audit-related or not, to be performed by the independent auditors.
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PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
Financial Statements
The documents filed as part of this report are listed in the Index to Financial Statements set forth in Table 11, below.
Financial Statement Schedules
The financial statement schedules filed as part of this report are listed in the Index to Financial Statement Schedules set forth in Table 12, below. All other required supplemental financial schedules are either contained within the notes to the financial statements or are not applicable.
Exhibits
A complete listing of exhibits, including those incorporated by reference, is shown on Table 13, below. All other exhibits are not applicable.
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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
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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REEVES TELECOM LIMITED PARTNERSHIP
December 31, 2007 and 2006
Financial Statements
And
Supplementary Information
With
Report of Independent Registered
Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Partners
Reeves Telecom Limited Partnership
Boiling Spring Lakes, North Carolina
We have audited the accompanying balance sheet of Reeves Telecom Limited Partnership as of December 31, 2007, and the related statements of operations, changes in partners’ capital and cash flows for the year then ended. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Reeves Telecom Limited Partnership as of December 31, 2006 and 2005 were audited by Lynch & Howard, P.A., who was acquired by Moore Stephens Frost during 2007, and whose report dated January 23, 2007, expressed an unqualified opinion on those financial statements.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Reeves Telecom Limited Partnership as of December 31, 2007, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
/s/ Moore Stephens Frost
Certified Public Accountants
Little Rock, Arkansas
March 28,
Lynch & Howard, PLLC
CERTIFIED PUBLIC ACCOUNTANTS
Member
American Institute of Certified Public Accountants
Center for Public Company Audit Firms
Private Companies Practice Section
Report of Independent Registered Public Accounting Firm
To the Partners
Reeves Telecom Limited Partnership
Boiling Spring Lakes, North Carolina
We have audited the accompanying balance sheets of Reeves Telecom Limited Partnership as of December 31, 2006 and 2005, and the related statements of operations, changes in partners’ capital and cash flows for each of the two years in the period ended December 31, 2006. 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 in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Reeves Telecom Limited Partnership as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2006 in conformity with U.S. generally accepted accounting principles.
Certified Public Accountants
Raleigh, North Carolina
March 23,
An
Affiliate
of
Glenwood Avenue
Suite
Raleigh, North Carolina 27612
Mailing Address
Post Office Box 17845
Raleigh, North Carolina 27619
Voice Telephone: (919) 782-8410
Fax Telephone: (919) 881-0892
www.lhcpa.com
REEVES TELECOM LIMITED PARTNERSHIP
Balance Sheets
December 31, 2007 and 2006
The accompanying notes are an integral part of these financial statements.
REEVES TELECOM LIMITED PARTNERSHIP
Statements of Operations
The accompanying notes are an integral part of these financial statements.
REEVES TELECOM LIMITED PARTNERSHIP
Statements of Changes in Partners’ Capital
The accompanying notes are an integral part of these financial statements.
REEVES TELECOM LIMITED PARTNERSHIP
Statements of Cash Flows
The accompanying notes are an integral part of these financial statements.
REEVES TELECOM LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2007 and 2006
1.
Nature of Operations
On May 17, 1979, the stockholders of Reeves Telecom Corporation (the “Corporation”) approved a plan of liquidation (the “Plan”) for the Corporation and its subsidiaries. The Plan, which was determined by the Internal Revenue Service to qualify as a Section 337 liquidation, authorized the Corporation’s Board of Directors to sell the Corporation’s assets and distribute any remaining unsold assets to its stockholders and/or a liquidation trust. On May 8, 1980, stockholders at a special meeting approved an amendment to the Plan whereby assets not sold within one year of the date the Plan was approved could be transferred, at the discretion of the Board of Directors, from the Corporation to a South Carolina limited partnership which would undertake to sell the remaining assets on behalf of the stockholders. On May 15, 1980, the Corporation was liquidated and all of its unsold assets and liabilities were transferred to Reeves Telecom Associates, a South Carolina limited partnership (the “Partnership”). Stockholders of the Corporation received one partnership unit in exchange for each share of common stock. The units are registered under the Securities Act of 1933, but are not listed on any national securities exchange. In January 1987, pursuant to a change in South Carolina law, the Partnership’s legal name was changed from Reeves Telecom Associates to Reeves Telecom Limited Partnership. From the liquidation of the remaining assets, the Partnership may acquire additional properties or make distributions to the partners. The Partnership currently has no intent to acquire additional properties but is not precluded from doing so.
Pursuant to the Plan, the Corporation sold all of its broadcasting assets and substantially all of the land held for development and sale at one of its two land development locations and distributed to its stockholders cash of $.90 per share on February 29, 1980 and $2.30 per share on May 14, 1980.
The remaining assets of the Partnership are primarily land held for sale, note receivable, U.S. Treasury securities and cash. The cash was generated from real estate sales including the sale of the golf club. During the first quarter of 2001, the Partnership sold the golf club.
The Partnership intends to continue to sell lots in the normal course of business and, while no assurances can be given, the Partnership believes the carrying value of the remaining lots is less than their net realizable value. Should the Partnership elect to affect a bulk sale and/or abandonment, the net amount realized could be less than the carrying value.
The Partnership’s Managing General Partner is Grace Property Management, Inc.
2.
Summary of Significant Accounting Policies
a.
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.
b.
Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
REEVES TELECOM LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2007 and 2006
2.
Summary of Significant Accounting Policies (cont.)
c.
Property sales - Property sales represent individual building lots and other undeveloped land sold for cash and the gross sales price of residential houses built or acquired by the Partnership for resale. The revenue from these sales is recognized at the closing date unless a deferral is required pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 66, “Accounting for Sales of Real Estate.” Land cost included in direct costs of property sold represents the proportionate amount of the total initial project costs, after recorded valuation allowances, based on the sales value of the lot to the total estimated project sales value plus the value per lot of any capital improvements made subsequent to the initial project costs.
d.
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.
ThePartnership assesses the realizability of the carrying value of its properties held for sale and related buildings and equipment whenever triggering events or changes in circumstance indicate that impairment may have occurred in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
e.
Significant concentrations of credit risk - At December 31, 2007, the Partnership maintained cash balances $219,847 in excess of Federal Deposit Insurance Corporation insured amounts. In the event that the bank where the Partnership maintains its accounts becomes insolvent, the Partnership may lose some or all of such excess.
f.
Cash and cash equivalents - For purposes of the statements of cash flows, the Partnership considers cash as cash on hand, cash deposited in financial institutions, money market accounts and U.S. Treasury securities with maturities of less than 91 days at the date of purchase. Cash equivalents are stated at cost, which approximates market value.
g.
Investments - Investments consist of U.S. Treasury securities that have been designated as trading securities. These investments are accounted for in accordance with the standards of SFAS No. 115, “Accounting for Certain Investments: Debt and Equity Securities” and are therefore recorded at fair value.
h.
Advertising costs - Advertising costs of $12,361, $7,894 and $7,107 were expensed as incurred during the years ended December 31, 2007, 2006 and 2005, respectively.
i.
Recently issued accounting standards - In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and expands on required disclosures about fair value measurement. SFAS No. 157 is effective for the Partnership on January 1, 2008 and will be applied prospectively. Management does not believe the adoption of SFAS No. 157 will have a significant impact on its financial statements.
REEVES TELECOM LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2007 and 2006
2.
Summary of Significant Accounting Policies (cont.)
In February 2007, the FASB issued SFAS No. 159, “Establishing the Fair Value Option for Financial Assets and Liabilities,” to permit all entities to choose to elect to measure eligible financial instruments at fair value. SFAS No. 159 applies to fiscal years beginning after November 15, 2007 with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157, “Fair Value Measurements.” An entity is prohibited from retrospectively applying SFAS No. 159, unless it chooses early adoption. Management is currently evaluating the impact of SFAS No. 159 on its financial statements.
3.
Properties Held for Sale and Property and Equipment
The Partnership obtained an independent appraisal report dated March 2, 2008 valuing the properties held for sale at December 31, 2007. Based upon this appraisal, management determined that no additional valuation allowances were required. Management believes that the properties held for sale are not reported in excess of their fair values. The change in the valuation allowances reported below are reductions related to the properties sold. See Note 10 to the financial statements for contingent liabilities related to the properties held by the Partnership.
A summary of properties held for sale and property and equipment at December 31, 2007 and 2006 is as follows:
REEVES TELECOM LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2007 and 2006
4.
Investments
Investments consist of debt instruments that are direct obligations of or guaranteed by the U.S. government recorded at fair market value. The fair market value of the investments may fluctuate depending on changes in interest rates. Fair market value was $3,339,193 and $3,331,269 at December 31, 2007 and 2006, respectively. The net unrealized gains were $44,247, $967 and $14,851 at December 31, 2007, 2006 and 2005, respectively. Cost was $3,294,945 and $3,330,302 at December 31, 2007 and 2006, respectively. Investment income was $162,682, $116,821 and $28,677 at December 31, 2007, 2006 and 2005, respectively.
5.
Accrued Expenses - Affiliates
A summary of accrued expenses owed to affiliates at December 31, 2007 and 2006 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. See Note 6 for additional information regarding related party transactions.
6.
Related Party Transactions
The General Partner and its affiliates charged the Partnership for services and office space for the years ended December 31, 2007, 2006 and 2005 as follows:
REEVES TELECOM LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2007 and 2006
7.
Income Taxes
No provision has been made for federal income taxes since income or loss is includable in the partners’ returns as they report to tax authorities in their respective capacities as partners. During 2007, 2006 and 2005, the Partnership expensed $35,000, $150,304 and $55,050, respectively, of state income taxes paid. Management believes that the administrative cost of allocating such liability among the partners would be time consuming and complex. Therefore, management elected to pay such taxes and reduce each partner’s pro rata share of income.
8.
Fair Value of Financial Instruments
Thefollowing disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, “Disclosure About Fair Value of Financial Instruments.” The estimated fair value amounts have been determined by the Partnership using the methods and assumptions described below. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Partnership could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value of cash in banks is estimated to be its carrying value and is not included in the analysis below.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value:
U.S. Treasury Securities
The fair value of the U.S. Treasury securities has been estimated at the quoted market price. The fair value of the U.S. Treasury securities was estimated to be $3,339,193 and $3,331,269 at December 31, 2007 and 2006, respectively.
Note Receivable
The fair value of the note receivable has been estimated by discounting the future cash flows using the rate the Partnership would expect to receive on similar type instruments. The note was modified on June 17, 2003 and a current interest rate was negotiated. The fair value of the note receivable was estimated to be $128,823 and $133,769 at December 31, 2007 and 2006, respectively.
REEVES TELECOM LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2007 and 2006
9.
Disposal of Business Segment / Note Receivable
The Partnership closed a sale agreement for Fox Squirrel Country Club on March 9, 2001. Under the agreement, the Partnership received $150,000 in cash and a note for $712,500. The note required monthly payments of $6,641 including interest at 9.75% per annum and maturing on March 9, 2004. The note is collateralized by a first mortgage on the golf club. On June 17, 2003, the note was modified and the Partnership received an additional principal payment of $534,748. The Partnership subordinated its lien priority on the assets sold to a bank. Under the modified terms of the note, monthly payments are $1,371 including interest at the greater of 8.75% or FNB Southeast’s prime interest rate plus 2%. The note requires a balloon payment of $125,459 due July 15, 2008. The remaining balance on the note receivable was $128,823 and $133,769 as of December 31, 2007 and 2006, respectively.
10.
Commitments and Contingencies
Dam Repairs
The Partnership is responsible for the maintenance and repair of an earthen dam designed to retain water in one of the lakes. The dam was breeched approximately 11 years ago and the Partnership has spent approximately $184,000 in repairs since 2001. The Partnership intends to deed the dam to the City of Boiling Spring Lakes, but the city has required additional repairs before accepting ownership. The Partnership believes that damage to the dam, such as could occur during a hurricane or a flood, before the transfer of title could result in significant additional repair costs.
Commitment for Municipal Water and Sewer Services
Most of the land owned by the Partnership lacks municipal water and sewer service. The City of Boiling Spring Lakes began to phase in municipal water service to certain portions of the development in 2004. A significant portion of the costs of water distribution and sewer lines to land owned by the Partnership must be borne by the Partnership or by subsequent purchasers of the land. As of the date of this report, the Partnership is unable to determine the magnitude of these costs and, accordingly, has not accrued any provision in these financial statements.
Environmental Matters
The Partnership is subject to various federal, state and local laws, ordinances and regulations regarding environmental matters. The Partnership may be required to investigate and clean up hazardous or toxic substances or petroleum product releases on land currently or formerly owned by it, and may be liable to a governmental entity or to third parties for property damage and the cost of investigation, removal and decontamination incurred by such parties. The penalty may be imposed whether or not the Partnership was aware, or responsible for, the hazardous or toxic substances, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The cost of investigation, removal and decontamination of substances could be substantial. If such substances are found on land currently owned by the Partnership, or there is a failure to properly remove or decontaminate the area, the property could be difficult to sell, rent or develop. Some environmental laws create a lien on a contaminated site in favor of the government for damages and cost it incurs in connection with such contamination. The Partnership may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. As of the date of this report, the Partnership is not aware of any environmental matters that would have a material effect on the financial statements and, accordingly, the Partnership has accrued no liabilities in these financial statements. However, it is at least reasonably possible that such matters may exist at the date of this report, and the effect on the Partnership and these financial statements could be substantial.
REEVES TELECOM LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2007 and 2006
10.
Commitments and Contingencies (cont.)
Endangered / Protected Species
Portions of Boiling Spring Lakes and surrounding area are known as or believed to be the habitat of various species of flora and fauna which have been identified as endangered or protected species. Development of the Partnership’s land is subject to various laws and regulations intended to limit disturbance of endangered and protected species.
The red-cockaded woodpecker is one endangered species known to inhabit portions of Boiling Spring Lakes. During 2006, the U.S. Fish and Wildlife Service undertook certain initiatives to preserve the habitat of the endangered woodpecker, and for a portion of 2006, the City of Boiling Spring Lakes temporarily ceased issuing building permits altogether for land in the proximity of a known or suspected nesting site. The Partnership believes that not more than approximately 180 acres, or approximately 22%, of the Partnership’s land may be affected by restrictions relating to the red-cockaded woodpecker, although the amount of land affected could increase under certain circumstances. Management believes that the Partnership’s land sales will continue to be reduced compared to past years until the City of Boiling Spring Lakes has developed a conservation plan to protect the habitat of the red-cockaded woodpecker or until other means of addressing the concerns of the U.S. Fish and Wildlife Service can be implemented.
The Partnership has not made any representations or warranties to buyers of land as to the red-cockaded woodpecker or to protected or endangered species generally. Nevertheless, it is reasonably possible that one or more such buyers may seek compensation from the Partnership or seek rescission of their purchase of land from the Partnership, owing to the presence of protected or endangered species on or near the land or to restrictions on issuing building permits designed to preserve the habitat of protected or endangered species, preventing such buyer from utilizing the land in the matter intended. If any litigation is instituted seeking compensation or rescission due to endangered and protected species, the Partnership believes that it would prevail on the merits. As of the date of this report, there is no pending litigation, and the Partnership is not aware of any potential claims or actions relating to these matters. The Partnership has made no provision in the financial statements related to this contingent liability
REEVES TELECOM LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2007 and 2006
10.
Commitments and Contingencies (cont.)
Water Level of Lakes
The Partnership believes that the lakes within the City of Boiling Spring Lakes are recreational and scenic attractions to potential buyers of land from the Partnership. The Partnership’s ability to sell land at its asking prices would be adversely affected if the water level in the lakes was substantially below normal for any length of time. Due to protracted drought or near-drought conditions for much of 2007, nearly all the lakes within the City of Boiling Spring Lakes have a water level substantially below normal. These conditions resulted in a lowering of the water table, and sinkholes developed in the bed of Boiling Spring Lake, the largest lake in the community. Remedial measures taken by the city seem to have solved the issue of the sink holes; however, the lack of normal rainfall has prevented the lakes, including Boiling Spring Lake, from returning to approximately normal levels. The Partnership has not made any representations or warranties to buyers of land as to the water level in the lakes. Nevertheless, it is reasonably possible that one or more of such buyers may seek compensation from the Partnership or seek rescission of their purchase of land from the Partnership, owing to the water level of the lakes being substantially below normal, whether due to damage to the dam, protracted drought conditions, or otherwise. If any litigation is instituted seeking compensation or rescission, the Partnership believes that it would prevail on the merits, but the cost of defending such litigation may be substantial. As of the date of this report, there is no pending litigation and the Partnership is not aware of any potential claims or actions in these matters. The Partnership has made no provision in the financial statements related to this contingent liability.
Building and Maintaining Roads
The Partnership is responsible for maintaining certain roads, most of which are unpaved and certain road rights-of-way within the City of Boiling Spring Lakes. The Partnership may complete some or all of the roads, but there is no contractual obligation to do so. The Partnership has not set aside any money or entered into any bond, escrow or trust agreement to assure completion of the roads. It may be difficult or impossible for the Partnership to sell lots located on uncompleted roads. The City of Boiling Spring Lakes will not assume any road that is not paved with asphalt and the City of Boiling Spring Lakes need not assume any paved road. Accordingly, unless and until the Partnership completes a road and has it paved with asphalt, and the road has been assumed by the City of Boiling Spring Lakes, the Partnership will be responsible for maintaining such road and the right-of-way. Since 2001, the Partnership has spent approximately $193,000 for rocking and paving roads. The failure by the Partnership to provide proper maintenance of the roads and rights-of-way which have not been assumed by the City of Boiling Spring Lakes may subject the Partnership to substantially greater risk of litigation from persons adversely affected by such failure. If such litigation were to be initiated, management believes that the Partnership would prevail, but that the cost of defending the case could be material, and should the Partnership not prevail, the cost of building any such road could be material.
Independent Registered Public Accounting Firm
Report on Supplementary Information
Partners
Reeves Telecom Limited Partnership
Boiling Spring Lakes, North Carolina
Our report on our audit of the basic financial statements of Reeves Telecom Limited Partnership as of December 31, 2007 appears on page 1. That audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedules on pages 16 - 18 are not a required part of the basic financial statements but are supplementary information required by the Securities and Exchange Commission. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. The 2006 and information included in the financial statement schedules on pages 16 - 18 was subjected to the auditing procedures applied in the 2006 audit of the basic financial statements by other auditors, whose report on such information stated that it was fairly stated in all material respects in relation to the 2006 and 2005 basic financial statements taken as a whole.
/s/ MOORE STEPHENS FROST
Certified Public Accountants
Little Rock, Arkansas
March 28,
REEVES TELECOM LIMITED PARTNERSHIP
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.
(3)
The changes represent the estimated realized value of property received in exchange for other property held by the Partnership.
See independent registered public accounting firm report on supplementary information.
REEVES TELECOM LIMITED PARTNERSHIP
Real Estate and Accumulated Depreciation
NOTES:
(1)
All building lots and land held for sale are unimproved.
(2)
The amounts shown for building lots ad improved lot held for resale in Boiling Spring Lakes do not reflect valuation allowance of $539,373 at December 31, 2007. See Valuation and Qualifying Accounts on page 15. 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.
See independent registered public accounting firm report on supplementary information.
REEVES TELECOM LIMITED PARTNERSHIP
Reconciliation of Gross and Net Book Value
NOTE:
(1)
Cost of real estate sold does not reflect valuation allowances. See Valuation and Qualifying Accounts on page 15.