**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**FORM 10-Q**

 
| **(Mark One)**                                                                                                                                                                                                             |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                       |
| **ý**                                                                                                                                                                                                                 | **Quarterly report pursuant to section 13 or 15(d) of  the Securities Exchange Act of 1934** |
|                                                                                                                                                                                                                       |
| **for the quarterly period ended: June 30, 2004**                                                                                                                                                                     |
|                                                                                                                                                                                                                       |
| **o**                                                                                                                                                                                                                      | **Transition report pursuant to section 13 or 15(d) of  the Securities Exchange Act of 1934** |
|                                                                                                                                                                                                                       |
| **for the transition period from                 to               ** |

 

**CommissionFile Number 000-22091**

 

----

 

**GOLF TRUSTOF AMERICA, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Maryland**                                                      |   | **33-0724736**                          |
|-------------------------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of  incorporation or organization)   |   | (I.R.S. Employer Identification Number) |
|                                                              |   |                                    |
| **14 North Adger’s Wharf, Charleston, South Carolina 29401** |
| (Address of principal executive offices)  (Zip Code)              |
|                                                              |
| **(843) 723-4653**                                           |
| (Registrant’s telephone number, including  area code)        |

 

----

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such report(s) and (2) hasbeen subject to such filing requirements for the past90 days. Yes ý  No o.

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý

 

On August 9, 2004, there were 7,372,788 common shares outstandingof the registrant’s only class of common stock. On August 9, 2004, therewere 800,000 shares outstanding of the registrant’s 9.25% Series ACumulative Convertible Preferred Stock, which is the registrant’s only class ofoutstanding preferred stock.

 

The Exhibit Index begins on page 56.

 

 

----

 

**GOLFTRUST OF AMERICA, INC.Form 10-Q Quarterly ReportFor the Three Months Ended June 30, 2004**

 

**INDEX**

 
| **PART I. FINANCIAL  INFORMATION** |              |
|------------------------------------|-------------------|
|                               | **Item 1.**       | **Liquidation Basis  Financial Statements** |   |
|                               |              | Condensed Consolidated Statements of Net  Assets as of June 30, 2004 (unaudited) and December 31, 2003 |   |
|                               |              | Condensed Consolidated Statements of  Changes in Net Assets (unaudited) for the Three Months Ended June 30,  2004 and 2003 |   |
|                               |              | Condensed  Consolidated Statements of Changes in Net Assets (unaudited) for the Six  Months Ended June 30, 2004 and 2003 |   |
|                               |              | Condensed Consolidated Statements of Cash  Flows (unaudited) for the Six Months ended June 30, 2004 and 2003 |   |
|                               |              | Notes to Condensed Consolidated Financial  Statements (unaudited) |   |
|                               | **Item 2.**       | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations** |   |
|                               | **Item 3.**       | **Quantitative and Qualitative Disclosures  About Market Risk** |   |
|                               | **Item 4.**       | **Controls and Procedures** |   |
| **PART II. OTHER INFORMATION**     |              |
|                               | **Item  1.**      | **Legal  Proceedings** |   |
|                               | **Item 2.**       | **Changes in Securities** |   |
|                               | **Item 3.**       | **Defaults upon Senior Securities** |   |
|                               | **Item 4.**       | **Submission of Matters to a Vote of Security Holders** |   |
|                               | **Item  5.**      | **Other  Information** |   |
|                               | **Item 6.**       | **Exhibits and Reports on Form 8-K** |   |
|                               | **Signatures**    |   |
|                               | **Exhibit Index** |   |

 

**CautionaryNote Regarding Forward-Looking Statements**

 

The following report contains forward-looking statements within themeaning of Section 27A of the Securities Act and Section 21E of theExchange Act. Forward-looking statements are statements that predict ordescribe future events or trends and that do not relate solely to historicalmatters. All of our projections in this quarterly report are forward-lookingstatements, including our projections regarding the amount and timing ofliquidating distributions. You can generally identify forward-lookingstatements as statements containing the words “believe,” “expect,” “will,”“anticipate,” “intend,” “estimate,” “project,” “assume” or other similarexpressions. You should not place undue reliance on our forward-lookingstatements because the matters they describe are subject to known (and unknown)risks, uncertainties and other unpredictable factors, many of which are beyondour control. Our forward-looking statements are based on the limitedinformation currently available to us and speak only as of the date on whichthis report was filed with the SEC. Our continued internet posting orsubsequent distribution of this dated report does not imply continuedaffirmation of the forward-looking statements included in it. We undertake noobligation, and we expressly disclaim any obligation, to issue any updates toour forward-looking statements, even if subsequent events cause ourexpectations to change regarding the matters discussed in those statements.Future events are inherently uncertain. Moreover, it is particularly difficultto predict business activity levels at the Innisbrook Resort with anycertainty. Accordingly, our projections in this quarterly report are subject toparticularly high uncertainty. Our projections should not be regarded as legalpromises, representations or warranties of any kind whatsoever. Over time, ouractual results, performance or achievements will likely differ from theanticipated results, performance or achievements that are expressed or impliedby our forward-looking statements, and such differences might be significantand harmful to our stockholders interests. Many important factors that couldcause such a difference are described under the caption “Risks that might Delayor Reduce our Liquidating Distributions,” in Item 2 of this quarterly report,which you should review carefully.

 

2

----

 

**GOLFTRUST OF AMERICA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF NET ASSETS (LIQUIDATION BASIS)**

**ASOF JUNE 30, 2004 (unaudited) AND DECEMBER 31, 2003(in thousands)**

 
|                                                                                                  |   | **June 30,  2004** |   | **December 31,  2003** |   |
|-------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
|                                                                                                  |   | **(unaudited)**         |   |                        |   |
|                                                                                                  |   |                    |   |                        |   |
| **ASSETS**                                                                                            |   |                    |   |                        |   |
| Real estate and mortgage note receivable —  held for sale                                        |   | $                       | 56,767 |                        | $      | 57,042 |   |
| Cash and cash equivalents                                                                             |   | 667                     |   | 601                         |   |
| Receivables — net                                                                                |   | 3,175                   |   | 3,672                       |   |
| Other assets                                                                                          |   | 247                     |   | 233                         |   |
| Total assets                                                                                          |   | 60,856                  |   | 61,548                      |   |
|                                                                                                  |   |                    |   |                        |   |
| **LIABILITIES**                                                                                       |   |                    |   |                        |   |
| Debt                                                                                                  |   | 1,090                   |   | —                      |   |
| Accounts payable and other liabilities                                                                |   | 2,878                   |   | 2,528                       |   |
| Dividends payable                                                                                     |   | 6,164                   |   | 4,914                       |   |
| Reserve for estimated costs during the  period of liquidation                                         |   | 5,667                   |   | 6,823                       |   |
| Total liabilities                                                                                     |   | 15,799                  |   | 14,265                      |   |
|                                                                                                  |   |                    |   |                        |   |
| Commitments and contingencies                                                                         |   |                    |   |                        |   |
| Preferred stock, $.01 par value, 10,000,000  shares authorized, 800,000 shares issued and outstanding |   | 20,000                  |   | 20,000                      |   |
| Total liabilities and preferred stock                                                                 |   | 35,799                  |   | 34,265                      |   |
|                                                                                                  |   |                    |   |                        |   |
| **NET ASSETS IN  LIQUIDATION** (available to holders of common stock  and OP units)                   |   | $                       | 25,057 |                        | $      | 27,283 |   |

 

*See accompanying notes to condensed consolidated financial statements.*

 

3

----

 

**GOLFTRUST OF AMERICA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OFCHANGES IN NET ASSETS (LIQUIDATION BASIS)**

**FORTHE THREE MONTHS ENDED JUNE 30, 2004 AND 2003**

**(inthousands) (unaudited)**

 
|                                                                        |   | **Three  Months Ended  June 30, 2004** |   | **Three  Months Ended  June 30, 2003** |   |
|-----------------------------------------------------------------------------|--------|---------------------------------------------|--------|---------------------------------------------|--------|
|                                                                        |   |                                        |   |                                        |   |
| Revenues                                                                    |   |                                        |   |                                        |   |
| Revenue from managed golf course operations                                 |   | $                                           | 1,617  |                                        | $      | 2,815 |   |
|                                                                        |   |                                        |   |                                        |   |
| Total revenues                                                              |   | 1,617                                       |   | 2,815                                       |   |
|                                                                        |   |                                        |   |                                        |   |
| Expenses:                                                                   |   |                                        |   |                                        |   |
| General & administrative                                                |   | 377                                         |   | 653                                         |   |
| Direct expenses from managed golf course  operations                        |   | 1,516                                       |   | 2,514                                       |   |
| Total expenses                                                              |   | 1,893                                       |   | 3,167                                       |   |
|                                                                        |   |                                        |   |                                        |   |
| Operating loss                                                              |   | (276                                        | )      | (352                                        | )      |
|                                                                        |   |                                        |   |                                        |   |
| Other income (expense):                                                     |   |                                        |   |                                        |   |
| Interest income                                                             |   | 47                                          |   | 59                                          |   |
| Interest expense                                                            |   | (34                                         | )      | (468                                        | )      |
| Total other income (expense)                                                |   | 13                                          |   | (409                                        | )      |
|                                                                        |   |                                        |   |                                        |   |
| Loss before adjustment for liquidation  basis                               |   | (263                                        | )      | (761                                        | )      |
| Adjustment for liquidation basis of  accounting                             |   | (275                                        | )      | 88                                          |   |
| Net loss available to common stockholders                                   |   | (538                                        | )      | (673                                        | )      |
|                                                                        |   |                                        |   |                                        |   |
| Preferred dividends                                                         |   | (625                                        | )      | (462                                        | )      |
|                                                                        |   |                                        |   |                                        |   |
| Net change in net assets available to holders  of common stock and OP units |   | $                                           | (1,163 | )                                           | $      | (1,135 | ) |

 

*See accompanying notes to condensed consolidated financial statements.*

 

4

----

 

**GOLFTRUST OF AMERICA, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOFCHANGES IN NET ASSETS (LIQUIDATION BASIS)**

**FORTHE SIX MONTHS ENDED JUNE 30, 2004 AND 2003**

**(inthousands) (unaudited)**

 
|                                                                        |   | **Six Months  Ended  June 30, 2004** |   | **Six Months  Ended  June 30, 2003** |   |
|-----------------------------------------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|
|                                                                        |   |                                      |   |                                      |   |
| Revenues                                                                    |   |                                      |   |                                      |   |
| Rent                                                                        |   | $                                         | — |                                      | $      | 452 |   |
| Revenue from managed golf course operations                                 |   | 3,213                                     |   | 5,249                                     |   |
| Total revenues                                                              |   | 3,213                                     |   | 5,701                                     |   |
|                                                                        |   |                                      |   |                                      |   |
| Expenses:                                                                   |   |                                      |   |                                      |   |
| General & administrative                                                |   | 765                                       |   | 1,384                                     |   |
| Direct expenses from managed golf course  operations                        |   | 2,837                                     |   | 4,819                                     |   |
| Total expenses                                                              |   | 3,602                                     |   | 6,203                                     |   |
|                                                                        |   |                                      |   |                                      |   |
| Operating loss                                                              |   | (389                                      | )      | (502                                      | )      |
|                                                                        |   |                                      |   |                                      |   |
| Other income (expense):                                                     |   |                                      |   |                                      |   |
| Interest income                                                             |   | 93                                        |   | 115                                       |   |
| Interest expense                                                            |   | (53                                       | )      | (1,289                                    | )      |
| Total other income (expense)                                                |   | 40                                        |   | (1,174                                    | )      |
|                                                                        |   |                                      |   |                                      |   |
| Loss before adjustment for liquidation  basis                               |   | (349                                      | )      | (1,676                                    | )      |
| Adjustment for liquidation basis of  accounting                             |   | (294                                      | )      | 88                                        |   |
| Net loss available to common stockholders                                   |   | (643                                      | )      | (1,588                                    | )      |
|                                                                        |   |                                      |   |                                      |   |
| Value of common stock redeemed                                              |   | (333                                      | )      |                                      |   |
| Preferred dividends                                                         |   | (1,250                                    | )      | (925                                      | )      |
|                                                                        |   |                                      |   |                                      |   |
| Net change in net assets available to  holders of common stock and OP units |   | $                                         | (2,226 | )                                         | $      | (2,513 | ) |

 

*See accompanying notes to condensed consolidated financial statements.*

 

5

----

 

**GOLFTRUST OF AMERICA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (LIQUIDATION BASIS)**

**FORTHE SIX MONTHS ENDED JUNE 30, 2004 AND 2003**

**(inthousands, unaudited)**

 
|                                                                                                        |   | **Six Months  Ended  June 30, 2004** |   | **Six Months  Ended  June 30, 2003** |   |
|-------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                                        |   |                                      |   |                                      |   |
| **Cash flows from  operating activities:**                                                                  |   |                                      |   |                                      |   |
| Change in loss available to holders of  common stock before preferred dividends and common stock redemption |   | $                                         | (643   | )                                         | $      | (1,588 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:                                |   |                                      |   |                                      |   |
| Adjustment to liquidation basis of  accounting                                                              |   | 294                                       |   | (88                                       | )      |
| Decrease in restricted cash                                                                                 |   | 1,529                                     |   |                                      |   |
| Decrease (increase) in other assets and  receivables-net                                                    |   | (49                                       | )      | 620                                       |   |
| Decrease (increase) in accounts payable and  other liabilities                                              |   | 350                                       |   | (101                                      | )      |
| Decrease in liquidation liabilities                                                                         |   | (943                                      | )      | (4,827                                    | )      |
| Net cash used in operating activities                                                                       |   | (991                                      | )      | (4,455                                    | )      |
|                                                                                                        |   |                                      |   |                                      |   |
| **Cash flows from  investing activities:**                                                                  |   |                                      |   |                                      |   |
| Golf course improvements                                                                                    |   | (18                                       | )      | (112                                      | )      |
| Net proceeds from golf course dispositions                                                                  |   | —                                    |   | 67,767                                    |   |
| Decrease (increase) in notes receivable                                                                     |   | (15                                       | )      | 112                                       |   |
| Net cash (used in) provided by investing  activities                                                        |   | (33                                       | )      | 67,767                                    |   |
|                                                                                                        |   |                                      |   |                                      |   |
| **Cash flows from  financing activities:**                                                                  |   |                                      |   |                                      |   |
| Borrowings under revolving line of credit                                                                   |   | 1,090                                     |   | —                                    |   |
| Net repayments on debt                                                                                      |   | —                                    |   | (69,003                                   | )      |
| Net cash provided by (used in) financing  activities                                                        |   | 1,090                                     |   | (69,003                                   | )      |
|                                                                                                        |   |                                      |   |                                      |   |
| Net increase (decrease) in cash                                                                             |   | 66                                        |   | (5,691                                    | )      |
| Cash and cash equivalents, beginning of  period                                                             |   | 601                                       |   | 7,990                                     |   |
| Cash and cash equivalents, end of period                                                                    |   | $                                         | 667    |                                      | $      | 2,299 |   |
| **Supplemental  Disclosure of Cash Flow Information**                                                       |   |                                      |   |                                      |   |
| Interest paid during the period                                                                             |   | $                                         | 18     |                                      | $      | 1,289 |   |
| **Non-cash  transactions:**                                                                                 |   |                                      |   |                                      |   |
| Cancellation of note receivable                                                                             |   | $                                         | 547    |                                      | $      | — |   |
| Note receivable from sale of asset                                                                          |   | $                                         | — |                                      | $      | 2,300 |   |

 

*See accompanying notes to condensed consolidated financial statements.*

 

6

----

 

**GOLFTRUST OF AMERICA, INC.Form 10-Q Quarterly ReportFor the Three Months and Six Months Ended June 30, 2004**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1.****              Planof Liquidation**

 

On February 25, 2001 our board of directors adopted, and onMay 22, 2001 our common and preferred stockholders approved, a plan ofliquidation for our Company. The plan of liquidation contemplates the sale ofall of our assets and the payment of, or provision for, our liabilities andexpenses, and authorizes us to establish a reserve to fund our contingentliabilities. The plan of liquidation gives our board of directors the power tosell any and all of our assets without further approval by our stockholders.However, the plan of liquidation constrains our ability to enter into saleagreements that provide for gross proceeds below the low end of the range ofgross proceeds that our management initially estimated would be received fromthe sale of such assets absent a fairness opinion, an appraisal or otherevidence satisfactory to our board of directors that the proposed sale is inthe best interest of our Company and our stockholders. Pursuant to the plan ofliquidation, as of August 9, 2004, we have sold 38 of the 47 (eighteen-holeequivalent) golf courses in which we once held interests.

 

At the time we prepared our proxy statement soliciting stockholders’approval for the plan of liquidation, we expected that our liquidation would becompleted within 12 to 24 months from the May 21, 2001 date of approval byour stockholders. While we have made significant progress in meeting theexpectation we had at the time that the proxy was prepared, the completion ofthe plan of liquidation within the time-frame set-out in the proxy has not occurred,and we now know that, as described below, realizing the range of liquidatingdistributions per share set forth in the applicable proxy statement will notoccur, particularly insofar as the disposition of our interest in theInnisbrook Resort is concerned.

 

Due to the conditions in the golf industry at that time, inMarch 2002, we retained our financial advisor, Houlihan Lokey, to adviseus on strategic alternatives available to us in furtherance of our efforts toseek to enhance stockholder value under our plan of liquidation. In connectionwith this engagement, Houlihan Lokey reviewed: (i) our corporate strategy;(ii) various possible strategic alternatives available to us with a viewtowards determining the best approach of maximizing stockholder value in thecontext of our existing plan of liquidation; and (iii) other strategicalternatives independent of the plan of liquidation. Houlihan Lokey evaluatedour lender’s mortgage interest in the Innisbrook Resort under two differentscenarios, both of which assumed that we would obtain a fee simple interest inthe asset by either successfully completing a negotiated settlement with ourformer borrower or foreclosing on our former borrower’s interest in themortgage encumbering the asset. Under the first scenario, Houlihan Lokeyanalyzed our immediate liquidation of the asset, and under the second scenario,Houlihan Lokey analyzed our holding the asset until no later thanDecember 31, 2005 to seek to realize a modest recovery in the financialperformance levels of the asset based on historical financial results.Following receipt of Houlihan Lokey’s report on March 15, 2002, and afterconsideration of other relevant facts and circumstances then available to us,our board of directors unanimously determined to proceed with our plan ofliquidation without modification. In February 2003, we, at the directionof our board, again engaged Houlihan Lokey to assist us in updating ourprojected range of liquidating distributions in light of the actual sale priceswe had obtained during the prior year and other relevant factors. Followingreceipt of Houlihan Lokey’s updated report on March 18, 2003, and afterconsideration of other relevant facts and circumstances then available to us,our board of directors unanimously reaffirmed its decision to proceed with ourplan of liquidation without modification. As a result, we value theparticipating mortgage on our balance sheet based on our estimate of the resalevalue of the Innisbrook Resort at the conclusion of the holding period. AtJune 30, 2003, we carried the participating mortgage on our books at$60.0 million, based on the assumptions that we would take ownership ofthe Innisbrook Resort, that the Innisbrook Resort’s operations would begin torecover in 2004 and that by the end of the 2005 holding period the InnisbrookResort would have realized a modest recovery generally in line with historicalresults (among other assumptions).   AtSeptember 30, 2003, we wrote down the value of the participating mortgagefrom a value of $60.0 million to $44.2 million as described below.

 

During the latter half of 2003, we continued to negotiate for asettlement of all claims resulting from our former borrower’s default of theparticipating mortgage of the Innisbrook Resort. However, these negotiationswere delayed in October when we received from the Westin Hotel Company(which operates the hotel and conference facilities at the Innisbrook Resort)an updated forecast for the Innisbrook Resort for the year end results for 2003and the calendar year 2004. As disclosed in our press release datedOctober 20, 2003, the updated forecast from Westin was materially lessfavorable than the forecasts we had received earlier from Westin regarding thesame periods. The revised forecast from Westin included a forecast for golf

 

7

----

 

operations at the Innisbrook Resort prepared by Troon Golf (whichoperates the golf courses at the Innisbrook Resort).  Following our receipt of the revised forecast and thecorresponding 2004 budget, we reviewed the budget methodology and economicassumptions underlying the 2004 budget from Westin in a series of meetings withWestin and Troon. The decline in the revised forecast from Westin resultedprimarily from fewer than anticipated group bookings at the Innisbrook Resortin 2003 and the decrease in the number of advance bookings for 2004 currentlyon the books as compared to the same time last year, which led Westin tobelieve that the adverse economic conditions of the past two years at theInnisbrook Resort would continue throughout 2004.

 

In light of the revised forecast from Westin, some of the assumptionsunderlying our estimate of the participating mortgage’s value, as recorded onour June 30, 2003 balance sheet, were then in doubt. Specifically, we hadassumed that the Innisbrook Resort’s recovery would begin in 2004. However,based on the limited information then available, Westin did not expect anysignificant improvement in corporate group spending at the Innisbrook Resort(or other significant new Innisbrook Resort bookings) in 2004, even if thelodging industry as a whole did begin to recover in 2004. Based on the asset’sdisappointing 2003 performance and the then 2004 performance forecast which wasbelow our expectations, we expected that any economic recovery for this assetcould be delayed by a year or more. In our prior SEC filings we haveconsistently stated that our assessment of the participating mortgage’s fairvalue may change at some future date, based on facts and circumstancesprevailing at that time, and that the asset may be written down in futureperiods. After we received and reviewed the revised forecast and the 2004budget from Westin, and attended the 2004 budget review meeting with Westin andTroon, we determined that our assessment of the participating mortgage’s fairvalue had indeed changed based on the new facts and circumstances described forus and that a write-down was necessary to reflect the new information.   (See footnote 9, *Subsequent Events*, fordiscussion regarding the current status of the ownership of the InnisbrookResort.)

 

**2.  Organization and Basis of Presentation**

 

Golf Trust of America, Inc., or GTA, was incorporated in Marylandon November 8, 1996. We were originally formed to be a real estateinvestment trust, or REIT, however, as of fiscal year 2002 we no longer haveour REIT status as a result of our repossession and operation of golf coursesfollowing the default of their original third-party lessees.  On January 30, 2003, we sold our lastproperty (3.5 golf courses) that was under a participating lease.  In our SEC filings, we often state golfcourse quantities in terms of 18-hole equivalents. Therefore, one 27-hole golfcourse property would be counted as 1.5 golf courses.  As of August 9, 2004, we own five properties which representnine golf courses. Four of these properties (5.0 golf courses) are owned andmanaged by us while the Innisbrook Resort is managed by Westin ManagementSouth. The four golf courses at Innisbrook are currently managed by Troon Golfthrough Westin.  As of June 30,2004, the Innibrook Resort served as collateral for a 30-year participatingmortgage wherein we were the lender and we held title to the other five golfcourses in fee simple.  Upon theexecution of the settlement agreement with our former borrower on July 15,2004, subsequent to the end of the quarter, we obtained ownership of theInnisbrook Resort (see note 9, *Subsequent Events,* for furtherdiscussion).   We presently hold thesefive properties (9.0 golf courses) in fee simple. The nine golf courses arelocated in Florida (6), South Carolina (2), and New Mexico. Title to our golfcourses, except in the case of Innisbrook, is generally held by Golf Trust of America, L.P., a Delaware limitedpartnership. We refer to Golf Trust of America, L.P. as our “operatingpartnership” or “OP” and we refer to the operating partnership and GTA(together with all of their subsidiaries) collectively as “we”, “us” or our“Company.” The title to Innisbrook is held by a wholly owned subsidiary of GolfTrust of America, L.P., namely, GTA – IB, LLC. Golf Trust of America, Inc., through its wholly owned subsidiariesGTA GP, Inc. (“GTA GP”) and GTA LP, Inc. (“GTA LP”), holds a99.5 percent interest in our operating partnership as of August 9,2004. GTA GP is the sole general partner of our operating partnership and ownsa 0.2 percent interest therein. GTA LP is a limited partner in theoperating partnership and owns a 99.3 percent interest therein. These percentagesgive effect to all outstanding preferred OP units on an as-converted basis. Oneof our former lessees held the only remaining minority interest in ouroperating partnership which was recently transferred from our former lessee tothe buyer of this property (3.5 golf courses).

 

**Adjustment toLiquidation Basis of Accounting**

 

As a result of our board of directors’ adoption of our plan ofliquidation and its approval by our stockholders, as required we adopted theliquidation basis of accounting for all periods subsequent to May 22,2001. Accordingly, on May 22, 2001, our assets were adjusted to theirestimated fair value and our liabilities, including estimated costs associatedwith implementing the plan of liquidation, were adjusted to their estimatedsettlement amounts. The valuation of real estate held for sale, including thereal estate pledged as collateral under our participating mortgage notereceivable, as of June 30, 2004 is based on current contracts andestimates of sales values based on indications of interest from themarketplace, certain

 

8

----

 

assumptions by management specifically applicable to each property, andon the property value ranges. The valuation of our other assets and liabilitiesunder the liquidation basis of accounting are based on management’s estimatesas of June 30, 2004.   Anadjustment of $294,000 is included in the June 30, 2004 consolidatedstatement of changes in net assets to reflect a $275,000 write-down of certaingolf course assets and a $19,000 increase in the reserve for capitalexpenditures at the golf courses that we own and manage.  There were no other liquidation basis ofaccounting adjustments for the six months ended June 30, 2004.

 

**Reserve for EstimatedCosts During the Period of Liquidation**

 

Under the liquidation basis of accounting, we are required to estimateand accrue the costs associated with implementing the plan of liquidation.These amounts can vary significantly due to, among other things, the timing andrealized proceeds from golf course sales, the costs of retaining personnel andothers to oversee the liquidation, including the costs of insurance, the timingand amounts associated with discharging known and contingent liabilities andthe costs associated with cessation of our operations.   These accruals do not provide for anyoperating cash shortfalls that may occur from assets that we own and/or managenow or in the future.  These costs areestimated and are expected to be paid out over the liquidation period.

 

The following table summarizes the changes in the Reserve for EstimatedCosts During the Period of Liquidation:

 
|                   |   | **December 31,  2003** |      | **Payments** |   | **Adjustments** |   | **June 30,  2004** |     |
|------------------------|--------|-----------------------------|-----------|--------------|--------|-----------------|--------|-------------------------|----------|
|                   |   |                        |      |         |   |            |   |                    |     |
| Severance              |   | $                           | 2,201,000 |         | $      | (138,000        | )      | $                       |     | $ | 2,063,000 |   |
| Professional fees      |   | 1,569,000                   |      | (448,000     | )      | —          |   | 1,121,000               |     |
| Financial advisor fees |   | 451,000                     |      | —       |   | —          |   | 451,000                 |     |
| Capital expenditures   |   | 11,000                      |      | (18,000      | )      | 19,000          |   | 12,000                  |     |
| Other                  |   | 2,591,000                   |      | (357,000     | )      | (214,000        | )      | 2,020,000               |     |
| Total                  |   | $                           | 6,823,000 |         | $      | (961,000        | )      | $                       | (195,000 | ) | $ | 5,667,000 |   |
|                        |        |                             |           |              |        |                 |        |                         |          |  |  |  |  |

 

Included in the accrued severance amounts above are performancemilestone payments due to our executives pursuant to their amended and restatedemployment agreements. Performance milestone payments aggregating approximately$2,526,000 were paid upon our complete repayment of our obligations under oursecured credit facility.  One fourth ofthe second milestone payment ($165,230) due to our chief financial officer, Mr.Peters, was paid on September 30, 2003 pursuant to his fourth amended andrestated employment agreement and a payment of 25% of the remaining earnedmilestone payment plus accrued interest will be paid to him upon the sale ofour golf course assets whereby we receive more than $1,200,000 of net cashproceeds. The remaining 50% of the remaining earned milestone payment, plusaccrued interest, shall be paid to Mr. Peters upon the sale of our golfcourse assets whereby we receive more than $2,500,000 of net cash proceeds andsuch receipts are not subject to holdback, claw-backs or any escrow or otherlimitations. Commencing October 1, 2003, interest began accruing on theunpaid portion of Mr. Peters’ remaining earned milestone payment at 5% perannum. Our chief executive officer, Mr. Blair, is also entitled to an additionalperformance milestone payment of approximately $1,234,000, plus accruedinterest, due to the repayment of the outstanding balance under our thenapplicable credit facility. Such payment will be made in due course; nooutstanding conditions to this payment exist. Any severance payments otherwise payable by us under the amended andrestated employment agreements will be reduced by the amount of all earlierperformance milestone payments.   Theseverance payments in the table above of $138,000 were made pursuant toseverance obligations that we have to other employees.

 

Included in the total payments under the Other category above is$259,000 in payments ($119,000 which represents a 35% down payment and fivemonthly installment payments) under our current directors and officersinsurance policy which renewed on February 7, 2004 and expires onFebruary 7, 2005.  Also, includedin the total payments under the Other Category above is $42,000 in commitmentfees paid to our lender under the revolving line of credit, $16, 000 indiligence related costs paid to other third-parties in obtaining the revolvingline of credit, $13,000 in interest paid on golf course property taxes, $20,000in printing costs related to the filing of our annual report on Form 10-K, and$7,000 in other miscellaneous costs.  The “Other” category also includes a non-cash adjustment of $214,000which represents the difference in the redemption value of the 143,790 sharesof our common stock that were pledged as collateral under a note receivablebetween the company and our chief executive officer, W. Bradley Blair, and theoutstanding balance due under the related non-recourse note receivable.  On March 22, 2004, these shares weretransferred to the company by our chief executive officer and the related notereceivable was cancelled (see note 6, *Other Assets*,  for further discussion).

 

9

----

 

**3.  Summary of Significant Accounting Policies**

 

*Interim Statements*

 

The accompanying condensed consolidated financial statements for thethree and six months ended June 30, 2004 and 2003 have been prepared inaccordance with (i) generally accepted accounting principles (“GAAP”), andunder the liquidation basis of accounting following stockholders’ approval ofthe plan of liquidation on May 22, 2001, and (ii) the instructions toForm 10-Q and Article 10 of Regulation S-X. These financialstatements have not been audited by independent public accountants, however,they include adjustments (consisting of normal recurring adjustments) whichare, in the judgment of management, necessary for a fair presentation of thenet assets, financial condition, results of operations and cash flows for suchperiods. However, these results are not necessarily indicative of results forany other interim period or for the full year. In particular, revenues fromgolf course operations are seasonal.

 

Certain information and footnote disclosures normally included infinancial statements in accordance with GAAP have been omitted as allowed inquarterly reports by the rules of the Securities and Exchange Commission, orthe SEC. Management believes that the disclosures included in the accompanyinginterim financial statements and footnotes are adequate to make the informationnot misleading, but also believes that such information should be read inconjunction with the consolidated financial statements and notes theretoincluded in our annual report on Form 10-K for the year endedDecember 31, 2003.

 

**4.****              MortgageNote Receivable**

 

In June 1997, our operating partnership closed and funded aninitial $69.975 million participating mortgage to Golf HostResorts, Inc., an entity affiliated with Starwood Capital Group LLC. Theparticipating loan was secured by the Innisbrook Resort, a 72-hole destinationgolf and conference facility located near Tampa, Florida. The additionalcollateral included cash, excess land at the Innisbrook Resort and a securityinterest in the Tamarron Golf Course, which was released upon the achievementof certain performance levels. The operator of the Innisbrook Resort, WestinHotel Company, guaranteed up to $2.5 million of debt service for each ofthe first five years, which guarantee was substantially funded. The initialloan of $69.975 million was increased by an additional $9 millionloan (creating a total principal loan amount of $78.975 million), whichwas used for a nine-hole expansion and other improvements to the InnisbrookResort facilities.

 

The loan term was 30 years from inception, with an initial baseinterest rate of 9.6% per annum, annual increases (of at least 5% but no morethan 7%) in the interest payment for the first five years, and a participatinginterest feature throughout the term based upon the growth in revenues, if any,over the base year.

 

Golf Host Resorts used $8,975,000 of the proceeds of the loan topurchase 274,039 of our OP units, 159,326 shares of our common stock and wasgranted an option to purchase an additional 150,000 shares of our common stockwhich expired (unexercised) on December 31, 1999. The 274,039 OP unitswere converted to shares of our common stock at the request of Golf HostResorts on March 3, 2000. These 274,039 shares of our common stock, plus79,663 of the shares of our common stock that they purchased at the time we madethe loan to them (for a total of 353,702 shares) were pledged as security forour former borrower’s performance under the participating loan. Prior to ourformer borrower’s default under the participating mortgage discussed below, werecognized interest income on a straight-line basis.

 

Attributed to the impact of the events of September 11th,our former borrower failed to pay us interest when due, in arrears, for themonth of October 2001. (Previously, the borrower’s affiliate, Lost Oaks,L.P. (the lessee of our Lost Oaks Golf Club), failed to pay us monthly golfcourse rent when due, in arrears, for September 2001.) On November 6,2001, we notified Lost Oaks, L.P. that its failure to pay rent (as well as latecharges and interest) for the month of September 2001 constituted an eventof default under its participating lease.

 

The former borrower under our participating mortgage failed to cure itsnon-payment of the October 2001 interest payment within ten days of thelate notice that we sent on November 14, 2001 which constituted an eventof default under our participating mortgage. We also sent a notice of defaulton November 14, 2001 to our former borrower based upon the cross-defaultof

 

10

----

 

its affiliate, Lost Oaks, L.P., under its participating lease.Subsequently, on June 30, 2002, the Lost Oaks participating lease wasterminated and, on January 13, 2003 this golf course was sold.

 

On March 8, 2002, we sent a notice to Westin Hotel Companyalleging that Westin breached the subordination agreement by failing to remitpayments directly to us, on behalf of our former borrower. Westin has contestedour claim that it breached the subordination agreement.

 

Also on March 8, 2002, we delivered a legal notice to our formerborrower accelerating the entire amount of its indebtedness to us as a resultof its continuing default under the participating mortgage loan. Theparticipating mortgage loan was a non-recourse loan. Accordingly, following anevent of default thereunder, we could not bring a legal action directly againstour former borrower to compel payment. Rather, our only recourse was to proceedagainst the guarantors and/or to foreclose upon the Innisbrook Resort (otherthan the condominium units which are owned by third parties) and any otherproperty of our former borrower that had been pledged as collateral to us tosecure our loan to our former borrower. Since the default, we have been seekinga negotiated foreclosure or settlement with the borrower as described in moredetail below. We have been negotiating a global resolution of all aspectsimpacting the past, present and future performance of Innisbrook Resort. (Seenote 9, *SubsequentEvents*, for discussion regarding the current status of the ownershipof the Innisbrook Resort.)

 

**5.****              Commitmentsand Contingencies**

 

*Stonehenge (CountryClub at Wildewood and Country Club at Woodcreek Farms)*

 

On April 22, 2002, we filed an action entitled *Golf Trustof America, L.P. and GTA Stonehenge, LLC v. Lyndell Lewis Young and StonehengeGolf Development, LLC* in the Court of Common Pleas for RichlandCounty. We had asserted causes of action against the defendant for breach ofcontract, fraud and unfair trade practices. We were seeking damages ofapproximately $172,000, which represents prepaid dues that were not disclosedby the defendants. A counterclaim for payment under a consulting agreement,along with claims for payment of operating/maintenance and insurance expenseswas filed by the defendant against us on June 20, 2002; our reply wasfiled on July 22, 2002 denying the claims and, alternatively, seeking aset-off or recoupment against the defendant’s alleged claim for the amount ofour claim against the defendant. The Court dismissed the case on May 28, 2003.Under the court rules, the case may be restored to the active roster within oneyear and the statute of limitations will have been deemed to have been tolledduring that year.  If restored outsidethe one-year period, the normal three-year statute of limitations would runfrom the original accrual date.  Thattime period would expire in March 2005.

 

*Other Litigation*

### ** **

On March 22, 2004, a lawsuit was filed (and was served on ouragent for service of process on March 25, 2004) in the U.S. District Courtfor the District of South Carolina, Florence Division, by one of our priordirectors, Larry D. Young (together with Danny L. Young, Kyle N. Young, theYoung Family Irrevocable Trust and The Legends Group, Ltd.), against ourindependent auditors, BDO Seidman, LLP (together with one current BDO partnerand two former BDO partners) and our company (together with our executiveofficers). The complaint alleges that the BDO defendants engaged inprofessional malpractice, misrepresentation, breach of fiduciary duty and fraudby counseling plaintiffs to participate in a type of tax shelter transaction,held illegal by the IRS. The complaint has seven counts, the last of whichapplies to all defendants (the first six apply only to BDO and its partners).The seventh count alleges that Golf Trust conspired with BDO to convinceMr. Young that he would realize a large projected tax gain in order toinduce Mr. Young (and the other plaintiffs) to enter into the failed taxshelter transactions. The plaintiffs are seeking damages of at least$3.7 million, together with legal expenses and other costs. Defendants BDOSeidman, LLP (together with one current BDO partner and two former BDOpartners) filed a motion to compel arbitration and dismiss the complaint onenlargement of time in which to answer or otherwise respond to the plaintiffs’complaint on May 5, 2004, and we filed a motion of defendants our company(together with our executive officers) to stay, and for enlargement of time inwhich to answer or otherwise respond to plaintiffs’ complaint on May 18,2004.  The plaintiffs filed memorandaopposing the aforementioned motions on May 24, 2004 and June 4, 2004,respectively.  There has been no rulingfrom the court on either motion as yet.

 

11

----

 

*Lake Ozark Industries, Inc. and Everett Holding Company, Inc.v. Golf Trust of America, et al.*  This is an action initiated in the CircuitCourt of Miller County, Missouri, by a contractor, Lake Ozark ConstructionIndustries, Inc., or LOCI, and its asserted assignee of lien and accountrights, Everett Holding Company, Inc., in the Fall of 1999 against numerousdefendants, including Golf Trust of America, L.P.  Plaintiffs assert LOCI performed construction services on, orthat benefited, the property of various defendants, including Golf Trust ofAmerica, L.P.  So far as the actionconcerns Golf Trust of America, L.P., plaintiffs seek to foreclose a mechanic’slien upon property formerly owned by Golf Trust of America, L.P.  The lien is for the principal amount of$1,276,123, plus interest at 10% per year and attorney fees.  Plaintiffs calculate interest toMay 20, 1999, just prior to the lien filing, to be $151,180 and interestthereafter to be $354 per day.  InMarch 2002 the Court orally granted a motion for summary judgment filed byGolf Trust of America, L.P., ruling that plaintiffs’ claimed lien does notcomply with requirements of the Missouri mechanic’s lien statute and isinvalid.  The court entered its writtenorder granting Golf Trust of America, L.P.’s motion for summary judgment inApril 2002.  Since not all claimsinvolved in this lawsuit were disposed of by that ruling, Plaintiffs’ time toappeal this ruling did not begin to run. In November 2003 the court entered a final judgment, and plaintiffsnow have appealed the ruling in favor of Golf Trust of America, L.P. to theMissouri Court of Appeals.  The appealcurrently is in the briefing stage.  Adecision by the court of appeals could be issued by the end of 2004.  At this time, we are unable to assess thelikely outcome of this litigation.

 

*Ordinary CourseLitigation*

 

Owners and operators of golf courses are subject to a variety of legalproceedings arising in the ordinary course of operating a golf course,including proceedings relating to personal injury and property damage.  Since we are now the operator of ourremaining golf courses we maintain insurance for these purposes. We are notcurrently subject to any material claims of this type.

 

*RefundableInitiation Fees*

 

Certain membership initiation fees at these golf courses are refundablebased on specific conditions. The estimated present value of the potentialrefunds over the thirty-year required membership term, as defined in the ClubMembership Manual, recorded as an accrued liability on our books atJune 30, 2004 and is valued at $125,000. Additionally, certain initiationfees may be refundable prior to the expiration of the thirty-year term underspecific membership replacement conditions. There is no liability recorded toconsider the refundability of refunds issued under these conditions due to thefact that four new members have to join in the specific membership category fora resigned member to receive a refund. A refund issued under these specificcircumstances would be considered a reduction of membership revenue for thatperiod. All initiation fees received are initially recorded as deferred revenueand amortized over the average life of a membership which, based on historicalinformation, is deemed to be nine years.

 

**6.  Other Assets**

 

Receivables—net consists of the following:

 
|                                     |   | **(Liquidation  Basis)** |      |
|------------------------------------------|--------|--------------------------|-----------|
|                                     |   | **June 30,  2004**  |      | **December 31,  2003** |   |
|                                     |   | **(unaudited)**          |      |   |   |
|                                     |   |                     |      |   |   |
| Note receivable taken in sale of asset   |   | $                        | 2,313,000 |   | $ | 2,313,000 |   |
| Loans to officers                        |   | 211,000                  |      | 758,000 |   |
| Other miscellaneous receivables—net |   | 651,000                  |      | 601,000 |   |
| Receivables—net                     |   | $                        | 3,175,000 |   | $ | 3,672,000 |   |

 

The note receivable taken in sale of this asset represents the $2.5million note we received from the buyer of the Eagle Ridge Inn & Resort,plus accrued interest less a discount reserve of $200,000 (i.e., in the eventthat the borrower has not caused any uncured event of default to occur underthe note up to its maturity, the borrower shall have the right to reduce itspayment obligations under the note by $200,000 plus any interest paid on thatsum during the term of the note upon borrower’s payment of the balance of thenote, subject to certain prepayment prohibitions).

 

12

----

 

*Loans to Officers*

 

Historically, the compensation committee of the board authorized usfrom time to time to make loans to our officers to purchase shares of ourcommon stock and to assist in their payment of their personal income taxliability arising in connection with their non-cash compensation and benefitarrangements. The table above includes a non-recourse note from one officer inthe original amount of $445,000 which is secured by 55,625 shares of our commonstock.  The carrying value of the notehas been reduced to approximate book value per share. This loan matures at theearliest of the following: (i) February 25, 2006; (ii) threeyears following termination of the executive/borrower’s employment; or(iii) the date of the final distribution under the plan of liquidation.

 

Pursuant to a letter agreement that we entered into with our chiefexecutive, Mr. W. Bradley Blair, II, on March 22, 2004, Mr. Blairagreed to, among other things, irrevocably assign to us 143,790 shares of GTAcommon stock which he owned and which secured his non-recourse loan (made toMr. Blair in 2001 in the amount of $1,150,000).  Mr. Blair’s outstanding loan balance as of March 22, 2004was $547,000 (including accrued and unpaid interest through June 30, 2002of $44,000 and after application of his portion of the allowance for doubtfulaccounts of $647,000).  The assignedshares of common stock were valued at the 10-day trailing stock price of$2.32  for a total value ofapproximately $333,000.  We applied thisamount to the outstanding loan balance including accrued interest and wecancelled the remainder of the loan balance (which, by its terms wasnon-recourse and, thus, following our receipt of all of the collateral, waseffectively unsecured and uncollectible).  The remainder of the unreserved loan balance of approximately $214,000was written off against the “other” category of the liquidation accrual.   The loan to our chief financial officer of$461,000, including unpaid interest accrued as of June 30, 2002  (carried at $211,000 on June 30, 2004after the allowance for doubtful account of $250,000) remains outstanding.  This loan is secured by our chief financialofficer’s holdings of 55,625 shares of our common stock.

 

The other miscellaneous receivables at June 30, 2004 includesapproximately $387,000 of member, trade and other miscellaneous receivables ofour managed golf courses and $264,000 in notes receivable, including accruedinterest, taken in participating lease terminations as compared to the othermiscellaneous receivables at December 31, 2003 which includedapproximately $352,000 of member, trade and other miscellaneous receivables ofour managed golf courses and $249,000 in notes receivable, including accruedinterest, taken in participating lease terminations.

 

**7.****              RevolvingLine of Credit**

 

On March 18, 2004, we entered into a loan agreement and relatedmortgage with Textron Financial for a revolving line of credit with a maximumpermissible outstanding loan amount not to exceed $2,100,000. This loan iscollateralized by a security interest in our golf courses in Columbia, SouthCarolina, Country Club at Wildewood and Country Club at Woodcreek, collectivelyknown as Stonehenge. The term of the loan is for two years and the interestrate is the prime rate plus 1.75% per annum paid monthly. We paid a one-timecommitment fee to Textron Financial of $42,000 to obtain this credit line andwe will pay to Textron a monthly fee of 0.25% per annum of the unused linebalance in arrears on the first day of each month for the immediately precedingmonth and on the maturity date. This loan requires that the operations atStonehenge for the immediately preceding twelve month period is sufficient tomeet a debt service coverage ratio, as defined in the mortgage of at least1.20, as measured monthly. The funds drawn under this credit line will be usedfor working capital as needed from time to time as we continue to proceedthrough the plan of liquidation. The principal balance outstanding under therevolving line of credit as of June 30, 2004 was approximately $1,090,000.  Additional draw requests are permittedmonthly on the first day of each month commencing May 1, 2004.   (See note 9, *Subsequent Events*, forfurther information.)

 

**8.****              PreferredStock**

 

***Series APreferred Stock***

 

On April 2, 1999, we completed a registered offering of 800,000shares of 9.25% Series A Cumulative Convertible Preferred Stock, par value$0.01 per share, or Series A preferred stock, at a price of $25.00 pershare to a single purchaser, AEW Targeted Securities Fund, L.P., or AEW.  The Series A preferred stock isconvertible, in whole or in part, at the option of the holder at any time intoour common stock at an implicit conversion price of $26.25 per share of commonstock, subject to adjustment in certain circumstances. We contributed the netproceeds to our operating partnership in exchange for 800,000 Series Apreferred OP units with analogous terms.

 

13

----

 

Aggregate Series A preferred stock dividends accrued, untilJuly 20, 2003, at a rate of $462,500 per quarter. Effective July 21,2003 the rate increased to $625,000 per quarter (see further discussion of thisincrease below).  As of June 30,2004, we have accrued and not paid twelve quarters of Series A preferredstock dividends (including the dividend otherwise payable in respect of thequarter ended June 30, 2004). Under our Series A charter document,because we have at least six quarters of accrued and unpaid Series Apreferred stock dividends, the holder of the Series A preferred stock, AEWTargeted Securities Fund, L.P. (or its transferee), had the right to elect twoadditional directors to our board of directors at our annual meeting that washeld on November 17, 2003, whose terms as directors would continue untilwe fully pay all accrued but unpaid Series A dividends.  Although AEW did not exercise this right, itmay do so in the future in accordance with the terms of our charter and thevoting agreement.

 

On February 22, 2001, we entered into a voting agreement with AEW,which continues to hold all of the shares of the Series A preferred stock.That agreement required AEW to vote in favor of the plan of liquidation andrequired us to redeem all of the shares of Series A preferred stock (for$25 per share plus dividends accrued and unpaid thereon through the date of thefinal redemption payment) promptly after we determine in good faith that wehave received sufficient net proceeds from the disposition of our assets and/oroperations to redeem all of the preferred shares without violating any legal orcontractual obligations.

 

Moreover, under our voting agreement with AEW, since we did not fullyredeem the Series A preferred stock by May 22, 2003 (which was thesecond anniversary of our stockholders’ adoption of the plan of liquidation),AEW Targeted Securities Fund (or its transferee) had the right to require us toredeem the Series A preferred stock in full within 60 days whichright they exercised. Since we defaulted on that obligation, from and afterJuly 21, 2003 the stated dividend rate of the Series A preferredstock increased from 9.25% to 12.50% per annum (equivalent to a quarterlydividend of $625,000) until the Series A preferred stock is redeemed.Although we are permitted to continue to accrue such dividends without payingthem on a current basis, they must be paid in full prior to any distribution toour common stockholders, which will reduce our cash available for liquidatingdistributions to common stockholders. We intend to continue to accrue suchdividends until such time as we have cash available to redeem the Series Apreferred stock, at which time we intend to redeem the Series A preferredstock.

 

**9.****              SubsequentEvents**

 

On July 14, 2004, we drew the remaining balance of $1,009,000available under our revolving line of credit. We will use these funds for working capital needs and approximately$617,000 in closing costs, such as documentary stamp taxes, incurred inconnection with the global settlement for the Innisbrook Resort.  The maximum amount permissable of $2.1million is now outstanding under this line of credit.

 

We entered into a Settlement Agreement dated July 15, 2004 (the“Settlement Agreement”) with GTA-IB, LLC (“GTA-IB”), Golf Host Resorts, Inc.(“Former Borrower”), Golf Hosts, Inc., Golf Host Management, Inc., Golf HostCondominium, Inc. and Golf Host Condominium, LLC relating to the settlement ofa number of issues between the parties, including Former Borrower’s defaultunder the $79 million loan made by us to the Former Borrower in June 1997.  Pursuant to the Settlement Agreement,GTA-IB, one of our subsidiaries, settled claims relating to the loan to theFormer Borrower and took ownership of the Innisbrook Resort.  In connection with the Settlement Agreement,GTA-IB and Westin Management Company South entered into a management agreementproviding for Westin’s management of the Innisbrook Resort, and Westin andTroon Golf LLC entered into a facility management agreement providing forTroon’s management of the golf facilities at the Innisbrook Resort.

 

We had previously entered in to an agreement with the Former Borrowerand the prospective purchaser of a parcel of undeveloped land within theInnisbrook Resort known as Parcel F. This agreement, known as the Parcel F Development Agreement, wasexecuted on March 29, 2004 and held in escrow pending the closing of thetransactions contemplated by the Settlement Agreement.  The Parcel F Development Agreement providesfor the terms and conditions which Parcel F may be developed includingrestrictions to avoid interference with the operations of the InnisbrookResort.

 

In connection with the Innisbrook Resort Settlement Agreement, ElkFunding, L.L.C. provided a $2 million loan to us, in the form of two promissorynotes.  Pursuant to our agreement withElk Funding, L.L.C., these loans are to fund the Innisbrook Resort’s currentworking capital needs.  Promissory NoteA is non-recourse loan for $700,000 which is collateralized by a securityinterest in the proceeds

 

14

----

 

from the ultimate sale of Parcel F. Interest will accrue on this unpaid balance at a rate of prime +1% untilthe closing of the sale of Parcel F, at which time the principal and accruedinterest will be due.  Promissory Note Bis a recourse loan for $1,300,000, which is collateralized by a securityinterest in 50% of the net proceeds from the sale of two of our golf courses,namely the Black Bear Golf Club and the Wekiva Golf Club. Interest will accrueon this unpaid balance at a rate of prime +1% until the earlier of theSeptember 30, 2006 maturity date and the time that the assetscollateralizing this note are sold and the note is repaid.   If during the term of the $1,300,000principal amount note there is no default which has not been cured or expresslywaived by the lender, the lender agrees to forgive approximately $122,000 ofthe principal of the note.  There are nospecific financial reporting covenants in these two notes.

 

15

----

 

**GOLFTRUST OF AMERICA, INC.Form 10-Q Quarterly ReportFor the Three and Six Months Ended June 30, 2004**

 
| **ITEM 2****.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS** |
|-----------------|-------------------------------------------------------------------------------------------------|

 

Golf Trust of America, Inc., or GTA, was incorporated in Marylandon November 8, 1996. We are engaged in a liquidation of our assetspursuant to a plan of liquidation approved by our stockholders.  We were originally formed to be a realestate investment trust, or REIT, however, as of fiscal year 2002 we no longerhave our REIT status as a result of our repossession and operation of golfcourses following the default of their original third-party lessees.  We sold our last property (3.5 golf courses)that was subject to a participating lease on January 30, 2003.   We own and operate golf courses, subject toour efforts to market the same for sale to third-parties.  In our SEC filings, we often state golfcourse quantities in terms of 18-hole equivalents. Therefore, one 27-hole golfcourse property would be counted as 1.5 golf courses. As of August 9,2004, following the July 15, 2004 execution of the settlement agreementrelating to the Innisbrook Resort, we own five properties, held by us in feesimple, which represent nine golf courses. Five of these nine golf courses aremanaged by us and four (namely, the Innisbrook Resort golf courses) are under amanagement contract with an unaffiliated third-party, Westin Management CompanySouth.   At June 30, 2004, prior tothe July 15, 2004 settlement agreement, five of these nine golf courseswere owned by us and four (namely, the Innisbrook Resort golf courses) werecollateral for a 30-year participating mortgage wherein we were thelender.  The five golf courses that weowned at June 30, 2004 were held by us in fee simple.  The nine golf courses, including those atthe Innisbrook Resort, are located in Florida (6), South Carolina (2), and NewMexico. Title to our golf courses is generally held by Golf Trust of America,L.P., a Delaware limited partnership, except for the title to Innisbrook whichis held by a wholly-owned subsidiary of Golf Trust of America, L.P., GTA – IB,LLC.   We refer to Golf Trust ofAmerica, L.P. as our “operating partnership” or “OP” and we refer to theoperating partnership and GTA (together with all of their subsidiaries) collectivelyas “we”, “us” or our “Company.” Golf Trust of America, Inc., through itswholly owned subsidiaries GTA GP, Inc. (“GTA GP”) and GTA LP, Inc.(“GTA LP”) holds a 99.4 percent interest in our operating partnership asof August 9, 2004. GTA GP is the sole general partner of our operatingpartnership and owns a 0.2 percent interest therein. GTA LP is a limitedpartner in the operating partnership and owns a 99.2 percent interesttherein. These percentages give effect to all outstanding preferred OP units onan as-converted basis. One of our former lessees holds the only remainingminority interest in our operating partnership.

 

## **Significant Events since the filing of our quarterly report on Form10-Q on May 11, 2004**

 

Significant events occurring since May 11, 2004 (the filing date of ourForm 10-Q for the quarter ended March 31, 2004) include the mattersdiscussed below.

 

•                  On June 30,2004, we extended the term of the fourth amended and restated employmentagreement of Scott D. Peters, our chief financial officer by an additional nine(9) months.  The amended employmentagreement now expires on March 31, 2005.

 

•                  On July 6,2004, Roy C. Chapman, a member of our Board of Directors since our IPO in 1997,died unexpectedly.  Mr. Chapman was amember of the Audit, Compensation and Nominating Committees of the Board ofDirectors.  He was an independentdirector and served as our “Audit Committee Financial Expert” as defined inItem 401(h) of Regulation S-K.  OnJuly 12, 2004, the Board of Directors met and elected Mr. Fred W. Reams,also an independent member of our Board of Directors since our IPO in 1997, toserve as our “Audit Committee Financial Expert.”  Mr. Chapman has not been replaced on the Board of Directors.

 

•                  We entered intoa Settlement Agreement dated July 15, 2004 (the “Settlement Agreement”)with GTA-IB, LLC (“GTA-IB”), Golf Host Resorts, Inc. (“Former Borrower”), GolfHosts, Inc., Golf Host Management, Inc., Golf Host Condominium, Inc. and GolfHost Condominium, LLC relating to the settlement of a number of issues betweenthe parties, including Former Borrower’s default under the $79 million loanmade by us to the Former Borrower in June 1997.  Pursuant to the Settlement Agreement, GTA-IB, one of our subsidiaries,settled claims relating to the loan to the Former Borrower and took ownershipof the Innisbrook Resort, as described in more detail below.

 

16

----

 

**The Innisbrook Resort**

 

***Recent InnisbrookDevelopments***

 

During the second quarter of 2004, we continued to negotiate for apotential settlement of claims resulting from the former borrower’s defaultunder the participating mortgage at the Innisbrook Resort.

 

On July 15, 2004, we entered into a settlement agreement with ourformer borrower and related parties and took control of the InnisbrookResort.  As part of the settlementagreement, we did the following:

 

•                                          obtainedfee simple title to the Innisbrook Resort real property and personal property(including all accounts) and took over all operations at the Innisbrook Resortthrough a number of companies under common ownership by our newly-formed,wholly-owned subsidiary, GTA-IB Golf Resort, LLC;

 

•                                          receivedthe collateral pledged under the participating mortgage, which included 368,365shares of our common stock and three condominium units within the InnisbrookResort (including the Presidential Suite and the Penthouse);

 

•                                          enteredinto a settlement agreement with the former borrower, Golf Hosts Resorts,providing for (i) an orderly transition of ownership of the Innisbrook Resortand its integrated operations and contracts (including real estate salesactivities) to us and (ii) limiting our liability for pre-transition events;

 

•                                          entered,through one of our subsidiary LLCs, into new management agreements with Westin,as the Innisbrook Resort manager (and with Troon Golf, as the golf manager,through Westin), which incorporated a broad range of new revenue enhancementpossibilities, accountability and reporting provisions, controls overmarketing, and also payment by us of certain fees related to terminationrights, management fees and incentive fees;

 

•                                          entered,through one of our subsidiary LLCs, into an agreement with our former borrowerregarding the residential development of an adjacent parcel of land, commonlycalled Parcel F; and

 

•                                          assumed,through one of our subsidiary LLCs, the responsibilities of the currentInnisbrook Resort owner regarding the administration of the condominium unitrental pool (the day-to-day operation of which shall be subject to a contractwith Westin);

 

***InnisbrookBackground***

 

We were the lender under an original principal balance $79 millionnon-recourse loan, secured by a first mortgage on the Innisbrook Resort (otherthan the Innisbrook Resort’s condominium units).  The Innisbrook Resort, located near Tampa, Florida, is adestination golf resort that includes four high-end golf courses and adjacentcondominium and conference facilities. We originated this loan in June 1997 as the lender.  The former borrower, Golf Host Resorts, Inc.,owned the Innisbrook Resort (other than the condominium units).  The former borrower entered into anarrangement with many of the persons who own condominium units at theInnisbrook Resort.  Under thisarrangement, the condominiums owned by these participating persons are placedin a securitized pool and rented as hotel rooms to guests of the InnisbrookResort.  There are no separate hotelrooms.  This group of condominiums isknown as the “rental pool”. Accordingly, maintaining condominium owner participation in the rentalpool is critical to the continued economic success of the InnisbrookResort.  The former borrower alsoentered into an agreement with Troon Golf, LLC for Troon to manage the golfcourses, and a separate management agreement with Westin Hotel Company forWestin to manage the condominium unit rental-pool and the conferencefacilities.  Westin Hotel Company andTroon Golf are affiliates of the former borrower.

 

The loan term at inception was 30 years, with a contract initialbase interest rate of 9.6% per annum and annual interest rate increases of atleast 5%, but no more than 7%, of that amount for the first five years.  We refer to this loan as a participatingmortgage because the required mortgage payments included an interest componentrelated to the former borrower’s revenues from Innisbrook Resortoperations.  However, operations at theInnisbrook Resort have not resulted in any participating interest payments (asdistinct from base interest payments) since 1999 (see note 4 to ourcondensed consolidated financial statements).

 

17

----

 

In addition to the Innisbrook Resort itself, the collateral securingthe former borrower’s performance under the participating mortgage included 368,365shares of our common stock owned by the former borrower (and held by us, as thesecured party) and three condominium units owned by the former borrower at theInnisbrook Resort.  The formerborrower’s parent, Golf Hosts, Inc., guaranteed all of the formerborrower’s loan payment obligations, however, Golf Hosts, Inc. has nosignificant assets other than its interest in the former borrower.  In June, 1997, Westin and the formerborrower entered into an agreement pursuant to which Westin agreed to advance,in specified circumstances, up to $2.5 million per year to the formerborrower for five years in the event that the Resort did not generate thelevels of cash flow specified in that agreement.  We entered into a subordination agreement with Westin and theformer borrower whereby Westin agreed to make such payments directly to us inspecified circumstances, and we agreed that in the event of foreclosure, Westinwould continue to manage the Innisbrook Resort pursuant to the existingmanagement agreement.

 

Following September 11, 2001, the former borrower informed us thatdue to the erosion in the lodging industry performance resulting from thedecline in the economy and the significant impact of the events ofSeptember 11th on the Innisbrook Resort’s operating performance, theformer borrower might default on its mortgage payments to us.  Shortly thereafter, the former borrower’saffiliate, Lost Oaks, L.P. (the lessee of our Lost Oaks Golf Club), failed topay us monthly golf course rent when due, in arrears, forSeptember 2001.  The formerborrower then failed to pay us interest when due, in arrears, for the month ofOctober 2001.  On November 6,2001, we notified Lost Oaks, L.P. that its failure to pay rent (as well as latecharges and interest) for the month of September 2001 constituted an eventof default under its participating lease. On November 14, 2001, we sent a notice to the former borrower thatits interest payment was overdue.  Onthat same day, we sent a notice of default to the borrower based upon thecross-default of its affiliate, Lost Oaks, L.P., under its participatinglease.  (The participating lease at LostOaks golf course was terminated on June 30, 2002 and the golf course wassubsequently sold on January 13, 2003.) On November 29, 2001, wenotified the former borrower that its failure to cure its non-payment of theOctober 2001 interest payment within ten days of our previous noticeconstituted an event of default of the former borrower under our participatingmortgage.

 

On March 8, 2002, we sent a notice to Westin Hotel Companyalleging that Westin breached the subordination agreement by failing to remitpayments directly to us, on behalf of the former borrower.  Westin has contested our claim that itbreached the subordination agreement. No litigation has been filed in this regard.  We had been seeking a resolution of this dispute, which weconcluded as part of the global Innisbrook settlement discussed below.

 

Also on March 8, 2002, we delivered a notice to the formerborrower accelerating the entire amount of its indebtedness to us as a resultof its continuing default under the participating mortgage.  The participating mortgage loan was anon-recourse loan.  Accordingly,following an event of default thereunder, we could not bring a legal actiondirectly against the former borrower to compel payment.  Rather, our only recourse was to proceedagainst the guarantors and/or to foreclose upon the Innisbrook Resort (otherthan the condominium units which are owned by third parties) and any otherproperty of the former borrower that had been pledged as collateral to us tosecure our loan to the former borrower. From the time of the notice of the default until execution of thesettlement agreement, we sought to resolve complex open issues in furtheranceof a negotiated foreclosure or settlement with the former borrower as describedabove.

 

***Rental Pool***

 

In addition to the current rental pool agreement dated January 1,2002, the former owner of the Innisbrook Resort agreed with the condominium ownersassociation that the former owner of the Innisbrook Resort would reimburse 50%of the refurbishment costs plus accrued interest (at 5% per annum) thereoninvested in the condominium units by the condominium owners.  This amount will be amortized and reimbursedto participating condominium owners (or transferees of their condominium unit)over the five-year period beginning in 2005 as reflected in the tablebelow.  The reimbursement is contingenton the units remaining in the rental pool from the time of the refurbishment oftheir unit throughout the reimbursement period (2005 to 2009).  If the unit does not remain in the poolduring the reimbursement period of 2005 through 2009, the owner or successorowner forfeits any unpaid installments at the time the unit is removed from thepool.  As of September 2003, therefurbishment of all 617 rental pool units was completed.

 

18

----

 
| **Year**  |   | **Principal** |          | **Interest** |   |
|-----------|--------|---------------|---------------|--------------|--------|
|      |   |          |          |         |   |
| 2005      |   | $             | 727,304       |         | $      | 345,470 |   |
| 2006      |   | 1,090,957     |          | 300,013      |   |
| 2007      |   | 1,454,609     |          | 236,374      |   |
| 2008      |   | 1,818,261     |          | 154,552      |   |
| 2009      |   | 2,181,913     |          | 54,548       |   |
|      |   |          |          |         |   |
| **Total** |   | **$**         | **7,273,044** | ** **   | **$**  | **1,090,957** | ** ** |

 

Approximately fifty condominium owners initiated legal action againstthe former borrower, Golf Host Resorts, Inc., and its corporate parent,Golf Hosts, Inc., regarding various aspects of the prior rental poolarrangement (see *Part II, Item I. Legal Proceedings* for furtherdiscussion).  At the present time, weare not a party to the lawsuit, nor are our affiliates.  It is our understanding, however, that thecondominium owners/plaintiffs allege breaches of contract, including breachesin connection with the prior rental pool arrangement.  The plaintiffs are seeking unspecified damages and declaratoryjudgment stating that the plaintiffs are entitled to participate in the rentalpool and requiring that golf course access be limited to persons who are eithermembers, their accompanied guests, or guests of the Innisbrook Resort.

 

Neither we nor any of our affiliates is a party to that lawsuit.

 

***Innisbrook Strategy***

 

Prior to the execution of the settlement agreement, we faced apotential trade-off between (a) seeking to sell the participating mortgageon the Innisbrook Resort, as a distressed loan, which would likely result in asignificant loss on our investment, but would likely hasten the completion ofour liquidation, and (b) seeking to resolve the problems with our formerborrower and others associated with the Innisbrook Resort through a negotiatedsettlement or foreclosure of the Innisbrook Resort loan, after which we, inconjunction with the Innisbrook Resort operators, namely Westin, as theInnisbrook Resort manager (and Troon, the golf manager, through Westin), wouldseek to realize a modest recovery, based on past historical results.

 

When our financial advisor, Houlihan Lokey, evaluated our interest inInnisbrook in March 2002 and again in March 2003, they valued thisasset under two different scenarios: a “forced liquidation” and an “orderlyliquidation.” Both scenarios assumed that we would obtain a fee simple interestin the asset, either by completing a negotiated settlement or by foreclosing onour mortgage interest, by the end of the second quarter of 2003.  Under the “forced liquidation” scenario,Houlihan Lokey projected the range of total value we could reasonably expect toreceive upon an immediate sale of the Innisbrook Resort.  Under the “orderly liquidation” scenario,Houlihan Lokey then projected the range of total value we could reasonablyexpect to receive if we were to hold the asset for a period of approximately30-months (ending on or about December 31, 2005) and during that time weand the Innisbrook Resort’s operators, namely Westin (and Troon, throughWestin) were to successfully realize a modest recovery based on past historicalresults.  In a letter datedMarch 15, 2002, subject to various limiting assumptions, Houlihan Lokey’sanalysis as of that date projected that we would receive between $45 and$50 million under the forced liquidation scenario, and between $60 and$70 million under the orderly liquidation scenario.

 

Houlihan Lokey updated its analysis of the Innisbrook Resort inMarch 2003.  In a report wereceived on March 18, 2003, subject to various limiting assumptions,Houlihan Lokey’s analysis as of that date projected that we would receivebetween $40 and $47 million under the forced liquidation scenario, andbetween $58 and $70 million under the orderly liquidation scenario.

 

The information we have provided related to Houlihan Lokey’sprojections regarding the Innisbrook Resort are forward-looking statements,subject to this quarterly report’s introductory cautionary note and the riskfactors listed herein.  The actual valuewe may obtain may be much lower. Houlihan Lokey’s estimates were based on several assumptions aboutfuture events, including assumptions that we would successfully obtain feesimple title to the Innisbrook Resort and then successfully realize a modestrecovery in the financial performance of the Innisbrook Resort (which isdependent on the success of the operators of the Innisbrook Resort and arecovery in the travel and leisure sectors of the U.S. economy) and anassumption that we would not be subject to any material liability under any ofthe lawsuits we were defending at that time and in some cases are currentlydefending.  These assumptions mightprove to be incorrect.  Moreover,Houlihan Lokey’s projections were not based

 

19

----

 

on any appraisals of the asset or any independent litigation riskassessments.  Accordingly, we have notand you should not place undue reliance upon these projections.

 

In March 2002, following receipt of Houlihan Lokey’s 2002 report,our board determined that an immediate liquidation of the Innisbrook Resort didnot then appear to be the more favorable option to our stockholders.  After consideration of that report and otherrelevant facts, circumstances and assumptions and review of the alternativesthen available to us, our board determined that it would be in ourstockholders’ interests to seek a negotiated resolution to the formerborrower’s default in order to allow us to best preserve the value of ourcollateral.  In view of the potentiallyadvantageous result for our stockholders, our board approved a strategy ofseeking to obtain title to the Innisbrook Resort and thereafter hold the assetuntil approximately December 31, 2005 to seek to realize a modest recoveryin its financial performance levels, based on historical financial results,prior to disposing of the asset.

 

Following review of Houlihan Lokey’s March 2003 report andconsideration of other relevant facts, circumstances and analyses, managementand the board of directors continued to believe that seeking a recovery in theInnisbrook Resort’s financial performance and a resolution of issues with theformer borrower (as opposed to actively marketing our Innisbrook interests forsale at a distressed price), is in our stockholders’ best interest.  To that end, we negotiated with our formerborrower, as well as with Westin and Troon Golf, in an effort to seek a globalresolution of all contractual defaults at the Innisbrook Resort.  Because the former borrower is insolvent, itcould not generally make distributions to its equity owners.  We have also received confirmations from theInnisbrook Resort’s management that all cash generated by the business isretained in the operating entity. (These confirmations are consistent with its unaudited financialstatements.)

 

During the third quarter of 2003 we continued to negotiate for a globalsettlement of claims resulting from the former borrower’s default.  However, these negotiations stalled inOctober when we received from the Westin Hotel Company (which operates thehotel and conference facilities at the Innisbrook Resort) an updated InnisbrookResort forecast for the fourth quarter of 2003 and the calendar year 2004.  As disclosed in our press release datedOctober 20, 2003, the updated forecast we received from Westin was materiallyless favorable than forecasts we had received earlier from Westin regarding thesame periods.  Westin’s revised forecastincluded a forecast for golf operations at the Innisbrook Resort prepared byTroon Golf (which currently operates the golf courses at the InnisbrookResort).  Following our receipt of therevised Westin forecast and the corresponding 2004 Westin budget, we reviewedthe budget methodology and economic assumptions underlying the 2004 Westin budgetin a series of meetings with Westin and Troon. The decline in the revised Westin forecast resulted primarily from fewerthan anticipated group bookings at the Innisbrook Resort in 2003 and thedecrease in the number of advance bookings for 2004 as compared to the sametime for the prior year, which led Westin to believe that the adverse economicconditions of the past two years at the Innisbrook Resort would continuethroughout 2004.

 

Some of the assumptions underlying our then estimate of theparticipating mortgage’s value, as recorded on our December 31, 2002 andJune 30, 2003 statements of net assets, were more favorable than theupdated assumptions contemplated in the revised forecast.  Specifically, at that time we had assumedthat the Innisbrook Resort’s recovery would begin in 2004.  However, Westin advised us that it did notexpect any significant improvement in corporate group spending at theInnisbrook Resort (or other significant new Innisbrook Resort bookings) in2004, based on the information then available to it, even if the destinationresort lodging industry as a whole did begin to recover in 2004.  Based on the asset’s disappointing 2003performance, and Westin’s forecast of 2004 performance for Innisbrook at thattime which fell below our expectations, we then faced and still face the riskthat any economic recovery for this asset will be delayed by a year ormore.  In our prior SEC filings we haveconsistently stated that our assessment of the participating mortgage’s fairvalue may decline at some future date, based on facts and circumstancesprevailing at that time, and that the asset may be written-down in futureperiods.  After we received and reviewedthe revised Westin forecast for Innisbrook and the 2004 Westin budget forInnisbrook and attended the 2004 Westin budget review meeting with Golf HostResorts, Westin and Troon, we determined based on the newly received facts thatour prior assessment of the participating mortgage’s fair value had declinedand that a write-down was necessary to reflect the new information.

 

***Factors Consideredin Preparing our Revised Estimate of the Resale Value of the InnisbrookResort. ***Inour effort to determine the proper extent of the write-down at that time, weconsidered the following information, among other factors.

 

•***                                          BookingInformation in 2003***.  Asmentioned above, Westin’s bookings for the Innisbrook Resort in 2003 weredisappointing and the lack of bookings resulted in a significant revenuedecline as of year-end 2003 as compared to the prior year.  Based on the Innisbrook Resort’s historicalexperience, we did not expect to be able to discern at that time any near term2004 booking trends for the Innisbrook Resort until the end of the

 

20

----

 

peak season which typically concludes at the end of April.  To compound the problem, advance bookingdata was deemed to be less useful as a leading indicator of the InnisbrookResort’s performance because, in response to increased competition fromdiscount Internet travel sites and other factors, booking windows had narrowedresulting in Innisbrook Resort reservations increasingly being booked withinshorter time periods in advance of the stay.

 

•***                                          ExtendedWestin Forecasts for the Innisbrook Resort***.  We obtained Innisbrook Resort’s then earnings forecasts fromWestin for the years 2004 through 2007, which predicted relatively slow, steadygrowth from the Westin forecasted 2004 levels described above.  In general, these long-term Westinprojections did not appear to assume a sharp recovery or rapid rebound from thedepressed performance that the Innisbrook Resort had experienced in 2003.   Westin was assuming only marginal positiveimpact from any anticipated economic recovery in 2004 due in part to the effecton their 2003 performance of competition from two new resorts in their market.

 

•***                                          Discussionswith Westin Management****. *Followingreceipt of Westin’s then forecast of 2004 through 2007 we, together withrepresentatives of our financial advisor, met again with Westin representativesto discuss any differences in our view of the asset.  The main difference seemed to be that we believed greaterpotential is possible at the Innisbrook Resort over the next few years ifWestin broadens the scope of its marketing approach to include relativelysmaller business and personal groups, golf packages, transient stays andvacation bookings rather than focusing primarily on large corporate groupbookings.  Westin informed us that theywould attempt to broaden their marketing strategy for the Innisbrook Resort.

 

•***                                          Estimateof Fair Value.***  The single mostimportant factor we considered in arriving at our then revised estimate of theInnisbrook Resort’s fair value was the result of a study that we commissionedin July of 2003 in anticipation of our taking ownership of the InnisbrookResort by the end of 2003 and needing to allocate the implicit purchase priceamong different asset categories on our balance sheet at that time.  This study included an estimate of themarket value of the Innisbrook Resort’s real estate, an estimate of the fairmarket value in continued use of the Innisbrook Resort’s furniture, fixturesand equipment, or FF&E, inventory and an estimate of the fair value of theInnisbrook Resort’s identified contractual intangible assets.  At our request, this study was expanded toinclude an estimate of the fair value of the Innisbrook Resort’snon-contractual but identifiable intangible items.  The estimate of the fair market value of each of these assetgroups are based on facts and circumstances known to us as ofOctober 2003.  Accordingly, theseestimates could change (and they could change in adverse ways) based on changesin events and circumstances.

 

***EstimatedValue/Amount of Write-Down.***  Based on the above considerations and theother limited information available to us at that time (the date of the filingof our third quarter report on Form 10Q, November 14, 2003), forpurposes of our September 30, 2003 balance sheet, we estimated the fairvalue of the participating mortgage under the “orderly liquidation” strategy(i.e., based on our estimate of the Innisbrook Resort’s resale value as a goingconcern at the end of the 2005 holding period) to be $44.2 million.  Accordingly, for the quarter ended September 30,2003, we recorded a write-down of $15.8 million against the participatingmortgage’s December 31, 2002 and June 30, 2003 value of$60 million.  In arriving at thisrevised fair value estimate in 2003, we made several assumptions about futureevents, which may not occur, including the following:

 

•                                          thatwe would successfully obtain fee simple title to the Innisbrook Resort (whichhas occurred) and that the condominium owners litigation will be concurrentlysettled (which has not yet occurred) in 2004;

 

•                                          thatthe Innisbrook Resort’s performance would begin to recover toward historicaltrend levels, but that this operational recovery would not begin at theInnisbrook Resort until 2005 (at least a year later than previouslyexpected).  We believed the timing ofthe Innisbrook Resort’s ultimate recovery (if any) depends heavily upon: themarketing and management skills of Westin (and Troon, as the golf manager,through Westin) as the Innisbrook Resort’s operator; the restoration of thecorporate travel and meeting budgets to historical levels; and, a recovery inFlorida’s destination resort and lodging industry and general improvement intravel, resort and lodging spending nationwide;

 

21

----

 

•                                          thatwe would have sufficient liquidity and capital resources to hold and operatethe Innisbrook Resort through the end of the anticipated holding period.  We face the risk that we might haveinsufficient liquidity and capital resources to hold the Innisbrook Resort forthe current or any extended holding period. During the holding period, we currently anticipate that our liquidityand capital resources will come from: sales of our remaining five golf courses,representing four separate properties (for which we currently have a purchaseagreement for two of these properties, but do not have purchase agreements orletters of intent on the other two of these properties); a decision by ourboard to seek short-term financing (which occurred); and potential positivecash flows from the operations of Innisbrook and/or our other remainingproperties; and

 

•                                          thatthe Innisbrook Resort would be operated by Westin, as resort manager (andTroon, as golf manager, through Westin), in a manner that generally approachesthe level of operating performance we believe can be generated by the InnisbrookResort during the anticipated holding period. We face the risk that Westin and Troon might not manage the InnisbrookResort at the levels we believe are attainable.  We anticipate that such attainment will depend upon: themarketing and management skills of Westin, as Innisbrook Resort manager (andTroon, as golf manager, through Westin) as the Innisbrook Resort’s operator;and the successful implementation of the process to broaden the marketing focusfrom primarily large corporate group bookings to smaller business and personalgroups, golf packages, transient stays and vacation bookings.

 

The estimate of $44.2 million is subject to the assumptions set forthin the prior paragraphs, and to the risk that the performance of the parties tothe settlement agreement will fall short of our expectations.

 

Since our October 20, 2003 press release regarding Westin’s thennew forecast for Innisbrook, we have received preliminary third-partyindications of interest regarding a potential acquisition of the InnisbrookResort, however, we have received no firm written offers.  Our board might decide to sell our interestin the Innisbrook Resort prior to the end of the previously anticipated holdingperiod (i.e., prior to December 31, 2005) in response to a reasonableoffer, if after consideration of the facts and circumstances at that time ourboard determines that the sale would be in the best interest of ourstockholders.  However, we cannotpresently predict what events, signals, factors or outcomes might cause ourboard to alter the orderly liquidation strategy in favor of an immediatesale.  We face the risk that our effortsto preserve the value of the Innisbrook Resort might be unsuccessful and,therefore, that we might ultimately sell our interest in the Innisbrook Resortfor less than our current estimates of its fair value.  Finally, it is possible that at some futuredate our assessment of the asset’s fair value may change, and the asset may beagain be written-down.

 

Prior to execution of the settlement agreement with Golf Host andWestin, Westin exercised management control of the Innisbrook Resort pursuantto existing contractual obligations with the prior owner.  One such obligation was the prospectiverequired repayment to Westin of its approximately $11.0 million in prioradvances to the Innisbrook Resort in the event of the termination of themanagement agreement.  These contractualobligations relating to Westin’s management were binding upon us in the eventthat we took title to the Innisbrook Resort by foreclosure or negotiatedsettlement.  Subject to our ability torestructure the terms of the management agreement and to enter into a newmanagement agreement satisfactory to us, we determined that changing managementcompanies at the Innisbrook Resort at this point in time in our Plan ofLiquidation would be too costly, inefficient and not in the best interest ofthe performance of the Resort or our stockholders.  In connection with the negotiation of the settlement agreement,we entered into new agreements with Westin (and Troon through Westin) relatingto the management of the Innisbrook Resort, including hotel operations and golfoperations.  We believe these newagreements include provisions that are significantly improved from the owner’sperspective, particularly as they pertain to the redesigned management feestructure which we believe more effectively focuses Westin on achievingprofitability for the Resort, our control over accounting, our control overmarketing and Westin’s obligations to report to us.  Ultimate management control rests with Westin until such time asthe July 15, 2004 management agreement with Westin is terminated orexpires pursuant to its terms.  Now thatwe have obtained ownership of the Innisbrook Resort, we, along with theInnisbrook Resort’s operator, Westin, as resort manager (and Troon Golf, asgolf manager, through Westin), expect to face the difficult task of seeking torealize a recovery in the Innisbrook Resort’s performance.  Because of the complexity of the issuessurrounding the Innisbrook Resort, our efforts to recoup our investment in thatasset could take many months and/or years. Our board of directors will continue to monitor and evaluate all of ouroptions from time to time in its efforts to preserve stockholder value and tofurther implement the plan of liquidation.  As a function of this effort, we recently retained the same third-partyexperts that prepared the asset study that we commissioned in July of 2003to update this study to provide the updated information necessary to allocatethe implicit purchase price among different asset categories on our balancesheet as of the date that we assumed ownership of the Innisbrook Resort.  This study will include an estimate of themarket value of the Innisbrook Resort’s real estate, and an estimate of thefair value of the Innisbrook Resort’s identified contractual intangible assets,non-contractual but identifiable intangible items as well a determination ofthe fair value of the Innisbrook Resort on an enterprise value basis.  We plan to update the estimated fair marketvalue in continued use of the Innisbrook Resort’s furniture, fixtures andequipment, or FF&E, inventory from the value obtained in July 2003 bygiving consideration to new FF&E purchased since July 2003 instead ofretaining a third party expert for this purpose as we believe that this is areasonable approach. The estimate of the fair market value of each of theseasset groups are based on facts and circumstances known to us at this time.  We expect to have the results of this assetstudy by December 31, 2004.

 

As earlier discussed, at the present time, we do not believe we areable to reliably project the amount of the total liquidating distributions wewill make to the holders of our common stock over the remainder of the orderlyliquidation period.

 

22

----

 

We have earlier discussed the reasons for this conclusion.  Accordingly, you should not rely on theranges earlier provided as representative of our current views on the subject.

 

**Plan of Liquidation**

 

***Background to thePlan of Liquidation***

 

On February 25, 2001, our board of directors adopted, and onMay 22, 2001 our common and preferred stockholders approved, a plan ofliquidation for our company.  The eventsand considerations leading our board to adopt the plan of liquidation aredescribed in our proxy statement dated April 6, 2001, and are summarizedin part below.  The plan of liquidationcontemplates the sale of all of our assets and the payment of (or provisionfor) our liabilities and expenses, and authorizes us to establish a reserve tofund our contingent liabilities.  Theplan of liquidation gives our board of directors the power to sell any and allof our assets without further approval by our stockholders.  However, the plan of liquidation constrainsour ability to enter into sale agreements that provide for gross proceeds belowthe low end of the range of gross proceeds that our management estimated wouldbe received from the sale of such assets absent a fairness opinion, anappraisal or other evidence satisfactory to our board of directors that theproposed sale is in the best interest of the company and our stockholders.

 

Our board’s decision to adopt the plan of liquidation followed alengthy process in which our board and management reviewed different strategicalternatives with the goal of maximizing stockholder value.

 

During 1999, we began to observe what would become increasinglyunfavorable trends in the golf course industry and the capital markets,including an oversupply of golf courses and diminished availability of equityand debt capital for real estate companies in general and for small capspecialty REITs, such as our company, in particular.  As a result of our concern about our declining stock price, onFebruary 9, 2000, our board of directors engaged Banc of AmericaSecurities LLC, or BAS, as our then financial advisor to review a broad rangeof strategic alternatives.  The alternativesunder consideration at that time included:

 

•                                          mergerof our company with other companies;

 

•                                          saleof our company;

 

•                                          issuanceby our company of equity in a private placement;

 

•                                          establishmentor acquisition of a management company;

 

•                                          recapitalizationof our company;

 

•                                          saleof some of our company’s assets; and

 

•                                          terminationof our status as a REIT in combination with some of the other alternatives.

 

As a result of information gathered in this process, we authorized BASto solicit merger bids and other strategic proposals regarding our company.  BAS contacted a number of potential buyersor potential merger partners and solicited bids to acquire our company,however, the proposals that we received were all below our expectations andcommon stock price at that time.  Wenever received a firm written proposal to acquire our entire company.

 

Faced with declining prospects for our company and a lack of acceptableopportunities to sell our real estate portfolio as a whole, and based uponinput from our financial advisors, our board determined at that time that thebest available strategic alternative to maximize stockholder value would be toengage in a liquidation of our assets. This decision was based on the following five important factors, amongothers.

 

The first important factor that the board considered was an oversupplyin the golf course industry in 1999 and 2000. Most of our revenue came from lease payments made by lessees of our golfcourses, and we depended on the ability of our lessees to generate sufficientincome from golf course operations to pay their lease payments to us.  However, the environment

 

23

----

 

for golf course operators and owners, including our lessees, had becomeincreasingly competitive over the prior two years.  This was primarily a result of the significant number of new golfcourse openings and increases in the overall number of golf courses, whichoffset the growth in participation rates and the overall number of golfers.

 

The increase in the number of golf courses contributed to a decline inthe value of existing golf courses and poor financial performance by golfcourse operators.  For example, inMarch 1999, Meditrust divested its portfolio of 45 golf courses, known asits Cobblestone assets, for aggregate consideration of approximately$393 million, which was approximately $210 million less than it hadpaid for those golf courses in 1998. Moreover, two of the largest golf course operators, Clubcorp, Inc.and American Golf Corporation had reported declines in net income for the firstnine months of 2000, compared to the same period a year before, with Clubcorpreporting a net loss for the period. Also in 2000, another operator, Arnold Palmer Golf, unable to completeits proposed initial public offering, had been unsuccessfully marketed forsale.  Additionally, Family GolfCenters, Inc. an owner and operator of golf practice facilities wassuffering from liquidity troubles and a deteriorating stock price and, as aresult, filed for bankruptcy relief in May 2000.  Finally, Golden Bear Golf, Inc., a diversified golf productsand services company that went public in August 1996 at $16 per share,after suffering from cumulative net losses, delisted in July 2000 in agoing private transaction in which publicly held shares were converted into theright to receive $0.75 per share.

 

A second important factor that our board considered during itsstrategic review process was the change in the financial markets forREITs.  In general, the market prices ofpublicly-traded REIT securities began a decline in mid-1998.  The declining investor interest in REITstocks restricted the ability of REITs to obtain public equity.  REITs completed very few equity offerings inthe public markets from the beginning of 1998 through 2000, and faced debtmarkets with significantly diminished liquidity.  According to the National Association of Real Estate InvestmentTrusts, an industry association, total REIT capital raising through 2000 wasonly $10.4 billion, compared to $17.2 billion in 1999, $38.4 billionin 1998 and $45.3 billion in 1997. Although we were able to issue $20 million of preferred stock in adirect offering on April 2, 1999, we had been unable to obtain additionalpublic equity since then on acceptable terms. This limited our ability to complete acquisitions, fund growthopportunities, improve our balance sheet and enhance stockholder value.

 

A third important factor that our board considered was the restrictionsour corporate structure placed on our operations.  As a specialty REIT, we were generally prevented by law frommanaging our own assets.  Instead, weleased our properties to independent lessees. The inability of a REIT to operate its own specialty properties canresult in the problem known as lessee leakage. This refers to the fact that the profit from successful operation of theREIT’s assets “leaks out” to the lessee/operator rather than accruing to theREIT/owner.  We attempted to address theproblem of leakage by entering into participating leases with our lessees in whichthe rent lessees pay includes an income-related component.  Our participating leases were designed toprovide us with limited participation in the economic upside from golf courseoperations, while leaving the economic downside risk with the lessee.  However, many of our lessees were specialpurpose entities with limited capital and were unable to fund their rentpayments from any source other than operations.  If the lessee’s operations were not sufficient to pay the fixedminimum lease payments, the lessee would likely default on its participatinglease obligations.  We intended toprotect ourselves in part against the risk of lessee default by takingcollateral from the lessee (or its affiliate) at the time we entered into eachparticipating lease.  Generally, ourgolf course acquisitions were structured so that the seller would contributeits golf course to our operating partnership in exchange for operatingpartnership interests, or OP units, and our operating partnership would thenlease the golf course back to a newly-formed affiliate of the seller.  Our collateral for the lessee’s obligationsusually consisted of a pledge of the seller’s OP units, with a value generallyinitially equal to approximately 15% of the purchase price.  This collateral generally approximated16 months of rent.  The OP unitsare convertible into our common stock and, thus, their value fluctuates withour common stock price.  As our stock pricedeclined, beginning in mid-1998, the value of our collateral at each golfcourse steadily declined.  This declineboth made defaults by the lessees more likely and reduced the value of thecollateral that we could turn to in the event of a lessee default.

 

A fourth important factor considered by our board during its thenreview of our strategic alternatives was that material defaults by lessees hadoccurred under participating leases at a number of our golf courses.  In 1999, several of our lessees generatedlosses, and by March 2000, we had declared events of default under leasesagainst our lessees at 12 golf courses (though the defaults at seven such golfcourses were cured by their respective lessees).  By the time we solicited stockholders’ approval for the plan ofliquidation, we had taken possession of five of our golf courses from thelessees as a result of defaults by those lessees that resulted in eviction orvoluntary relinquishment of the golf course by the lessees.  In addition, at that time, we believed,based on information from the lessees, that the financial performance of thelessees of 25 of our golf courses was inadequate to support the paymentsrequired under the respective participating leases.  The potential for additional defaults under

 

24

----

 

our participating leases reduced the value of our golf courses and ofour company to a potential buyer.  Inaddition, lease defaults reduced the amount that we could borrow under ourcredit agreement, pursuant to a formula in the credit agreement.  Under laws applicable to REITs, if weterminated a participating lease as a result of a lessee default, we were facedwith the options of leasing the golf course to a new lessee, operating the golfcourse through a taxable subsidiary, engaging a management company to managethe golf course, or selling the golf course within 90 days in order toprevent the operating income from becoming disqualified income for REIT taxpurposes.  If we were to continue tooperate the golf course and received too much disqualified income during ataxable year, we would lose our REIT status (unless we were entitled to reliefunder certain statutory provisions).

 

A fifth important factor our board considered at that time was theeffect of the decline in our operating income on our ability to operate, andthe possibility that our operating income would decline further if additionallessees were to default.  The decline inour operating income triggered defaults under our credit agreement.  It was also likely to result in ourinability to comply with a financial covenant in our charter governing therights of our preferred stock, which might have then prevented us from sellingassets.  Moreover, we were concernedthat an inability to repay our obligations under our credit agreements byselling assets might induce our lenders to accelerate our obligations under thecredit agreement, which could have resulted in a bankruptcy filing.

 

***Adoption and InitialImplementation of the Plan of Liquidation***

 

On September 28, 2000, our board appointed a special committee ofindependent board members in contemplation of a transaction with Larry Young,one of our directors, our largest OP unit holder, and the owner of more of ourlessees than any other owner.

 

On November 6, 2000, our board formally directed management todevelop a plan of liquidation and a related proxy statement for presentation tothe board.  In addition, the boardauthorized us to enter into non-binding or binding letters of intent anddefinitive agreements for the sale of one or more of our golf courses.

 

In connection with the plan of liquidation, we entered into a votingagreement with our sole preferred stockholder, AEW Targeted Securities Fund,L.P., or AEW.  Under the votingagreement, AEW agreed, among other things, to vote in favor of the plan ofliquidation.  We agreed under the votingagreement, in the event that common stockholders approve the plan ofliquidation and the agreement is not otherwise terminated, to redeem all of theshares of Series A preferred stock for $25 per share plus dividendsaccrued and unpaid thereon through the date of the final redemptionpayment.  We agreed to so redeem theSeries A preferred stock promptly after we determine in good faith that wehave received sufficient net proceeds from the disposition of our assets and/oroperations to redeem all of the preferred shares without violating any legal orcontractual obligations.  We furtheragreed that after paying dividends on the common stock for the first and secondquarter of 2001, each in an amount not to exceed $0.25 per share, we would makeno further regular dividend distributions on the common stock without AEW’sconsent until the preferred stock was redeemed, other than distributionsrequired to maintain our status as a REIT and other distributions that we mightbe required to make to avoid the payment of certain taxes resulting from thesale of our properties.

 

Also, in connection with the plan of liquidation, we entered into apurchase and sale agreement with an affiliate of our largest lessee, LegendsGolf Management, LLC, or Legends, to sell to that affiliate up to 12.5(eighteen-hole equivalent) golf courses leased by Legends.  In addition, single-purpose affiliates ofLegends would be released from their obligations to repay limited recourseworking capital loans in the aggregate amount of approximately$6.6 million.  Pursuant to thepurchase and sale agreement, we could accept superior offers for these golfcourses (other than the five Myrtle Beach golf courses) upon payment of abreak-up fee to Legends.  BecauseMr. Young controlled Legends and was at that time a member of our board, aconflict of interest would have existed if Mr. Young participated in theboard’s consideration and/or decision to approve the sale of these golf coursesto Legends.  The special committee,which was aware of Mr. Young’s interest in the Legends transaction,unanimously recommended that our board approve the transaction between us andLegends.  In addition, both BAS andHoulihan Lokey Howard & Zukin Financial Advisors, Inc. advisedthe special committee that, as of the date of their opinions, the considerationto be received by our operating partnership in the Legends transaction was fairto our operating partnership from a financial point of view.  Mr. Young did not participate as aboard member in any of the board discussions regarding the Legends agreement,and he recused himself from all board discussions after September 27,2000.  Mr. Young did appear beforethe board in his capacity as a prospective purchaser of the Legends golfcourses.  The negotiations among us,Legends and Legends’ lenders were protracted and did not result in a signedpurchase and sale agreement until February 25, 2001.  The

 

25

----

 

purchase and sale agreement was effective as of February 14,2001.  Mr. Young was represented byseparate counsel during these negotiations. Mr. Young resigned from our board immediately after the Legendspurchase and sale agreement was approved.

 

On February 25, 2001, the special committee unanimouslyrecommended adoption of our plan of liquidation to our board and our board ofdirectors unanimously adopted a plan of liquidation for Golf Trust ofAmerica, Inc. and our operating partnership, Golf Trust of America, L.P.,subject to approval by our stockholders.

 

The plan of liquidation was submitted to a vote of our commonstockholders by means of a proxy statement dated April 6, 2001.  Our proposed plan of liquidation wasapproved by a 98% affirmative vote of the shares present or represented byproxy at our special stockholders meeting (constituting a 77% affirmative voteof all outstanding common shares) on May 22, 2001.  One hundred percent of our preferred stockvoted in favor of the plan of liquidation. As required by generally accepted accounting principles, or GAAP, weadopted the liquidation basis of accounting for all accounting periodsbeginning on or after May 22, 2001.

 

***Annual Updates tothe Projected Range of Liquidating Distributions***

 

The projections described below are forward-looking statements, subjectto this report’s introductory cautionary note and the risk factors listedbelow.

 

***Original 2001 Range****.*  At the time we prepared our proxy statement,dated April 6, 2001, soliciting stockholders’ approval for the plan ofliquidation, management estimated that if stockholders approved the plan, totalliquidating distributions to common stockholders would be within the range of$10.74 to $13.93 per share and would be paid within 12 to 24 monthsfollowing stockholders’ approval of the plan of liquidation.  Management’s estimate at that time was basedon numerous assumptions, notably including asset-by-asset estimated priceranges.  (For assets covered by definitivepurchase and sale agreements or letters of intent at that time, the then estimateswere based on the prices specified in those documents, rather than a range.)These and other management estimates were included within a financial modeldeveloped with the assistance of Banc of America Securities, LLC in order toproduce our overall estimated range of liquidating distributions.  We use the term “Original 2001 Range” torefer to this 2001 projection of the range within which total liquidatingdistributions to common stockholder were contemplated.  (As the context requires, the term “Original2001 Range” also refers to the component estimate prices or price ranges forone or more particular golf courses, all of which contributed to the overallprojected range of liquidating distributions.) The plan of liquidation givesour board of directors the power to sell any and all of our assets withoutfurther approval by our stockholders. However, the plan of liquidation constrains our ability to enter intosale agreements that provide for gross proceeds below the low end of the golfcourse’s respective Original 2001 Range absent a fairness opinion, anappraisal, or other evidence satisfactory to our board of directors that theproposed sale is in the best interest of our company and our stockholders.

 

***Houlihan Lokey’s2001 Range****.* At the time management prepared the Original 2001 Range, one of ourfinancial advisors, Houlihan Lokey, estimated that liquidating distributions tocommon stockholders would be lower, in the range of $9.53 to $13.26 pershare.  We refer to this projection as“Houlihan Lokey’s 2001 Range,” which term also refers to its componentper-course estimated sale price ranges, as the context requires.

 

***Updated 2002 Range****.*  Conditions in the golf resort industrydeclined significantly in late 2001 and early 2002 primarily as a result of adecline in travel and leisure spending after the September 11, 2001terrorist attacks.  Most importantly forus, the former borrower under our participating mortgage went into paymentdefault, significantly reducing the resale value of our interest, as the formerlender, in our mortgage loan secured by the Innisbrook Resort.  In light of these changed conditions, duringthe first quarter of 2002 our board re-engaged Houlihan Lokey to help the boardanalyze, among other things, whether it would be preferable to sell theparticipating mortgage immediately, in its distressed condition, or seek torestore the operating performance of the Innisbrook Resort first, beforeliquidating our interest therein.  Asexplained above (see “Our Participating Mortgage Secured by the InnisbrookResort”), based in part on Houlihan Lokey’s report, the board decided thatseeking to restore the Innisbrook Resort’s performance would be in ourstockholders’ best interest.  We also askedHoulihan Lokey at that time to assist us in updating our projection of ourtotal liquidating distributions in light of the golf course sale prices wereceived during the prior year as well as the new economic climate.  Based in part on Houlihan Lokey’s reportdated March 15, 2002, in the Spring of 2002 we projected at that time thatour total liquidating distributions to common stockholders would be within therange of $6.01 to $9.43 per share.  Werefer to this projection as the “Updated 2002 Range.” The Updated 2002 Rangewas based on many assumptions and estimates. Notably, this projection assumed that we, along with the InnisbrookResort’s operators, namely Westin and Troon Golf, would successfully achieve amodest recovery, based on historical financial results, in

 

26

----

 

the financial performance of the Innisbrook Resort; that all of ourgolf course assets would be sold by the end of 2002 (other than our interest inthe Innisbrook Resort, which this estimate assumed would be liquidated in 2005);and that the condominium owner litigation at the Innisbrook Resort would beresolved by the time that we sold those properties, among many other limitingassumptions and estimates.

 

***Updated 2003 Range****.*  In February 2003, our board againengaged Houlihan Lokey to assist us in updating our projected range ofliquidating distributions, in light of the actual sale prices we obtainedduring the prior year and other relevant factors.  Based in part on Houlihan Lokey’s report dated March 18,2003, and subject to many limiting assumptions and uncertain estimates, weprojected at that time that total liquidating distributions to our commonstockholders over the remainder of our orderly liquidation would be within therange of $4.75 to $7.21 per share.  Werefer to this projection as the “Updated 2003 Range.” In comparing the Updated2002 Range and the Updated 2003 Range, the low end of the range decreased by$1.26, or 21% ($6.01 less $4.75), and the high end of the range decreased by$2.22, or 24% ($9.43 less $7.21).  Whilethere were several factors that contributed to the net variance, the primaryreason for the net decrease was due to the reduction in the expected net freecash flow from Innisbrook for the four year period 2002 through 2005 (includinga significant number of which were one-time non-recurring payments).  This projection was a forward-lookingstatement, subject to this quarterly report’s introductory cautionary note andthe risk factors listed in the section titled “*Risks that might delay or reduce orliquidating distributions”*. This projection was based on several assumptions about future events,including, among others, the following:

 

•                                          anassumption that we would successfully obtain ownership of the InnisbrookResort;

 

•                                          anassumption that we, in conjunction with the Innisbrook Resort’s operators,namely Westin (and Troon Golf, through Westin), would be able to realize amodest recovery, based on historical financial results, in the financialperformance of the Innisbrook Resort by year-end 2005 (which implicitly assumesthat economic recovery would begin sufficiently in advance of that date tosupport regular business and group leisure activity at the Innisbrook Resort bylate 2005); and

 

•                                          anassumption that we would not be subject to any material liability under any ofthe lawsuits that we were defending at that time (February 2003) which, infact, turned out to be the case.

 

***No New Range ofLiquidating Distributions****:*  We have recorded the value of our golf courses and the InnisbrookResort (discussed in detail in an earlier section titled “FactorsConsidered in Preparing our Revised Estimate of the Resale Value of theInnisbrook Resort”), at our current best estimates of fair value.  However, at the present time we do notbelieve we are able to reliably project the amount of the total liquidatingdistributions we will make to our common stockholders over the remainder of theorderly liquidation period.  Subject tothe following caveats, we do, however, believe that it may be possible to do soin future periods as the quality and reliability of information necessary tomake estimates of cash flow and, correspondingly, value become morereliable.  However, we can make noassurances that the quality and reliability of all such necessary informationwill develop to the degree necessary to allow us to derive a reliable estimateof the range of liquidation distributions.

 

Among other reasons, the primary reason we do not believe we are ableat this time to project the amount of the total liquidating distributions wewill make to our common stockholders over the remainder of the orderlyliquidation period is because we have not been able to obtain sufficientlystatic financial data with respect to the Innisbrook Resort’s performance,which is necessary to establish a cashflow-based valuation of the InnisbrookResort.  The factors giving rise to thisuncertainty include, without limitation, the following:

 

•                                          thatprior to the execution of the settlement agreement we were not able to obtainaccurate forecasts from Westin regarding operating performance, among otherfactors, including, without limitation, the cash flow and bookings at theInnisbrook Resort caused by compressed group booking windows, unexpected groupcancellations (caused by outside circumstances unrelated to the InnisbrookResort), unexpected group slippage (groups filling less rooms than theyoriginally book), and increased competition in the marketplace.  According to industry sources, corporaterestrictions on travel have hurt bookings and meeting business has been softand many companies are now in the habit of booking events much closer to thetime they need the space than in past years;

 

•                                          thatthe financial performance at the Innisbrook Resort has not begun to realize anysignificant positive impact from the economic rebound that has begun and thatthe Innisbrook Resort has been experiencing a modest downward trend, which issomewhat contrary to recent industry trends. Westin has evaluated and restructured their sales personnel as well asimplemented new sales and marketing programs in

 

27

----

 

an effort to reverse the Innisbrook Resort’s downward trend and torealize the modest recovery currently being seen in the destination InnisbrookResort industry which seems to be having a positive impact on sales efforts;

 

•                                          thatalthough in connection with the settlement agreement we entered into a newmanagement agreement with Westin providing for our increased control overaccounting and marketing and improved provisions governing reporting by Westin,we do not directly manage the Innisbrook Resort;

 

•                                          thatthe litigation between our former borrower and approximately fifty of thecondominimum owners at the Innisbrook Resort (to which we presently are not aparty) continues to cloud the future of the Innisbrook Resort from a valuationperspective, notwithstanding periodic, interim successes in the litigation byour former borrower as reported to us by our former borrower;

 

•                                          thatour competitors have used as a competitive advantage in marketing their resortsagainst the Innisbrook Resort the historical uncertainty surrounding theprospects of the future of the Innisbrook Resort;

 

•                                          therisk that our July 15, 2004 settlement agreement with Westin and our formerborrower may prove less successful than anticipated, and that the performanceof the parties to the settlement agreement will fall short of our expectations;

 

•                                          thatwe have not as yet received any firm offers from third-parties desiring toacquire the Innisbrook Resort which are of the type to allow us to reliablyestablish a value for the Innisbrook Resort;

 

•                                          uncertaintyregarding the depth and timing of the economic recovery; and

 

•                                          continuedthreats of terrorism and the impact thereof on the travel and lodging industry.

 

Consequently, we will continue to refrain from making any adjustments(positive or negative) to any earlier reported range of distributions orproposing a new range.  We may, however,be able to do so in future periods in the event that the quality andreliability of all information necessary to make estimates of cash flow and,correspondingly, value become more reliable. However, we can make no assurances that the quality and reliability ofall such necessary information will develop to the degree necessary to allow usto develop a reliable estimate of the range of liquidation distributions.

 

Any of these historical estimates might prove to be incorrect inmaterially adverse ways which might cause our actual liquidating distributionsto be lower than our projections.  Wecurrently expect liquidating distributions to the holders of our common stockto begin after the sale of the Innisbrook Resort, originally planned for late2005 which as indicated may be delayed.

 

All of the historical projections described above are forward-lookingstatements subject to this annual report’s introductory cautionary note and therisk factors listed herein.  Thehistorical projections are based on numerous estimates and limitingassumptions, including those listed above, any or all of which might prove tobe incorrect in materially adverse ways. None of the projections are based on any appraisals of any of ourassets, except Innisbrook which is based on a commissioned asset study, or anyindependent litigation risk assessments. The actual amount of our liquidating distributions could be lower thanour historical projections (we are not providing any current projections), andthe actual timing of our liquidating distributions could be later than our historicalprojections.  Accordingly, you shouldnot place undue reliance on the assumptions or historical projectionsabove.  Important factors that couldcause such variances are discussed herein under the caption “Risks that mightDelay or Reduce our Liquidating Distributions.”

 

Moreover, preparing financial projections such as those above isdifficult and time consuming.  Except asmay be required by applicable law, we have no current intention to produce anyfurther updates to our projected range of liquidating distributions.  In the future, the mere fact that we havenot updated our historical projections does not indicate that we continue toendorse those historical projections or that they have not declined further; infact, we believe the historical projections may be more favorable than thecurrent facts..  All projections areinexact and subject to numerous risks and uncertainties.  You should not place undue reliance on anyprojections.

 

28

----

 

##### ***Progress of our LiquidationCompared to our Original Projections***

 

As of August 9, 2004, we have sold 29 of our 34 properties.(Stated in 18-hole equivalents, we have sold 38 of our 47 golf courses).  Any equity redemption component of each saleprice is valued as agreed upon by the parties at the time of sale. In theaggregate, our gross sales proceeds of $301.4 million are within thecombined per-course ranges for the golf courses sold to date, as estimatedduring the preparation of Houlihan Lokey’s 2001 Range. However, our gross salesproceeds are $15.6 million, or 4.9%, below the low end of the combinedOriginal 2001 Range. Of the twelve properties that have been sold below the lowend of the Original 2001 Range, all but two were sold after September 11,2001 (four in late 2001, three in 2002 and four in 2003). The events ofSeptember 11, 2001, as well as the continuing decline in the economy afterthat date, negatively impacted our ability to close sales transactions withinthe originally contemplated range of prices. Although no fairness opinions orappraisals were obtained, based on the board’s observations of the environmentin which we and the nation were operating in at the time of each sale and otherevidence regarding each sale below the low end of the range, our boarddetermined that each of these twelve transactions at prices below the Original2001 Range was fair to, and in the best interest of, the company and ourstockholders.

 

For the period January 1, 2003 through August 9, 2004, wehave disclosed comparisons of asset sale prices primarily against the Updated2003 Range.   For the remainder of 2004,we intend to continue to disclose price comparisons (if at all) for theproperties remaining in our portfolio primarily against the Updated 2003 Range.

 

As earlier discussed, at the present time, we do not believe we areable to reliably project the amount of the total liquidating distributions wewill make to the holders of our common stock over the remainder of the orderlyliquidation period. We have earlier discussed the reasons for this conclusion.Accordingly, you should not rely on the ranges earlier provided asrepresentative of our current views on the subject.

 

The net assets of $25,057,000 at June 30, 2004 result in aliquidation distribution per share of $3.42. The $3.42 is based on the net assets at a particular point in time (i.e.,June 30, 2004) and does not take account of our corporate overheadexpenses or the potential Innisbrook Resort overhead expenses which we expectwill arise in the event that we assume ownership of the Innisbrook Resortduring our anticipated holding period, but such corporate expenses will impactour ultimate liquidating distributions to our holders of common stock.  The $3.42 also does not take account of any positiveoperating cash flows that may be realized from any of our golf course assets,including the potential positive cash flows that may be realized from theInnisbrook Resort which will also impact our liquidating distributions to ourholders of common stock.  The $3.42 isderived by dividing the net assets of $25,057,000 less loans to officers of$211,000 by the number of shares of common stock and common operatingpartnership units outstanding (7,409,000 less 141,000) after consideration ofthose shares that will be cancelled prior to the distribution of the netassets, which total 140,625, described as follows (i)  55,625 shares of common stock pledged to usas security for the payment of our executive officers’ promissory notes, and(ii) 85,000 shares of common stock pledged to us as security for the paymentand performance of the obligations and liabilities of the pledgor under acommon stock redemption agreement executed concurrently with the sale of RoyalNew Kent and Stonehouse.  This redemptionagreement provides in part that this security will be tendered to us if andwhen the total amount of liquidating distributions paid to our holders ofcommon stock pursuant to the plan of liquidation is less than $10.74 per share.

 

As previously discussed, our estimate of the fair value of theInnisbrook Resort, as recorded on our books at June 30, 2004, is$44.2 million.  If there were noother changes to the factors underlying our Updated 2003 Range (and we cannotassure that fact or result), this difference in the valuation of the InnisbrookResort would cause the low end of the Updated 2003 Range to decline from $4.75to $2.85.  As noted above (see ***Estimated Value/Amount of Write-Down***),we have engaged the expert that prepared the asset study performed in July of2003 to update this study and determine the present enterprise value of theInnisbrook Resort.  In the event that theestimate of the fair market value of the Innisbrook Resort determined in thisstudy is less than the valuation provided in the study performed in July of2003, the difference in the valuation of the Innisbrook Resort would cause thelower end of the Updated 2003 Range to decline below $2.85.

 

##### ***Assets Held for Sale***

 

The following chart identifies each of our unsold properties:

 

29

----

 

**Properties Held for Sale as ofAugust 9,  2004**

 

| **Property**                               | ** ** | **Location**    | ** ** | **18-Hole  Equivalent** | ** ** |
|--------------------------------------------|------------|-----------------|------------|-------------------------|------------|
|                                       |       |            |       |                    |       |
| Black Bear                                 |       | Orlando, FL     |       | 1.0                     |       |
| Wekiva                                     |       | Orlando, FL     |       | 1.0                     |       |
| Innisbrook Resort                          |       | Palm Harbor, FL |       | 4.0                     |       |
| Tierra Del Sol                             |       | Belen, NM       |       | 1.0                     |       |
| Stonehenge (Wildewood and Woodcreek Farms) |       | Columbia, SC    |       | 2.0                     |       |
| Total                                      |       |            |       | 9.0                     |       |

 

As of August 9, 2004, we have entered into the followingarrangements for the disposition of two of our golf courses. These dispositionsare pending and we face the risk that they might not occur in the time andmanner anticipated. We do not intend to issue any updates regarding thesearrangements unless and until a closing occurs. After we enter into a purchaseagreement, the buyer’s obligation to close is often subject to conditions, someof which might be within the buyer’s control. Accordingly, these sales couldfail to close, in which case we would attempt to locate an alternate buyer andenter in to a new purchase agreement or seek to renegotiate the sales with theoriginal buyers. Any such alternate or renegotiated transaction might be onterms less favorable than described below.

 

*Wekiva Sale Agreement.*  On January 27, 2004, we entered into adefinitive agreement for the disposition of the Wekiva Golf Club to CasselberryGolf Club, Inc. The price that Casselberry Golf Club, Inc. will pay if theagreement for the disposition of Wekiva closes will fall within the Updated2003 Range of sales prices for this asset of $2.0 to $3.0  million.  A refundable earnest money deposit of$100,000 was made on July 22, 2004. Under the terms of the sale agreement,the purchase price will be paid in cash at closing, subject to closingconditions and adjustments.    Theclosing is expected to occur on or before September 1, 2004.

 

*Black Bear Sale Agreement.*  On July 27, 2004, we entered into adefinitive agreement for the disposition of the Black Bear Golf Club to AshleyFields, LLC.  The price that AshleyFields, LLC will pay if the agreement for the disposition of the Black BearGolf Club closes will fall within the Updated 2003 range of sales prices forthis asset of $1.5 to $2.0 million.  Arefundable earnest money deposit of $100,000 was made on August 2, 2004.  Under the terms of the sale agreement, thepurchase price will be paid in cash at closing, subject to closing conditionsand adjustments.   The closing iscurrently expected to occur on or before September 25, 2004.

 

## **Application of Critical Accounting Policies**

 

##### ***Liquidation Basis ofAccounting***

 

As a result of our board of directors’ adoption of a plan ofliquidation and its approval by our stockholders, we adopted the liquidationbasis of accounting as required. Our discussion and analysis of our financialcondition and results of operations is based on our financial statements whichhave been prepared in accordance with generally accepted accounting principlesin the United States of America. The preparation of these financial statementsrequires us to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. We base our estimates on historicalexperience and other various assumptions that we believe to be reasonable underthe circumstances. Actual results may differ from these estimates. Real estateheld for sale includes the Innisbrook Resort as well as the five golf courses(four properties) that we own and manage. Our most significant estimate is thefair value of the Innisbrook Resort estimated to be $44.2 million, which wasdetermined as previously described under the section titled “*Factors Considered in Preparing our Revised Estimate of the ResaleValue of the Innisbrook Resort”*. The valuation of our four otherproperties is based on estimates of sales values based on indications ofinterest from the marketplace, certain assumptions by management specificallyapplicable to each property, and on the property value ranges.

 

30

----

 

##### ***Estimated Liquidation Valueof the Innisbrook Resort (formerly pledged as collateral under a participatingmortgage receivable).***

 

As of June 30, 2004, we held a participating mortgage, as thefirst lender, secured by the Innisbrook Resort. At that time, our formerborrower was in default under the mortgage. Our estimate of the fair value ofour interest, as lender, in the participating mortgage, as recorded on ourbooks prior to September 30, 2003, was $60 million. This value wastoward the low end of the valuation range estimated by Houlihan Lokey in itsMarch 2003 valuation report (the low end of Houlihan Lokey’s orderlyliquidation range for this asset was $58.0 million and the high end ofthis range was $70.4 million). The March 2003 valuation rangeassumes, among other things, that we will acquire direct ownership of theInnisbrook Resort and that the Innisbrook Resort will successfully realize amodest recovery in financial performance levels, based on historical results,within the following 30-month period ending on or about December 31, 2005.As part of its valuation process, Houlihan Lokey also analyzed the immediateliquidation value of our lender’s mortgage interest in the Innisbrook Resort,which its March 2003 report estimated to be between $40.5 and$47.3 million (compared to an estimate of between $45 and $50 millionin the March 2002 report). Based on the current facts and circumstances atthe time, we recorded a write-down to the Innisbrook Resort’s value of$15,760,000 in the three months ended September 30, 2003 and the value ofour lender’s mortgage interest in the Innisbrook Resort was then recorded andcontinued to be recorded at June 30, 2004 at $44.2 million on ourbalance sheet.

 

##### ***Reserve for Estimated CostsDuring the Period of Liquidation***

 

Under the liquidation basisof accounting we are required to estimate and accrue the costs associated withimplementing the plan of liquidation. These amounts can vary significantly dueto, among other factors, the timing and actual receipt of proceeds from golfcourse sales, the costs of retaining personnel and others to oversee theliquidation, including the costs of insurance, the timing and amountsassociated with discharging known and contingent liabilities and the costsassociated with cessation of our operations. These costs are estimated and areexpected to be paid over the liquidation period.

 

##### ***Revenue Recognition***

 

With respect to the golfcourses that we are currently managing, revenue from green fees, cart rentals,food and beverage sales, merchandise sales, and range income are generallyrecognized at the time of sale. Membership dues are recognized ratably over theapplicable period.

 

Certain membership initiation fees at these golf courses are refundablebased on specific conditions. The estimated present value of the potentialrefunds at Wildewood and Woodcreek Farms over the original 30-year requiredmembership term, as defined in the Club Membership Manual, recorded as anaccrued liability on our books at June 30, 2004 is valued at $125,000.Additionally, certain initiation fees may be refundable prior to the expirationof the 30-year term under specific membership replacement conditions. There isno liability recorded to reflect our contingent refund obligation due to thefact that four new members have to join in the specific membership category fora resigned member to receive a refund. A refund issued under these specificcircumstances would be considered a reduction of membership revenue for thatperiod. All initiation fees received are initially recorded as deferred revenueand amortized over the average life of a membership which, based on historicalinformation, is deemed to be nine years.

 

**Results of Operations**

 

***Results of operations for the three monthsended June 30, 2004 and 2003***

 

For the three months ended June 30, 2004  we recognized $1,617,000 in revenue from theoperations of the 5.0 golf courses that we own and manage compared to$2,815,000 in revenue from the operations of the 7.5 golf courses that we ownedand managed for varying periods of time during the same period in 2003.  The decrease in revenues of $1,198,000, or43%, is primarily due to $1,157,000 in lost operating revenue from Sandpiper (1.0golf courses) which we managed and subsequently sold in June 2003.  Additionally, there was a 3% decrease($42,000) in the aggregate revenue from the operations of the 5.0 golf coursesthat were managed throughout both the three months ended June 30, 2004 andthe three months ended June 30, 2003. Of the 7.5 golf courses that we managed during the three months endedJune 30, 2003, 2.5 were sold during the second quarter of 2003.

 

31

----

 

Expenses totaled $1,893,000 and $3,167,000 for the three months endedJune 30, 2004 and 2003, respectively. The period over period decrease was $1,274,000, or 40%, of which$998,000 represents the difference between the direct operating expenses of$1,516,000, in the aggregate, from the 5.0 golf courses that we managed duringthe three months ended June 30, 2004 compared to $2,514,000 in directoperating expenses of the 7.5 golf courses that we managed (for varying periodsof time) during the three months ended June 30, 2003. The net operatingincome for the managed courses for the three months ended June 30, 2004and 2003 was $101,000 and $301,000, respectively.   As noted above in the revenue discussions,we managed the 5.0 golf courses that we currently still own throughout theperiods ended June 30, 2004 and 2003. In the aggregate, these five golf courses recorded net income of$101,000 for the three months ended June 30, 2004, while they recorded anet loss of $251,000 for the three months ended June 30, 2003.  The improvement in the aggregate resultsperiod over period of $352,000 was due to a 3% growth in aggregate revenue anda 21% decrease in aggregate expenses (with the most significant expensereductions occurring at Tierra Del Sol located in Belen, New Mexico).

 

Subsequent to the period ended May 22, 2001 (the date of ourshareholders’ approval of our plan of liquidation), we adopted the liquidationbasis of accounting in accordance with the requirement that we do so whichrequires that we accrue all anticipated expenses associated with our executionof the plan of liquidation.  Therefore,the majority of our expenses incurred in the three months ended June 30,2004 and 2003, respectively, were specifically related to items that weprovided for in our liquidation accrual. The general and administrativeexpenses incurred during the three months ended June 30, 2004 and notspecifically related to the plan of liquidation and accrued for in ourliquidation accrual were approximately $377,000. Of this amount, approximately$195,000, or 52%, was salaries and benefits, $58,000, or 15%, was accounting,audit and tax fees, $36,000, or 10%, was shareholder service related fees andexpenses such as Chase Mellon fees and board fees and the remaining $88,000, or23%, included rent, utilities, property tax and insurance on our officespace,  travel expenses, general officeexpenses and all other operating expenses. This compares to general and administrative expenses of $653,000incurred during the same period in 2003.  Of this amount for the three months ended June 30, 2003,approximately $353,000, or 54%, was salaries and benefits, $72,000, or 11%, wasgeneral counsel legal fees not specifically related to the plan of liquidation,$38,000, or 6%, was shareholder service related fees and expenses such as ChaseMellon fees and board fees and the remaining $190,000, or 29%, included rent,utilities and office expenses, general audit and tax fees, travel and all otheroperating expenses.

 

For the three months ended June 30, 2004, interest expense was$34,000 compared to $468,000 for the three months ended June 30, 2003. Thedecrease of $434,000 is due to the fact that we paid in full the outstandingbalance under our credit facility on June 19, 2003.  The interest expense of $34,000 for the threemonths ended June 30, 2004 represents $16,000 in interest on our revolvingcredit line with Textron Financial Corporation and $18,000 in interest accruingto our executive officers on their remaining earned milestone payment.

 

We accrued a quarterly preferred dividend of $625,000 and $462,000 forthe three months ended June 30, 2004 and 2003, respectively.  The interest rate on the preferred stockincreased to 12.5% from 9.25% effective on July 22, 2003 (see furtherdiscussion below under the caption “*Cash flows for the sixmonths ended June 30, 2004 and 2003*”).

 

Asa result of the foregoing, we recorded a net change in net assets available toholders of common stock and OP unit holders of ($1,163,000) compared to($1,135,000) recorded for the three months ended June 30, 2004 and 2003,respectively.

 

***Results of operations for the six monthsended June 30, 2004 and 2003***

 

For the six months ended June 30, 2004 and 2003, we recognized$3,213,000 and $5,701,000, respectively, in revenue from the operations of thegolf courses that we manage and the participating leases that were formerly inplace.  The decrease in revenues of$2,488,000, or 44%, is due to lost rental revenue of approximately $452,000from the sale of Eagle Ridge (3.5 golf courses) that was sold inJanuary 2003 together with $2,092,000 in lost operating revenue from 3.5golf courses that we managed and subsequently sold in 2003 (1.0 inJanuary 2003, 1.5 in April 2003 and 1.0 in June 2003), with themost significant being Sandpiper.   Thesedecreases were offset by an increase of $56,000 in the revenue from theoperations of the 5.0 golf courses that were managed throughout the six monthsended June 30, 2004 and 2003. Revenue from the operations of the 5.0 golf courses that we managedduring the six months ended June 30, 2004 totaled $3,213,000.  During the same period in 2003, we managed atotal of 8.5 golf courses (for varying periods of time) from which we recorded$5,249,000 in revenue from managed golf course operations.  As previously noted, of these 8.5 golfcourses, 5.0 were also managed during this period in 2004 and 3.5 were soldduring the six month period ending June 30, 2003.

 

Expenses totaled $3,602,000 and $6,203,000 for the six months endedJune 30, 2004 and 2003, respectively. The period over period decrease was $2,601,000, or 42%, of which$1,982,000 represents the difference between the direct

 

32

----

 

operating expenses of $2,837,000, in the aggregate, from the 5.0 golfcourses that we managed during the six months ended June 30, 2004 comparedto $4,819,000 in direct operating expenses of the 8.5 golf courses that wemanaged (for varying periods of time) during the six months ended June 30,2003. The net operating income for the managed courses for the six months endedJune 30, 2004 and 2003 was $376,000 and $430,000, respectively.   As noted above in the revenue discussions,we managed the 5.0 golf courses that we currently still own throughout theperiods ended June 30, 2004 and 2003. In the aggregate, these five golf courses recorded net income of$376,000 for the six months ended June 30, 2004, while they recorded a netloss of $258,000 for the six months ended June 30, 2003.  The change in the aggregate results periodover period of $634,000 was due to a 2% growth in aggregate revenue and a 17%decrease in aggregate expenses (with the most significant expense reductionsoccurring at Tierra Del Sol located in Belen, New Mexico).

 

Subsequent to the period ended May 22, 2001 (the date of ourshareholders’ approval of our plan of liquidation), we adopted the liquidationbasis of accounting in accordance with the requirement that we do so whichrequires that we accrue all anticipated expenses associated with our executionof the plan of liquidation.  Therefore,the majority of our expenses incurred in the six months ended June 30,2004 and 2003, respectively, were specifically related to items that weprovided for in our liquidation accrual. The general and administrativeexpenses incurred during the six months ended June 30, 2004 and notspecifically related to the plan of liquidation and accrued for in ourliquidation accrual were approximately $765,000. Of this amount, approximately$420,000, or 55%, was salaries and benefits, $69,000, or 9%, was accounting,audit and tax fees, $64,000, or 8%, was shareholder service related fees andexpenses such as board fees and Chase Mellon fees and the remaining $212,000,or 28%, included rent, utilities, property tax and insurance on our officespace,  travel expenses, general officeexpenses and all other operating expenses. This compares to general and administrative expenses of $1,384,000incurred during the same period in 2003. Of this amount for the six months ended June 30, 2003, approximately$732,000, or 53%, was salaries and benefits, $268,000, or 19%, was generalcounsel legal fees not specifically related to the plan of liquidation,$83,000, or 6%, was shareholder service related fees and expenses such as boardfees and the remaining $301,000, or 22%, included rent, utilities and officeexpenses, general audit and tax fees, travel and all other operating expenses.

 

For the six months ended June 30, 2004, interest expense was$53,000 compared to $1,289,000 for the six months ended June 30, 2003. Thedecrease of $1,236,000 is due to the fact that we paid in full the outstandingbalance under our credit facility on June 19, 2003.  The interest expense of $53,000 for the sixmonths ended June 30, 2004, 2003 represents $18,000 of interest on ourrevolving credit line with Textron Financial Corporation and $35,000 ininterest accruing to our executive officers on their remaining earned milestonepayment.

 

We accrued quarterly preferred dividends of $1,250,000 and $925,000 forthe six months ended June 30, 2004 and 2003, respectively.  The interest rate on the preferred stockincreased to 12.5% from 9.25% effective on July 22, 2003 (see furtherdiscussion below under the caption “*Cash flows for the sixmonths ended June 30, 2004 and 2003*”).

 

Pursuant to a letter agreement that we entered into with our chiefexecutive, Mr. W. Bradley Blair, II, on March 22, 2004, Mr. Blairagreed to, among other things, irrevocably assign to us 143,790 shares of GTAcommon stock which he owned and which secured his non-recourse loan (made toMr. Blair in 2001 in the amount of $1,150,320 pursuant to his amended andrestated employment agreement dated February 25, 2001 which was amended onsuch date to facilitate the plan of liquidation) (see further discussion belowunder the caption *“Contractual Obligations, ContingentLiabilities and Commitments”*). These shares were valued at the 10-day trailing stock price of$2.32  for a total redemption value ofapproximately $333,000.  We applied thisamount to the outstanding loan balance and we cancelled the remainder of theloan balance (which, by its terms was non-recourse and, thus, following ourreceipt of all of the collateral, was effectively unsecured anduncollectible).   The remainder of theunreserved loan balance of approximately $214,000 was written off against the“other” category of the liquidation accrual.

 

Asa result of the foregoing, we recorded a net change in net assets available toholders of common stock and OP unit holders of ($2,226,000) compared to ($2,513,000)recorded for the six months ended June 30, 2004 and 2003, respectively.

 

## **Adjustment to Liquidation Basis of Accounting**

 

We adopted the liquidation basis of accounting for all periodssubsequent to May 22, 2001, the date on which our stockholders approvedour plan of liquidation. Accordingly, on May 22, 2001, our assets wereadjusted to their estimated fair value and our liabilities, including estimatedcosts associated with implementing the plan of liquidation, were adjusted totheir estimated settlement amounts. The minority interest in our operatingpartnership was reclassified to net assets because the

 

33

----

 

holders of common limited partnership units, which we call OP units, donot have preferential distribution rights over the common stockholders.

 

Real estate held for sale includes the Innisbrook Resort and the otherfive golf courses (at four properties) that we own and manage.  As of June 30, 2004, the valuation ofthe Innisbrook Resort is based on an asset study prepared by third-partyexperts in October 2003 that included a then estimate of the market valueof the Innisbrook Resort’s real estate, an estimate of the fair market value ofthe Innisbrook Resort’s furniture, fixtures and equipment, or FF&E, and anestimate of the fair value of the Innisbrook Resort’s identified contractualand non-contractual but identifiable intangible assets. The valuations of ourfive golf courses are based on current contracts and estimates of sales valuesbased on indications of interest from the marketplace, certain assumptions bymanagement specifically applicable to each property and on the property valueranges.

 

For the three months ended June 30, 2004, an adjustment of$275,000 was included in the consolidated statement of changes in net assets toreflect a $275,000 write-down of certain golf course assets.

 

For the six months ended June 30, 2004, an adjustment of $294,000was included in the consolidated statement of changes in net assets whichreflected the $275,000 write-down of certain assets and a $19,000 increase inthe capital expenditure reserve for the golf courses that we currentlymanage.  There were no other liquidationbasis of accounting adjustments for the six months ended June 30, 2004.

 

## **Tax Consideration**

 

We do not currently project any income tax liability for the remainderof our liquidation as a result of our net losses for 2002 and 2003 and our netoperating loss carryforwards, which we currently expect to be sufficient tooffset any taxable income for the remainder of our liquidation.

 

**Liquidity and Capital Resources**

 

At the beginning of the quarter ended June 30, 2004, andcurrently, our only sources of cash flow are the monthly interest income wereceive on a note receivable (approximately $13,000 per month) and a negligibledistribution of net operating income from the four golf courses we own andmanage. As a result, on March 18, 2004, we entered into a loan agreementand related mortgage with Textron Financial for a revolving line of credit witha maximum permissible outstanding loan amount not to exceed $2,100,000.Additional draw requests were permitted monthly on the first day of each monthcommencing with May 1, 2004. As of August 9, 2004, the maximumpermissible amount has been drawn and is outstanding on the revolving line ofcredit. This loan is collateralized by a security interest in our golf coursesin Columbia, South Carolina, Country Club at Wildewood and Country Club atWoodcreek, collectively known as Stonehenge. The term of the loan is for twoyears and the interest rate is the prime rate plus 1.75% per annum paidmonthly. We paid a one-time commitment fee to Textron Financial of $42,000 toobtain this credit line and we pay to Textron a monthly fee of .25% per annumof any unused line balance in arrears on the first day of each month for theimmediately preceding month and on the maturity date. This loan requires thatthe operations at Stonehenge for the immediately preceding twelve month periodis sufficient to meet a debt service coverage ratio, as defined in the mortgageof at least 1.20, as measured monthly. The funds drawn under this credit linewere used to pay the closing costs, such as documentary stamp taxes, inconnection with the ownership transfer of the Innisbrook Resort onJuly 15, 2004 of approximately $617,000 and are also being used forworking capital as needed from time to time as we continue to proceed throughthe plan of liquidation. The principal balance outstanding under the revolvingline of credit as of August 9, 2004 is $2,100,000, so we cannot draw downany additional funds from this line of credit.

 

In connection with the Innisbrook Resort Settlement Agreement, ElkFunding, L.L.C. provided a $2 million loan to us, in the form of two promissorynotes.   Pursuant to our agreement withElk Funding, L.L.C., these loans are to fund the Innisbrook Resort’s currentworking capital needs.  Promissory Note Ais non-recourse loan for $700,000, which is collateralized by a securityinterest in the proceeds from the ultimate sale of Parcel F.  Interest will accrue on this unpaid balanceat a rate of prime plus 1% until the closing of the sale of Parcel F, at whichtime the principal and accrued interest will be due.  Promissory Note B is a recourse loan for $1,300,000,which is collateralized by a security interest in 50% of the net proceeds fromthe sale of two of our golf courses, namely the Black Bear Golf Club and theWekiva Golf Club. Interest will accrue on this unpaid balance at a rate ofprime plus 1% until earlier of the September 30, 2006 maturity date, andthe time that the assets collateralizing this note are sold and

 

34

----

 

the note is repaid.   If duringthe term of the $1,300,000 principal amount note there is no default which hasnot been cured or expressly waived by the lender, the lender agrees to forgiveapproximately $122,000 of the principal of the note.

 

We currently hold a note receivable from the buyer of the Eagle RidgeInn & Resort.  The amount outstandingunder this note at June 30, 2004 was $2,313,000, which represents $2.5 millionprincipal on the note, plus accrued interest, less a $200,000 discountreserve.  This note is playable January30, 2005.

 

In the event that we are unable to sell our remaining assets asplanned, we may be unable to pay our obligations as they become due. Inaddition, our ability to pay our obligations as they become due is based on theassumption that our chief executive officer will not require payment of outstandingperformance milestone payments owed by us to him as of June 30, 2004 priorto our realizing net cash proceeds from asset sales sufficient to do so.  As of June 30, 2004, we owed our twomost senior executive officers a total of approximately $1,984,000 in milestonepayments and accrued interest on such milestone payments.

 

##### ***Cash flows for the sixmonths ended June 30, 2004 and 2003***

 

Aggregate Series A preferred stock dividends accrued, untilJuly 21, 2003, at a rate of $462,500 per quarter. Subsequent toJuly 21, 2003 the rate increased to $625,000 per quarter (see furtherdiscussion of this increase below). As of June 30, 2004, we have accruedand not paid twelve quarters of Series A preferred stock dividends(including the dividend otherwise payable in respect of the quarter endedJune 30, 2004). Under our Series A charter document, because we haveat least six quarters of accrued and unpaid Series A preferred stockdividends, the holder of the Series A preferred stock, AEW TargetedSecurities Fund, L.P. (or its transferee), had the right to elect twoadditional directors to our board of directors at our annual meeting that washeld on November 19, 2003, whose terms as directors would continue untilwe fully pay all accrued but unpaid Series A dividends; however, AEW didnot exercise this right.

 

Moreover, under our voting agreement with AEW, since we did not fullyredeem the Series A preferred stock by May 22, 2003 (which was thesecond anniversary of our shareholders’ adoption of the plan of liquidation),AEW Targeted Securities Fund (or its transferee) had the right to require us toredeem the Series A preferred stock in full within 60 days whichright they exercised. Since we defaulted on that obligation, the stateddividend rate of the Series A preferred stock increased from 9.25% to12.50% per annum (equivalent to a quarterly dividend of $625,000) until theSeries A preferred stock is redeemed. Although we are permitted tocontinue to accrue such dividends without paying them on a current basis, theymust be paid in full prior to any distribution to our common stockholders,which would reduce our cash available for liquidating distributions to commonstockholders**.** We intend to continue to accruesuch dividends and the preferred shares shall remain outstanding until suchtime as we have cash available to redeem the Series A preferred stock, atwhich time we intend to redeem the Series A preferred stock.

 

Cash flow used in operating activities for the six months endedJune 30, 2004 was $991,000 compared to cash flow used in operatingactivities for the six months ended June 30, 2003 of $4,455,000. Theprimary components of the cash fluctuations in operating activities wereliquidation liability payments and adjustments and working capital changes (forthe six months ended June 30, 2003 this included payments paid from andinterest received on restricted cash). The increase in cash flows fromoperating activities for the six months ended June 30, 2004 was primarilydue to a decrease in cash used in operating activities resulting from adecrease in liquidation liability payments. This decrease in liquidation liability payments resulted becauseseverance liabilities (officer milestone payments) which were paid in the six monthsended June 30, 2003 were not paid in the six months ended June 30,2004.   Also affecting cash flow fromoperations were changes in other assets and accounts payable and otherliabilities. The liquidation liabilities were accrued as of the approval of ourplan of liquidation on May 22, 2001 and, subsequently adjusted based onpayments and updated estimates of future liabilities. The decrease in theliquidation liabilities from December 31, 2003 is primarily due toinsurance premium payments made related to the renewal of our directors and officersinsurance policy on February 7, 2004 and legal and other professional feesincurred in connection with our plan of liquidation.

 

35

----

 

We invested approximately $18,000 in golf course capital expendituresat the golf courses that we managed during the six months ended June 30,2004 compared to $112,000 in the six months ended June 30, 2003. We didnot have any cash flow provided by investing activities in the six months endedJune 30, 2004; however, our investing activities for the first six monthsof 2003 provided $67,767,000 in cash flow from the sales of 7.0 golfcourses.  Additionally, we had accruedinterest income of $15,000 on a note receivable originally taken in connectionwith the termination of a participating lease. During the six months endedJune 30,2003, we received $112,000 in payments on two notes receivableoriginally taken in connection with the termination of participating leases.

 

During the six months ended June 30, 2004, we drew $1,090,000against our revolving line of credit, that we obtained on March 18, 2004,primarily for working capital needs. During the same period in 2003, we used $69,003,000 to pay down ouroutstanding debt under our credit agreement which was paid in full and retiredwith our last payment on June 19, 2003.

 

## **Off Balance Sheet Arrangements**

 

##### ***Generally***

 

As of June 30, 2004, we have no unconsolidated subsidiaries.

 

We do not have anyrelationships with unconsolidated entities or unconsolidated financial partnershipsof the type often referred to as structured finance or special purposeentities, i.e., unconsolidated entities established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes. Further, we have not guaranteed any obligations ofunconsolidated entities (except as described below) nor do we have anycommitment or intent to provide additional funding to any such entities (exceptpotentially in connection with the Innisbrook Resort, as discussed previously).Accordingly, we believe we are not materially exposed to any market, credit,liquidity or financing risk that could arise if we had engaged in suchrelationships.

 

Effective September 18, 2003, we guaranteed an equipment operatinglease for the Innisbrook Resort (with maximum exposure as of June 30, 2004of $126,000). This is an operating lease with monthly payments of $3,242including sales tax per month (made by Innisbrook) that expires in 2007.Effective September 18, 2003, we also guaranteed a second equipmentoperating lease for the Innisbrook Resort (with maximum exposure as ofJune 30, 2004 of $132,000). This is an operating lease with monthlypayments of $3,474 including sales tax (made by Innisbrook) that expires in2007.

 

Effective July 7, 2004, our wholly-owned subsidiaries known as GTA– IB, LLC, GTA – IB Golf Resort, LLC and GTA –IB Operations, LLC guaranteed twocapital equipment leases for the Innisbrook Resort.  The first of these two leases has a maximumexposure of $372,000, requires an initial payment of $73,111 including salestax followed by monthly payments of $6,361 including sales tax (made byInnisbrook) and expires in 2008.  Thesecond of these two leases has a maximum exposure of $91,000, requires aninitial payment of $15,297 including sales tax followed by monthly payments of$1,277 including sales tax (made by Innisbrook) and expires in 2009.

 

##### ***Innisbrook Resort FinancialPerformance***

 

We believe our most valuable asset at this point in time is theInnisbrook Resort.   As previouslydiscussed, we obtained ownership of the Innisbrook Resort, together with thebusiness and assets of the Innisbrook Resort’s owner, Golf Hosts Resorts (andits various related parties associated with operations at the InnisbrookResort) on July 15, 2004. The consolidated financial results of theseentities are discussed below.  Insubsequent quarters, we expect to include these newly acquired subsidiarieswithin our consolidated financial reporting group.

 

Even though we had notobtained ownership of the Innisbrook Resort at the time, the asset studyprepared by third-party experts in October 2003 included a then estimateof the market value of the Innisbrook Resort’s real estate, an estimate of thefair market value of the Innisbrook Resort’s furniture, fixtures and equipment,or FF&E, and an estimate of the fair value of the Innisbrook Resort’sidentified contractual intangible assets. At our request, this study wasexpanded to include an estimate of

 

36

----

 

the fair value of the Innisbrook Resort’snon-contractual but identifiable intangible items. The estimate of the fairmarket value of each of these asset groups was based on facts and circumstancesknown to us as of October 2003. Accordingly, these estimates could change(and they could change in materially adverse ways) based on changes in eventsand circumstances.  Upon obtainingownership of the Innisbrook Resort on July 15, 2004, we concluded that an updateof the material elements of this asset study is necessary at this time.   As a result, we recently retained the samethird-party experts that prepared the previous asset study to update this studyso that we might have the information necessary to allocate the implicitpurchase price among different asset categories on our balance sheet as of thedate that we assumed ownership of the Innisbrook Resort.  This study will include an estimate of themarket value of the Innisbrook Resort’s real estate, and an estimate of thefair value of the Innisbrook Resort’s identified contractual intangible assets,non-contractual but identifiable intangible items as well a determination ofthe fair value of the Innisbrook Resort on an enterprise value basis.  We plan to update the estimated fair marketvalue in continued use of the Innisbrook Resort’s furniture, fixtures andequipment, or FF&E, inventory from the value obtained in July 2003 bygiving consideration to new FF&E purchased since July 2003 instead ofretaining a third party expert for this purpose as we believe that this is areasonable approach. The estimate of the fair market value of each of theseasset groups are based on facts and circumstances known to us at thistime.  We expect to have the results ofthis asset study by December 31, 2004.

 

As earlier discussed, at the present time, we do not believe we areable to reliably project the value of the Innisbrook Resort and,correspondingly, the amount of the total liquidating distributions we will maketo our common stockholders over the remainder of the orderly liquidationperiod. We have earlier discussed the reasons for this conclusion. Accordingly,you should not rely on the valuations or ranges earlier provided asrepresentative of our current views on the subject. We have identified our valuationof the participating mortgage as a critical accounting estimate, and it isdiscussed previously under the caption *“Application of CriticalAccounting Policies.”*

 

While the economy in general appears to be rebounding, we believe thatthe Innisbrook Resort continues to be negatively impacted by the effects ofincreased competition and public perception regarding the uncertainty of itsprior owner’s default on their participating mortgage owned by us. Throughoutthe last year and a half, corporate meeting planners have been booking inshorter booking windows (i.e., 45 to 90 days from date of staywhere historically it had been 6 to 12 months prior to date of stay withsome windows even wider), however, there have recently been some indicationsthat booking windows may gradually be returning to traditional booking patternsfor a destination resort.  However,Corporate planners may continue to be more focused on planning aroundconvenience for their corporate traveler and maximizing meeting time byselecting meeting locations which provide the least travel inconveniences(given airport security guidelines enacted in response to terrorist activityand threats), for their attendees (i.e. locations in cities that are hubs formajor airlines which eliminate or reduce the cost of connections and,correspondingly, travel time).  Inaddition, recreation and social aspects of the corporate travel budgets havenot yet been and may not be in the foreseeable future restored to historicallevels, which as a consequence results in less food and beverage and golfrevenue from corporate group clients. While certain preliminary signs indicate that transient and golf groupbusiness appear to be recovering to historical levels (although it is too earlyto be certain), the recovery of the corporate group business segment continuesto be a challenge.  The Westin sales andmarketing staff are attempting to overcome this challenge by inviting customersand corporate meeting planners to tour the property and its meeting facilitiesand see that the Resort’s condition is substantially improved as compared torecent prior years.  This improvementcomes in part from the refurbishment of the 617 condominium rental pool units.

 

Based upon the financial results submitted to us by Golf Hosts Resorts,Inc., the net operating loss of the property for the three months endedJune 30, 2004 was approximately $1,360,000, which is an increase in theloss from the same period in the prior year of approximately $841,000, or161.8%. During the three months ended June 30, 2004, gross revenuesincreased only approximately $47,000, or .5%, from the same period in the prioryear.  Even though room nights for theperiod were up by 6.4%, the decrease in room night spending of $24.85 per roomnight, or 5.5%, offset the revenue generated by the room night increaseresulting in the nominal increase in gross revenues of $47,000.   Room night spending is typically a functionof the mix of business.  Transient roomnights for this period as compared to the same period in the prior year were up3,100 room nights while group room nights, which have historically realizedhigher room night spending due to banquet food and beverage consumption, weredown 1,800 room nights as compared to the same period in the prior year.

 

37

----

 

Total operating expenses before depreciation and amortization were upby approximately $933,000, or 10.2%, for the three months ended June 30,2004 as compared to the same period for the prior year.  The most significant increase was in payrolland benefits of $357,000.  This increasewas due to deferred 2003 annual performance increases for Innisbrook Resortemployees granted in 2004 which averaged 2.9%, increases in workerscompensation claim costs resulting from changes in premium and deductiblelevels, increased health insurance premiums, and non-recurring relocationexpenses of new Westin management personnel assigned to the InnisbrookResort.  Also contributing to the$933,000 increase in operating expenses were legal expenses associated with thesuccessful litigation of the property tax appeal, increased audit fees, newgolf equipment lease expenses, and bad debt credits that occurred in thisperiod in 2003 and did not reoccur in this period in 2004.  In addition, depreciation and amortizationdecreased in the aggregate amount of approximately $45,000.

 

The net operating loss of the property for the six months endedJune 30, 2004 was approximately $361,000, which is a reduction in incomefrom the same period in the prior year of approximately $1,153,000, or 145.5%.During the six months ended June 30, 2004, gross revenues decreasedapproximately $74,000, or .3%, from the same period in the prior year. Justprior to the end of the first quarter of 2004, and too late in the quarter toreplace the business, one of Innisbrook’s long-standing customers was acquiredby an unaffiliated entity.  Because ofthe acquisition, this customer had to cancel their scheduled conference atInnisbrook for 2004.  The InnisbrookResort has historically realized approximately $300,000 in gross operatingprofit from this customer in the first quarter.   Room nights for the six-month period were upby 1.0% while room night spending levels were down by $6.31 per room night or1.3%. The combined increase in room nights and decrease in average spendingresulted in the decrease of gross revenues noted above.

 

Total operating expenses before depreciationand amortization were up by approximately $1,079,000, or 5.5%, for the sixmonths ended June 30, 2004 as compared to the same period for the prioryear. The most significant increase was in payroll and benefits of $585,000.This increase was primarily due to deferred 2003 annual performance increasesfor Innisbrook Resort employees granted in 2004 which averaged 2.9%, increasedworkers compensation claim costs due to changes in premium and deductiblelevels, increased employee health insurance premiums and non-recurringrelocation expenses for Westin management personnel recently assigned to theInnisbrook Resort. In addition, there were increases in legal expensesassociated with the successful litigation of the property tax appeal, increasesin audit fees, bad debt credits that occurred in this period in 2003 and didnot reoccur in this period in 2004, increased reservation expenses as a resultof utilizing expanded third party discount travel agents services, andincreases in sales and marketing expenses for new collateral materials.  Depreciation and amortization expense wasflat for the six months ending June 30, 2004 as compared to the six monthsended June 30, 2003.

 

For the trailing twelve months ended June 30, 2004, net operatingincome is down approximately $924,000 or 35.8%, when compared to the trailingtwelve months ended June 30, 2003. While operational revenues for thecomparative twelve-month period were up by approximately $2,859,000, the netrevenues were up approximately $2,536,000 due to the recognition of income inDecember 2002 as a result of accounting reclassifications.  Those reclassifications of income related tolease versus capital assets in the approximate amount of $295,000 and theoffsetting of management fees against capital assets under the Westinmanagement agreement in the approximate amount of $426,000.  REVPAR (revenue per available room), which isa standard operating measurement tool within the hotel industry, is in ourjudgment not a useful analytical tool at the Innisbrook Resort due to therental pool arrangement and other significant revenue sources at the InnisbrookResort, primarily golf operations. Revenue per room night was approximately equal in the comparative twelvemonth trailing periods, down approximately 1.5% while occupied rooms were up by6,951 or 8.6%.  Operating expenses forthe trailing twelve month period ended June 30, 2004 increased byapproximately $3,821,000 or 10.8% over the twelve months ended June 30,2003. Other expenses, which include participating interest, straight-lineinterest, income tax benefits and non-cash charges for depreciation andamortization are down by approximately $154,000. This reduction in other itemsis primarily the result of a decrease in the recognition of depreciation andamortization in the amount of approximately $361,000 and an increase ininterest expense of approximately $207,000. These fluctuations culminated in an increase of approximately $1,131,000or 9.5%, in the loss for the trailing twelve months ended June 30, 2004,when compared to the same period in the prior year.

 

These results are un-auditedand were provided by our then borrower and not generated internally by us.Accordingly, we can provide no assurance as to the accuracy of these financialresults.

 

38

----

 

## **Contractual Obligations, Contingent Liabilities and Commitments**

 

The following table summarizes our contractual obligations atJune 30, 2004, and the effect such obligations are expected to have on theliquidity and cash flow of our company (or our successors in interest under theapplicable contracts, if the contracts are not terminated) in future periods:

 
| ** **                                                                                                                           | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **Contractual  Obligation**                                                                                                          | ** ** | **Total**                  | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **More than 5  years** | ** ** |
|                                                                                                                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Employment Agreements and Employment  Security Agreements                                                                            |       | $                          | 2,064      |   | $ | 1,805 |   | $ | 259 |   | $ | — |   | $ | — |   |
| Textron revolving line of credit                                                                                                     |       | 1,090                      |       | — |   | 1,090 |   |   |   |   |   |
| Liquor license note payable (applies to a  certain managed golf course)(1)                                                           |       | 125                        |       | — |   | — |   | 125 |   | — |   |
| Operating lease agreements at the managed  golf courses                                                                              |       | 974                        |       | 360 |   | 497 |   | 117 |   | — |   |
| Advertising, service, equipment maintenance  and other contracts and software license and support agreements at the  managed courses |       | 21                         |       | 10 |   | 9 |   | 2 |   | — |   |
| Lease agreements for GTA corporate office                                                                                            |       | 90                         |       | 49 |   | 41 |   | — |   | — |   |
| Total                                                                                                                                |       | $                          | 4,364      |   | $ | 2,224 |   | $ | 1,896 |   | $ | 244 |   | $ | — |   |

 

----

(1)                                  includedin accounts payable on the statement of net assets in liquidation.

 

Each type of contractual obligation listed in the table is discussed inmore detail below.

 

***Employment Agreements.***  Under the existing amended and restatedemployment agreements, performance milestone payments aggregating approximately$2,526,000 were paid to our executives upon our repayment of our obligationsunder our secured credit facility led by Bank of America, N.A. Pursuant to thefourth amended and restated employment agreement of Mr. Peters, our chieffinancial officer, which was effective August 29, 2003, twenty-fivepercent of the remaining earned milestone payment, $165,230 plus accruedinterest, was paid to him on September 30, 2003 and a payment oftwenty-five percent of the remaining earned milestone payment plus accruedinterest will be paid to him upon the sale of our golf course assets whereby wereceive more than $1,200,000 of net cash proceeds. The remaining fifty percentof the remaining earned milestone payment, plus accrued interest, shall be paidto Mr. Peters upon the sale of our golf course assets whereby we receivemore than $2,500,000 of net cash proceeds and such receipts are not subject to holdback,claw-backs or any escrow or other limitations. Commencing October 1, 2003,interest began accruing on the unpaid portion of Mr. Peters’ remainingearned milestone payment at five percent (5%) per annum. Our chief executiveofficer, Mr. Blair, is also entitled to the final performance milestonepayment of approximately $1,234,000, plus accrued interest, due to therepayment of the outstanding balance under our then applicable credit facility.Such payment will be made in due course; no outstanding conditions to thispayment exist. Any severance payments otherwise payable under the amended andrestated employment agreements will be reduced by the amount of the aboveperformance milestone payments that we have made. In addition, we haveseverance obligations to other employees aggregating $334,000 which have beenprovided for in the liquidation accruals.

 

Pursuant to the terms of our executive officers’ amended and restatedemployment agreements dated as of February 25, 2001 (which were amended tofacilitate the plan of liquidation), we made non-recourse loans of $1,595,000to our executive officers ($1,150,000 to Mr. Blair and $445,000 toMr. Peters) on February 25, 2001 for the payment of personal incometaxes arising from the acceleration of their restricted stock grants and theforgiveness of their outstanding debt to us that occurred on such date. Thesenew loans were evidenced by promissory notes from the executives and secured bytheir total holdings of 199,415 (143,790 of Mr. Blair’s and 55,625 ofMr. Peters’) shares of our common stock valued at $8 per share at the timeof the issuance of these loans. Interest accrues on these loans at 5.06% perannum (the applicable federal rate on the date of the loan) and is due atmaturity. Effective July 1, 2002, we discontinued accruing interest onthese loans because the total outstanding balance of each loan exceeded thevalue of the collateral, common stock, computed based on the current net assetsavailable to common stockholders. The outstanding balance of these loans atJune 30, 2002, principal and interest, was $1,655,000. For the years endedDecember 31, 2003 and 2002, we recorded an allowance for doubtful accountsagainst this receivable in the aggregate amounts of $497,000 and $400,000, respectively,which approximated the difference in the pledged value of $8 per

 

39

----

 

share and the computed value based on the net assets in liquidation atDecember 31, 2003 and 2002, respectively. Subsequently, as a result of aletter agreement that we entered into with Mr. Blair on March 22,2004, Mr. Blair agreed to, among other things, irrevocably assign to usthe shares of GTA common stock which secured the above-mentioned non-recourseloan (made to Mr. Blair in 2001 in the amount of $1,150,319.95) and wecancelled the remainder of the loan balance (which, by its terms wasnon-recourse and, thus, following our receipt of all of the collateral, waseffectively unsecured and uncollectible).

 

These loans mature at the earliest of the following times:(i) February 25, 2006; (ii) three years following termination ofthe borrower’s employment with us; or (iii) the date of the finaldistribution under the plan of liquidation. At any time when the loan isover-secured, the borrower has the right to sell such common stock securing theloan, provided that all proceeds of the sale are first applied to the thenoutstanding balance of the loan. All distributions (including any liquidatingdistributions) on the stock securing the loan are applied against the loan. Therelated promissory notes are non-recourse to the respective borrowers.

 

Since July 30, 2002, the Sarbanes-Oxley Act of 2002 has prohibitedus from making further loans, or modifying the terms of pre-existing loans, toour officers.

 

***Textron Revolving Line of Credit.***  On March 18, 2004, we entered into aloan agreement and related mortgage with Textron Financial for a revolving lineof credit with a maximum permissible outstanding loan amount not to exceed$2,100,000. This loan is collateralized by a security interest in our golfcourses in Columbia, South Carolina, Country Club at Wildewood and Country Clubat Woodcreek, collectively known as Stonehenge. The term of the loan is for twoyears and the interest rate is the prime rate plus 1.75% per annum paidmonthly. We paid a one-time commitment fee to Textron Financial of $42,000 toobtain this credit line and we will pay to Textron a monthly fee of 0.25% perannum of the unused line balance in arrears on the first day of each month forthe immediately preceding month and on the maturity date. This loan requiresthat the operations at Stonehenge for the immediately preceding twelve monthperiod is sufficient to meet a debt service coverage ratio, as defined in themortgage of at least 1.20, as measured monthly. The funds drawn under thiscredit line will be used for working capital as needed from time to time as wecontinue to proceed through the plan of liquidation. The principal balanceoutstanding under the revolving line of credit as of June 30, 2004 wasapproximately $1,090,000.  Additionaldraw requests are permitted monthly on the first day of each month commencingMay 1, 2004.  As of June 30,2004, there remained available approximately $1,010,000 under the revolving lineof credit.  As of August 9, 2004,following a draw request on July 14, 2004 for the remaining $1,010,000,there are no further funds available to draw under this revolving line ofcredit.

 

***Liquor License Note Payable.***  On November 9, 2000, we entered into aliquor license purchase agreement with The Marr Company Incorporated to obtaina liquor license for Tierra Del Sol Country Club. The principal amount of thispurchase agreement is $150,000, of which $25,000 was paid at the time of theexecution of the purchase agreement and $125,000 is represented by aninstallment promissory note which requires that we pay accrued interest onlyeach month at a rate of 8% per annum ($833.33 per month). The promissory notespecifically restricted prepayment in whole or in part prior to April 1,2004. The promissory note matures on December 1, 2007. In the table above,we do not include interest payments because the prepayment restriction on thenote expired on April 1, 2004 . This note will be assumed by the buyerwhen Tierra Del Sol is sold.

 

***Operating Lease Agreements.***  In the normal course of operating the golfcourses that we manage, we have entered into operating lease agreements tolease golf course maintenance equipment, golf course vehicles, golf carts, andoffice equipment at the managed courses. The terms of these leases range fromtwelve to sixty months.

 

***Advertising, service, equipment maintenanceand other contracts and software license and support agreements at the managedcourses.***  Inthe normal course of operating the golf courses that we manage, we have enteredinto contracts for services such as advertising, waste management, equipmentmaintenance, software support, etc. The terms of these contracts range from 12to 24 months and in certain cases with renewal options annually.

 

***Lease agreements for GTA corporate office.***  This represents the office space lease forour corporate office.

 

##### ***Commitments***

 

***Series A Preferred Stock.***  On April 2, 1999, we completed aregistered offering of 800,000 shares of 9.25% Series A CumulativeConvertible Preferred Stock, par value $0.01 per share, or Series Apreferred stock, at a price of $25.00 per share to a single purchaser, AEWTargeted Securities Fund, L.P., or AEW. The Series A preferred stock isconvertible, in whole or in

 

40

----

 

part, at the option of the holder at any time into our common stock atan implicit conversion price of $26.25 per share of common stock, subject toadjustment in certain circumstances. We contributed the net proceeds to ouroperating partnership in exchange for 800,000 Series A preferred OP unitswith analogous terms.

 

Aggregate Series A preferred stock dividends accrued, untilJuly 20, 2003, at a rate of $462,500 per quarter. Effective July 21,2003 the rate increased to $625,000 per quarter (see further discussion of thisincrease below). As of March 31, 2004, we have accrued and not paid twelvequarters of Series A preferred stock dividends (including the dividendotherwise payable in respect of the quarter ended June 30, 2004). Underour Series A charter document, because we have at least six quarters ofaccrued and unpaid Series A preferred stock dividends, the holder of theSeries A preferred stock, AEW Targeted Securities Fund, L.P. (or its transferee),had the right to elect two additional directors to our board of directors atour annual meeting that was held on November 17, 2003, whose terms asdirectors would continue until we fully pay all accrued but unpaidSeries A dividends. Although AEW did not exercise this right, it remainsfree to do so at any time (pursuant to the procedures specified in our charterand the voting agreement).

 

On February 22, 2001, we entered into a voting agreement with AEW,which continues to hold all of the shares of the Series A preferred stock.That agreement required AEW to vote in favor of the plan of liquidation andrequired us to redeem all of the shares of Series A preferred stock (for$25 per share plus dividends accrued and unpaid thereon through the date of thefinal redemption payment) promptly after we determine in good faith that wehave received sufficient net proceeds from the disposition of our assets and/oroperations to redeem all of the preferred shares without violating any legal orcontractual obligations.

 

Moreover, under our voting agreement with AEW, since we did not fullyredeem the Series A preferred stock by May 22, 2003 (which was thesecond anniversary of our stockholders’ adoption of the plan of liquidation),AEW Targeted Securities Fund (or its transferee) had the right to require us toredeem the Series A preferred stock in full within 60 days whichright they exercised. Since we defaulted on that obligation, from and afterJuly 21, 2003 the stated dividend rate of the Series A preferredstock increased from 9.25% to 12.50% per annum (equivalent to a quarterlydividend of $625,000) until the Series A preferred stock is redeemed.Although we are permitted to continue to accrue such dividends without payingthem on a current basis, they must be paid in full prior to any distribution toour common stockholders, which will reduce our cash available for liquidatingdistributions to common stockholders; however, this reduction in availablefunds for liquidating distributions has already been taken into account in theUpdated 2003 Range. We intend to continue to accrue such dividends until suchtime as we have cash available to redeem the Series A preferred stock, atwhich time we intend to redeem the Series A preferred stock.

 

## **Inflation**

 

We believe that inflation does not pose a material risk to us. Our mainsource of cash flow, golf course dispositions, is not particularly vulnerableto inflation because we can adjust our asking prices if supply/demand factorssupport an interest in the particular golf course. Our main financialobligation, redemption of the Series A preferred stock, accrues at a fixedrate. Although some of our obligations (such as the salary of our chiefexecutive officer) automatically adjust for inflation, some of our rights aresimilarly indexed.  Our room rates atInnisbrook and our golf course fees at Innisbrook and at our properties that weown and manage are relatively flexible and can be increased, subject toconstraints imposed by competition and, in some cases, patrons’ yearlymembership privileges.

 

**Seasonality**

 

The golf industry is seasonal in nature because of weather conditions,with fewer available tee times in the rainy season and the winter months.Conversely, revenues fall at the Innisbrook Resort during the summer months asa result of the hot Florida weather being less appealing for group golf outingsand vacation destination golfers along with the fact that business conventionsand meetings are typically held October through April, when businesscustomers are relatively less likely to be on family vacations. InOctober 2003, the Innisbrook Resort hosted, and will host thereafterthrough 2006, a nationally televised PGA event, the Chrysler Championship, thatbrings some of the highest profile golfers to the Innisbrook Resort for severaldays for the tournament, as well as high profile golf industry sponsors andvendors. Historically, revenues pick-up in the fourth quarter but are generallythe greatest during the first quarter with guests coming form the northeast andother regions to enjoy the warm weather.  The Innisbrook Resort uses seasonal pricing (peak, shoulder, off-peak)to maximize revenues.  The effects ofseasonality at our golf courses can be partially offset at daily-fee golfcourses by varying greens fees based on changes in demand. Under our prior (nowdefunct) participating lease structure, we expected to be insulated from theeffects of seasonality 

 

41

----

 

in that the participating leases required our lessees to pay us baserent ratably throughout the year. Now that we manage our golf courses directly(except Innisbrook), we are experiencing some seasonal variability in ouroperating results, which seasonality is expected to increase in the event that weassume operations at the Innisbrook Resort.

 

**RISK FACTORS**

 

**Risks that might Delay or Reduce ourLiquidating Distributions**

 

While we have recorded thevalue of our golf courses and the Innisbrook Resort at our best estimates offair value as of August 9, 2004, we cannot provide assurances that theseestimates reflect actual current market value for the applicable courses.  As a result, at the present time, we do notbelieve that we are able to reliably project the amount of the totalliquidating distributions we will make to the holders of our common stock overthe remainder of the orderly liquidation period.  At a future time, it may be possible toreliably project the amount of total liquidating distributions in the eventthat the quality and reliability of information necessary to make reliableestimates of cash flow and, correspondingly, value become more reliable, but wecan provide no assurances that the quality and reliability of all suchnecessary information will develop to the necessary degree**.**

 

In our 2002 annual report onForm 10-K filed on March 31, 2003, we reported an updated projectedrange of liquidating distributions to common stockholders and an updatedprojection as to when liquidating distributions to common stockholders mightcommence.  We refer to these projectionsas our Updated 2003 Range.  Ourexpectations at that time regarding the amount of liquidating distributions wewould then make and when we would make them were based on many factors,including input from our financial advisors and our estimates and assumptionsat that time.   We face the risk thatactual events might prove to be less favorable than those estimates andassumptions.  Several important factorsthat could cause such a difference are described below.  Although we attempted to account for thefollowing risks during the preparation of the Updated 2003 Range, we might haveunderestimated their effects, and any such underestimate may provesubstantial.  As a result, the actual amountof liquidating distributions we may pay to the holders of our common stockmight be substantially less than our Updated 2003 Range of projectedliquidating distributions.  We also facethe risk that any under-estimation of the effects of these risks could resultin no liquidating distributions to our stockholders.  Any liquidating distributions that areultimately available might be paid substantially later than projected in theUpdated 2003 Range.  Factors that couldcause actual payments to be later or lower than the Updated 2003 Range includethe matters discussed below.

 

***Our estimate of the Innisbrook Resort’s fair value, as recorded on ourbooks for accounting purposes, is based on forward-looking estimates which aresubject to change.  We might sell theInnisbrook Resort for an amount less than our current estimate of its fairvalue, which could reduce our liquidating distributions to common stockholders.***

 

Our estimate of the fairvalue of the Innisbrook Resort, as recorded on our books at June 30, 2004,is $44.2 million.  This estimated fairvalue is lower than the $60 million valuation recorded in periods prior toSeptember 30, 2003.  If there wereno other changes to the factors underlying our Updated 2003 Range (and wecannot assure that fact or result), this difference in the valuation of theInnisbrook Resort would cause the low end of the Updated 2003 Range to declinefrom $4.75 to $2.85.  Although we had notyet obtained ownership of the Innisbrook Resort when we estimated its fairmarket value at June 30, 2004, we based our calculation of the InnisbrookResort’s liquidation value on an estimate of the future going-concern value ofthe Innisbrook Resort’s operations on the assumption that we would takepossession of the Innisbrook Resort (subject to the then proposed settlementagreement and an amended management contract with Westin) and hold theInnisbrook Resort until the Innisbrook Resort’s operating revenues realize arecovery.  This is consistent with theterms of the settlement agreement signed on July 15, 2004.  The currently contemplated holding period, ascontemplated by our board, extends through 2005.  In October 2003, we received from theInnisbrook Resort’s operator, Westin, an updated forecast of the net cash flowexpected to be generated by the Innisbrook Resort in the fourth quarter 2003and for the year 2004.  Westin’s thenupdated forecast was materially less favorable than Westin’s earlier forecastsfor the same periods, which were among the factors considered by our managementwhen arriving at the prior valuation.  Thedecline in the Westin forecast resulted primarily from fewer than anticipatedgroup bookings in the fourth quarter, the assumption that this trend wouldcontinue into 2004 and uncertainty regarding whether the settlement agreementand an amended management agreement would be signed.  In response to Westin’s forecast and ourinquiries into Westin’s budget methodologies and the basis for Westin’sprojections, as of September 30, 2003, we revised our estimate of theInnisbrook Resort’s fair value at the end of the holding period to$44.2 million.  This valuation isabove the low end of the valuation range for the Innisbrook Resort under the“forced liquidation” scenario, as estimated by Houlihan Lokey in both theirMarch 2002 and March 2003 analyses (as described in more detail inour annual report on Form 10-K filed on March 31, 2003).  We have identified our valuation of theparticipating mortgage as a critical accounting estimate, and it is discussedunder the caption “Application of Critical Accounting Policies.”

 

42

----

 

 

We do not believe we areable at this time to project the amount of the total liquidating distributionswe will make to our common stockholders over the remainder of the orderlyliquidating period because we have not been able to obtain sufficiently stablefinancial data with respect to the Innisbrook Resort’s performance to establisha reliable valuation of the Innisbrook Resort. The factors giving rise to this uncertainty include, without limitation,the following:

 

•                                          priorto the execution of the settlement agreement we had not been able to obtainaccurate forecasts from Westin regarding operating performance, including,without limitation, the cash flow and bookings at the Innisbrook Resort causedby compressed group booking windows, unexpected group cancellations (caused byoutside circumstances unrelated to the Innisbrook Resort), unexpected groupslippage (groups filling less rooms than they originally book), and increasedcompetition in the marketplace. According to industry sources, corporate restrictions on travel havehurt bookings and meeting business has been soft and many companies are now inthe habit of booking events much closer to the time they need the space than inpast years;

 

•                                          thefinancial performance at the Innisbrook Resort has not begun to realize anysignificant positive impact from the economic rebound that has begun and thatthe Innisbrook Resort has been experiencing a modest downward trend, which issomewhat contrary to recent industry trends. Westin has evaluated and restructured their sales personnel as well asimplemented new sales and marketing programs in an effort to reverse theInnisbrook Resort’s trend and to realize the modest recovery currently beingseen in the industry which seems to be having a positive impact on salesefforts;

 

•                                          althoughin connection with the settlement agreement we entered into a new managementagreement with Westin providing for our increased control over accounting andmarketing and improved provisions governing reporting by Westin, we do notdirectly manage the Innisbrook Resort;

 

•                                          therisk that our July 15, 2004 settlement agreement with Westin and ourformer borrower may prove less successful than anticipated, and that the performanceof the parties to the settlement agreement will fall short of our expectations;

 

•                                          thelitigation between our former borrower, who transferred title to the InnisbrookResort to us, and the homeowners association at the Innisbrook Resort continuesto cloud the future of the Innisbrook Resort from a valuation perspective, andmight eventually involve us in an adverse way;

 

•                                          therisk that historical uncertainty surrounding the prospects of the future of theInnisbrook Resort may create uncertainty insofar as corporate meeting plannersare concerned when contracting for large corporate groups and which may be usedas a competitive advantage by our competitors when marketing their InnisbrookResort against the Innisbrook Resort;

 

•                                          wehave not received any firm offers from third-parties desiring to acquire theInnisbrook Resort which are of the type to allow us to reliably establish avalue for the Innisbrook Resort; and

 

•                                          therisk of continued threats of terrorism and the impact thereof on the travel andlodging industry.

 

As a result of theforegoing, at the present time, we will refrain from either making anyadjustments (positive or negative) to any earlier reported range ofdistributions or proposing a new range. We may, however, be able to do so in future periods in the event thatthe quality and reliability of all information necessary to make estimates ofcash flow and, correspondingly, value become more reliable.  In particular, in the event that the thirdparty expert that prepared the asset study performed in July of 2003 isable to update this study and determines the present enterprise value of theInnisbrook Resort is less than the valuation provided in the asset studyperformed in July of 2003, the difference in the valuation of the InnisbrookResort would cause the lower end of the Updated 2003 Range to decline below$2.85.  Even though we have engaged thethird party expert that prepared the asset study performed in July of 2003for further analysis, we can make no assurances that the quality andreliability of all such necessary information will develop to the degreenecessary to allow us to develop a reliable estimate of the range ofliquidation distributions.  You shouldnot assume that the liquidating distributions have not declined, perhaps inmaterial amounts, from the historical projections earlier provided.

 

 

43

----

 

We do not rule out thepossibility that we might decide to sell our interest in the Innisbrook Resortprior to the end of the anticipated holding period (i.e.,December 31, 2005) in response to any reasonable offer, even if theoffered amount is less than $44.2 million if, after consideration of thefacts and circumstances at that time, our board determines that the sale would bein the best interest of our stockholders. However, we cannot predict what future events, factors or outcomes mightcause our board to cease pursuing the orderly liquidation strategy in favor ofan immediate sale.  It is also possiblethat our board might decide to extend the currently contemplated holding periodof this asset past 2005 if our board determines that to do so would be in ourstockholders’ best interest in hope of realizing a better recovery on the assetafter 2005.  In any case, we face therisk that our efforts to preserve the value of the Innisbrook Resort might beunsuccessful and we might ultimately sell our interest in the Innisbrook Resortfor less than our last estimate of its fair value.  Accordingly, at some future date, our assessmentof the asset’s fair value may change, perhaps in a material adverse mannerbased on facts and circumstances at that time, and the asset may again bewritten-down.

 

***We recently took ownership of the Innisbrook Resort pursuant to aglobal settlement agreement providing for the assumption of certain existing ormodified financial obligations of the former borrower.  We are now responsible for any negative cashflow of the Resort.  If the amount ofassumed liabilities and expenditures with respect to the Resort exceed ourexpectations, our liquidating distributions to common stockholders could bereduced.***

 

We recently entered asettlement agreement relating to our June 1997 $79.0 million originalbalance participating loan wherein we were the lender.  This loan was secured by a mortgage on theInnisbrook Resort, near Tampa, Florida. As part of the settlement agreement, we assumed certain financialobligations of the borrower such as refurbishment expenses paid by the condominiumowners and assumed a modified termination rights fee and outstanding golffacility management fees payable to Troon Golf. As owner of the Innisbrook Resort, we will be responsible for anynegative cash flow associated with the ownership and operation of theResort.  As a result of the assumption ofthese liabilities and our responsibility for any negative cash flow, we facethe risk that our ultimate liabilities and expenditures might be greater thanwe expected.  In that case, our cashavailable for distribution and the ultimate amount of our liquidatingdistributions to the holders of our common stock could be less than ourexpectations.

 

Although we obtained ownership of the InnisbrookResort following the end of the second quarter of 2004, we still face thedifficult task of seeking to revitalize its revenues. As a result of thesechallenges, our recovery with respect to this asset might be

significantly delayed, and the aggregate amount we ultimately receiveupon a sale of the Innisbrook Resort might be less than our current estimate ofthe Innisbrook Resort’s fair value which would reduce our liquidatingdistributions to holders of our common stock. Our estimate of the InnisbrookResort’s fair value, as recorded on our books for accounting purposes, is basedon forward-looking estimates which are subject to change. We can provide noassurance of the success of the settlement agreement, or the future success ofthe Innisbrook Resort.

 

***Stockholder litigationrelated to the plan of liquidation could result in substantial costs and distractour management.***

 

Extraordinary corporateactions, such as our plan of liquidation, often lead to securities class actionlawsuits and derivative litigation being filed against companies such asours.  We became involved in this type oflitigation in connection with our plan of liquidation (and the transactionsassociated with it) in a legal action we refer to as the *Crossley*litigation.  During the second quarter of2003, the *Crossely* claim was dismissed withprejudice on our motion for summary judgment, which means that the lawsuit wasdismissed and the plaintiff will not be allowed to refile the claim, althoughthe plaintiff could appeal the dismissal. We subsequently entered into a non-monetary settlement with theplaintiff whereby the plaintiff agreed not to appeal the dismissal and weagreed not to seek reimbursement of our legal costs from the plaintiff.  Even though the *Crossley*litigation has been dismissed, we face the risk that other claims might bebrought against us.  Any such litigationwould likely be expensive and, even if we ultimately prevail, the process woulddivert management’s attention from implementing the plan of liquidation andotherwise operating our business.  If wedo not prevail in any such litigation, we might be liable for damages.  It is not possible to predict the amount ofsuch potential damages, if any, but they might be significant.  Any damage liability would reduce our cashavailable for distribution and the ultimate amount of our liquidatingdistributions to common stockholders.

 

 

44

----

 

***If we are unable to retainat least one of our key executives and sufficient staff members to complete theplan of liquidation in a reasonably expeditious manner, our liquidatingdistributions might be delayed or reduced.***

 

Our ability to complete anygolf course sales currently under contract (of which we have two), or subjectto letters of intent (of which we do not have any as of the date of thisfiling), and to locate buyers for our other interests in golf courses andnegotiate and complete those sales depend to a large extent upon the experienceand abilities of our two most senior executives, W.  Bradley Blair, II, our chief executiveofficer and president, and Scott D. Peters, our senior vice president and chieffinancial officer, both of whom are currently serving on a reducedschedule basis, and their experience and familiarity with our assets, ourcounter-parties and the market for golf course sales.  We believe our liquidation has progressed tothe point that the resignation of one (but not both) of our executives wouldnot likely cause significant adverse consequences.  However, a loss of the services of both ofthese individuals could materially harm our ability to complete the plan ofliquidation in a reasonably expeditious manner and our prospects of selling ourassets at the best potential prices.

 

We face the risk that bothof our key executives might resign.  Inparticular, our payment in full of our outstanding obligations under our creditfacility, which occurred in the second quarter of 2003, was the last remainingmilestone under Mr. Blair’s amended employment agreement and, therefore, hisperformance bonus is now due and payable (but unpaid) by us**.** Accordingly, our executives might concludethat they no longer have meaningful financial incentives to remain employedespecially considering the reduction in their annual salaries.  Following the disposition of our Sandpiperproperty in mid-2003 and the corresponding reduction in demands on Mr. Peters’time, the compensation committee of our board of directors determined thatmanagement should seek to negotiate a reduced time commitment and a reducedsalary arrangement with Mr. Peters and, therefore, we entered into an amended andrestated employment agreement with Mr. Peters on August 29, 2003.  Under this amended and restated employmentagreement, Mr. Peters is expected to devote a substantially reduced number ofhours per calendar quarter to us.  Mr.Peters will continue to serve as our senior vice president, secretary and chieffinancial officer, as well as continuing to serve on our board ofdirectors.  Additionally, under thisamended and restated agreement Mr. Peters, is not entitled to the balanceof his remaining milestone payment until certain golf course sales thresholdsare met, as earlier described.  OnJune 30, 2004, the original expiration date, this agreement was extendeduntil March 31, 2005.  Additionally,on March 22, 2004, we entered into a letter agreement with Mr. Blair,which, among other things, provides for Mr. Blair to receive a reducedbase salary from us as of April 1, 2004, which was a result of an expectedfuture reduction in the amount of time he would be required to devote to us andour business.  As a result, effectiveApril 1, 2004, Mr. Blair will receive 75% of his immediatelypreceding applicable current base salary. In addition, effective January 1, 2005, Mr. Blair will receivea further reduced annual base salary at a level which is 50% of his currentbase salary as of March 31, 2004.

 

The potential resignation ofMr. Blair poses a relatively greater risk at this time in light ofMr. Peters’ reduced time commitment to our company.  If Mr. Blair were to resign, we wouldlikely ask Mr. Peters to increase his time commitment to us or seek tohire a replacement for Mr. Blair.  Weface the risk that Mr. Peters might have made other commitments unrelatedto us by that time and, therefore, might be unwilling or unable to return tofull time employment with us.  The costto us of hiring a replacement would likely depend upon the experience andskills required of such an individual in light of our financial condition, ourassets remaining to be liquidated, and the complexity of any issues bearing onus and the liquidation at that time.  Ourability to complete the plan of liquidation in a timely manner also depends onour ability to retain our key non-executive employees.  Our employees may seek other employmentrather than remain with us throughout the process of liquidation, even thoughthey generally would lose their eligibility for severance payments byresigning.  If we are unable to retainenough qualified staff to complete our plan of liquidation in a reasonably expeditiousmanner, liquidating distributions might be delayed or reduced.

 

***If we are unable to find buyers for theInnisbrook Resort or our other golf courses at our revised estimates of value,our liquidating distributions might be delayed or reduced.***

 

In addition to the four golfcourses at the Innisbrook Resort, we have four other properties (or fiveeighteen-hole equivalent golf courses), two of which are currently subject tosale agreements and the other two are not currently subject to sale agreementsor letters of intent.  In calculating ourprojected liquidating distribution, we assumed that we will be able to findbuyers for the Innisbrook Resort and these other golf courses at amounts basedon our estimates of their fair market values based on current indications ofinterest from potential buyers.  However,we may have overestimated the sales prices that we will ultimately be able toobtain in the sale of these golf courses. Houlihan Lokey’s March 18, 2003 analysis (upon which our Updated2003 Range was based in part, and upon which you should not rely at this point)is neither an appraisal nor an opinion. Assumptions underlying our Updated 2003 Range might prove to beincorrect and, therefore, our projections might overstate the ultimate net proceedswe will receive.  For example, in orderto find buyers in a reasonably expeditious manner, we might be required tolower our asking price below our estimate of a golf course’s fair value.  If we are not able to find buyers for these

 

45

----

 

golf courses in a reasonably expeditiousmanner or if we have overestimated the sales prices we will ultimately receive,our liquidating payments to the holders of our common stock will be delayed orreduced, perhaps in substantial ways.

 

At the present time, we donot have indications from the market as to a potential sales value forInnisbrook Resort or the results of the new study being undertaken to estimateits fair market value.  As a result, wedo not believe we are able to reliably project the amount of the totalliquidating distributions we will make to our common stockholders over theremainder of the orderly liquidation period. Accordingly, you should not rely on the valuations or ranges earlierprovided as representative of our current views on the subject.

 

***If we are unable to realize the value of apromissory note taken as part of any purchase price, our liquidatingdistributions might be reduced.***

 

In some golf course sales,we may agree to receive promissory notes from the buyer as a portion of thepurchase price.  Promissory notes areoften illiquid.  If we are not able tosell the promissory note without a great discount, or in the case of ashort-term note, if we hold it to maturity and the purchaser ultimatelydefaults, our liquidating distributions might be reduced.

 

***Decreases in golf course values caused byeconomic recession and/or additional terrorist activity might reduce the amountfor which we can sell our assets.***

 

The value of our interestsin golf courses might be reduced, and substantially so by a number of factorsthat are beyond our control, including the following:

 

•                                          adversechanges in the economy, prolonged recession and/or additional terroristactivity against the United States or our allies or other war-time activitiesmight increase public pessimism and decrease travel and leisure spending,thereby reducing golf course operators’ revenues (particularlydestination-resort golf course revenues) and diminishing the resale value ofthe affected golf courses;

 

•                                          increasedcompetition, including, without limitation, increasing numbers of golf coursesbeing offered for sale in our markets or nationwide;

 

•                                          continuingexcess supply and decreasing demand in the golf course industry; and

 

•                                          changesin real estate tax rates and other operating expenses.

 

Any reduction in the valueof our golf courses would make it more difficult for us to sell our assets forthe amounts and within the time-frames that we have estimated.  Reductions in the amounts that we receivewhen we sell our assets could decrease or delay our payment of liquidatingdistributions to our stockholders, perhaps in substantial ways.

 

***If our liquidation costs or unpaidliabilities are greater than we expect, our liquidating distributions might bedelayed or reduced, potentially in a substantial manner.***

 

Before making the finalliquidating distribution to the holders of our common stock, we will need topay all of our transaction costs pertaining to the liquidation and all validclaims of our creditors, which we expect will be substantial.  Our board may also decide to acquire one ormore additional insurance policies covering unknown or contingent claimsagainst us, including, without limitation, additional directors’ and officers’liability insurance, for which we would pay an additional premium based uponmarket prices prevailing at the time of purchase.  We have estimated such transaction costs incalculating the amount of our projected liquidating distributions.  To the extent that we have underestimatedcosts and expenses in calculating our historical projections, our actualaggregate liquidating distributions will be lower than we have historicallyprojected, and perhaps in substantial amounts. As earlier discussed, we have not updated our projections.

 

 

46

----

***Our loss of REIT status exposes us topotential income tax liability in the future, which could lower the amount ofour liquidating distributions.***

 

In order to maintain ourhistorical qualification as a REIT, at least 95% of our annual gross income wasrequired to be derived from real property rents, mortgage interest and a fewother categories of income specified in the tax code, which importantly do notinclude income from golf course operations. Although we did not affirmatively intend to revoke our REIT status,business conditions required us to begin operating golf courses in 2000 and thepercentage of our gross income supplied by such operations increased in 2001and surpassed the 5% ceiling in 2002. Consequently, we did not meet the 95% gross income test in 2002.  Failure to meet this test caused us to failto qualify as a REIT for the year 2002, which will prevent us fromre-qualifying for at least four years. Accordingly, we were then and are currently subject to federal incometax as a regular corporation.

 

However, our operationsresulted in a net operating loss for income tax purposes during 2002 and2003.  Therefore, no income tax will bedue on our operating income/loss or proceeds from the sale of properties thatoccurred during 2002 and 2003.  As ofJune 30, 2004, we believe we have sufficient net operating loss carryoversto offset any gains we might recognize through our liquidation.  If we were to recognize taxable gains in ayear before consideration of net operating loss carryovers, we could be subjectto alternative minimum tax.  Generally,for tax years ending after December 31, 2002, the use of net operatingloss carryovers to reduce alternative minimum taxable income is limited to 90%of alternative minimum taxable income. Therefore, tax at a rate of 20% could be imposed on our alternativeminimum taxable income that cannot be reduced by net operating losscarryovers.  The resulting taxliabilities would reduce the amount of cash available for liquidatingdistributions.

 

***The holder of our Series A preferredstock might exercise its right to appoint two directors to our board ofdirectors, which might result in decisions that prejudice the economicinterests of our common stockholders in favor of our preferred stockholders.***

 

We entered into a votingagreement with the holder of our preferred stock, AEW Targeted Securities Fund,L.P., pursuant to which the holder agreed to vote in favor of the plan ofliquidation.  The voting agreement providedthat if we failed to redeem the Series A preferred stock by May 22,2003, the holder of the preferred stock would be entitled to require us toredeem it.  We received such a demandfrom the preferred stock holder on May 23, 2003, but we do not have enoughcash available to redeem the preferred stock. Our default in making a timely redemption payment gives the preferredstock holder the right under the voting agreement to appoint two new directorsto our board.  Our charter also gives thepreferred stock holder the right to elect two new directors if and whendividends on the Series A shares are over six quarters in arrears.  Currently, dividends on the Series Ashares are eleven quarters in arrears. These director election rights are not cumulative, which means that thepreferred stock holder may elect two, but not four, new directors.  The current holder of the preferred stock,AEW Targeted Securities Fund, L.P., has informed us that it does not currentlyintend to exercise that right.  However,we face the risk that it might decide to exercise such right in thefuture.  The appointment of suchdirectors to our board might reduce the efficiency of our board’sdecision-making or result in decisions that prejudice the economic interests ofour common stockholders in favor of our preferred stock holder.

 

***Distributing interests in a liquidating trustmay cause you to recognize gain prior to the receipt of cash.***

 

At some point during ourliquidation, as expressly permitted by our plan of liquidation, we may elect tocontribute our remaining assets and liabilities to a liquidating trust.  Our stockholders would receive interests inthe liquidating trust and our corporate existence would terminate.  The SEC has historically allowed liquidatingtrusts to stop filing quarterly reports on Form 10-Q and to file unauditedannual financial statements on Form 10-K. Accordingly, if the SEC were to grant similar relief to any successorliquidating trust we may form, we might realize substantial legal and auditingcost savings over the remainder of our liquidation, as well as general andadministrative cost savings such as corporate governance costs, certaininsurance costs, and printing and reporting costs of a publicly traded company,among others.  However, the plan ofliquidation prohibits us from contributing our assets to a liquidating trustunless and until our preferred stock has been redeemed in full or until whichtime as they consent to such a contribution.

 

For tax purposes, thecreation of the liquidating trust should be treated as a distribution of ourremaining assets to our stockholders, followed by a contribution of the sameassets to the liquidating trust by our stockholders.  As a result, we will recognize gain or lossinherent in any such assets, with any gains offset by available net operatingloss carry-overs (discussed above).   Inaddition, a stockholder would recognize gain to the extent his share of thecash and the fair market value of any assets received by the liquidating trustwas greater than the stockholder’s basis in his stock, notwithstanding that thestockholder would not contemporaneously receive a distribution of cash or anyother assets with which to satisfy the resulting tax liability.

 

47

----

 

In addition, it is possible that the fairmarket value of the Innisbrook Resort and the other assets received by theliquidating trust, as estimated for purposes of determining the extent of thestockholder’s gain at the time interests in the liquidating trust are distributedto the stockholders, will exceed the cash or fair market value of propertyultimately received by the liquidating trust upon its sale of the assets, inwhich case the stockholder may not receive a distribution of cash or otherassets with which to satisfy any tax liability resulting from the contributionof the assets to the liquidating trust. In this case, the stockholder would recognize a loss in a taxable yearsubsequent to the taxable year in which the gain was recognized, which lossmight be limited under the tax code.

 

If we do not distribute ourassets to a liquidating trust and, instead, continue to operate as a regularcorporation until all of our assets are sold, we would recognize gains orlosses upon the sale of assets for federal income tax purposes.  Since we are no longer a REIT, we could besubject to income tax on any recognized gains. However, as of December 31, 2002, we believe we have sufficient netoperating loss carryovers to offset any recognized gains.  If we were to recognize taxable gains in ayear before consideration of net operating loss carryovers, we could be subjectto alternative minimum tax.  Generally,for tax years ending after December 31, 2002, the use of net operating losscarryovers to reduce alternative minimum taxable income is limited to 90% ofalternative minimum taxable income. Therefore, tax at a rate of 20% could be imposed on our alternativeminimum taxable income that cannot be reduced by net operating loss carryovers.  If a liquidating trust is formed, our netoperating loss carryovers will not be available to reduce any gains recognizedwithin the trust.  However, the trustwill have a tax basis equal to the fair market value of its assets at the datethe liquidating trust is formed.  Anygain recognized by the trust would thus be the result of either appreciation inthe value of the assets during the time that they are owned by the trust, or aninitial underestimation of the fair market value of the assets at the time thetrust is formed.

 

***If we are not able to sell our remaining golfcourses in a timely manner, we may experience severe liquidity problems, not beable to meet the demands of our creditors and, ultimately, become subject tobankruptcy proceedings.***

 

In the event that we are unable to sell our remaining assets asplanned, we may be unable to pay our obligations as they become due. Inaddition, our ability to pay our obligations as they become due is based on theassumption that our chief executive officer will not require payment ofoutstanding performance milestone payments owed by us to him as ofJune 30, 2004 prior to our realizing net cash proceeds from asset salessufficient to do so.  As of June 30,2004, we owed our two most senior executive officers a total of approximately$1,984,000 in milestone payments and accrued interest on such milestonepayments.

 

In the event we are not ableto sell our remaining assets within a reasonable period of time and forreasonable amounts, or if our expenses exceed our estimates, we may experiencesevere liquidity problems and not be able to meet our financial obligations toour creditors in a timely manner.  If wecannot meet our obligations to our creditors in a timely manner, we couldultimately become subject to bankruptcy proceedings.

 

**ITEM 3****.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

We have not entered into any transactions using derivative financialinstruments. We are subject to market risk associated with changes in interestrates applicable to the revolving line of credit that we obtained onMarch 18, 2004. The total outstanding debt, at August 9, 2004,subject to interest rate exposure is $2,100,000. A 25 basis point movement inthe interest rate on the floating rate debt would result in an approximate$5,250 annualized increase or decrease in interest expense and cash flows (seeNote 7 to our Consolidated Financial Statements for additional debtinformation).

 

We have not entered into any transactions using derivative commodityinstruments.   Reference is made toNote 7 to the Condensed Consolidated Financial Statements of Item 1 foradditional debt information.

 

48

----

 

**ITEM 4****.  CONTROLS AND PROCEDURES**

 

We maintain disclosure controls and procedures that are designed toensure that information required to be disclosed in our Exchange Act reports isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ourChief Financial Officer, as appropriate, to allow timely decisions regardingrequired disclosure. Our management assesses the costs and benefits of suchcontrols and procedures based upon the prevailing facts and circumstances,including management’s reasonable judgment of such facts.  As we neither controlled nor managed theInnisbrook Resort during the recent quarter, our disclosure controls andprocedures with respect to such persons and entities are necessarily morelimited than those we maintain with respect to our own corporate operations.

 

As of June 30, 2004, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and our Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures pursuant toExchange Act Rule 13a-14. Because the corporate office of our Company onlyhas seven employees, excluding golf course employees, two of the seven of whichare the CEO and the CFO, all matters of a disclosable nature, including anypotential significant issues relating to the management or operations of ourgolf courses, are typically addressed and handled by these two individuals. Basedupon the foregoing, our Chief Executive Officer and our Chief Financial Officerconcluded that as of June 30, 2004, our disclosure controls and proceduresare effective in timely alerting them to material information relating to ourCompany (including our consolidated subsidiaries) required to be included inour Exchange Act reports. There have been no significant changes in ourinternal controls or in other factors which could significantly affect internalcontrols subsequent to the date we carried out our evaluation.

 

There has been no change in our internal controls over financialreporting during our most recent fiscal quarter that has materially affected,or is reasonably likely to materially affect, our internal controls overfinancial reporting.

 

49

----

 

**PART II****.  OTHER INFORMATION**

 

**ITEM 1: Legal Proceedings.**

 

We are currently involved in (or affected by) the following materiallegal proceedings:

 

***Young Complaints***

 

On March 22, 2004, a lawsuit was filed (and was served on ouragent for service of process on March 25, 2004) in the U.S. District Courtfor the District of South Carolina, Florence Division, by one of our priordirectors, Larry D. Young (together with Danny L. Young, Kyle N. Young, the YoungFamily Irrevocable Trust and The Legends Group, Ltd.), against ourindependent auditors, BDO Seidman, LLP (together with one current BDO partnerand two former BDO partners) and our company (together with our executiveofficers). The complaint alleges that the BDO defendants engaged inprofessional malpractice, misrepresentation, breach of fiduciary duty and fraudby counseling plaintiffs to participate in a type of tax shelter transaction,held illegal by the IRS. The complaint has seven counts, the last of whichapplies to all defendants (the first six apply only to BDO and its partners).The seventh count alleges that Golf Trust conspired with BDO to convinceMr. Young that he would realize a large projected tax gain in order toinduce Mr. Young (and the other plaintiffs) to enter into the failed taxshelter transactions. The plaintiffs are seeking damages of at least$3.7 million, together with legal expenses and other costs. Defendants BDOSeidman, LLP (together with one current BDO partner and two former BDOpartners) filed a motion to compel arbitration and dismiss the complaint onenlargement of time in which to answer or otherwise respond to the plaintiffs’complaint on May 5, 2004, and we filed a motion of defendants our company(together with our executive officers) to stay, and for enlargement of time inwhich to answer or otherwise respond to plaintiffs’ complaint on May 18,2004.  The plaintiffs filed memorandaopposing the aforementioned motions on May 24, 2004 and June 4, 2004,respectively.  There has been no rulingfrom the court on either motion as yet.

 

***Pete Dye Golf Club***

 

On March 18, 2003, wefiled a lawsuit in the Circuit Court for the Ninth Judicial District, the Stateof South Carolina, against Burning Embers Corporation, Golf and Fairway, L.L.C.,Golf Course Leasing, LLC, James D. LaRosa, James J. LaRosa and Leigh AnnLaRosa, as joint and several co-borrowers, for collection of all sums due andowing, of approximately $220,000 plus accrued interest at March 24, 2003,under the promissory note due and owing to us that matured on December 19,2002. One payment of $10,000 has been received since the maturity date and hasbeen applied to the outstanding principal and interest on the promissory notedue to us. The promissory note was executed by the buyer in favor of us inconnection with our sale of the Pete Dye Golf Club on December 19, 2001 toan affiliate of the borrowers. The defendants were served on May 19, 2003,they answered the complaint, and we then filed a motion for summary judgment onJune 30, 2003. The motion for summary judgment was heard by the court onOctober 22, 2003, and resulted in our obtaining a judgment against thedefendants for $231,630, plus interest for a period beginning March 14,2003 until paid at 14% per annum. The judgment was entered on October 28,2003 and a copy was served upon the plaintiffs on the same day. The defendantsdid not appeal the judgment.  Anexemplification was issued by the Charleston County Clerk of Court onMarch 17, 2004, and the judgment was filed in Harrison County, WestVirginia on or about April 12,2004, pursuant to West Virginia’sdomestication statutes.  The attorneys inWest Virginia are in the process of enrolling the judgment as a lien on realproperty there.

 

***Tierra Del SolCountry Club***

 

All of the legal proceedings relating to the Tierra Del Sol golf coursehave been contractually resolved by the parties involved, pending theexpiration of the agreement for the marketing and joint sale of propertydiscussed below.

 

On September 20, 2000, Terence Mulvihill, a principal in thelessee and in the entity which previously owned the Tierra Del Sol CountryClub, attempted to terminate our water rights lease agreement at the Tierra DelSol Country Club for: (a) the existence of an unauthorized assignment,which Mr. Mulvihill claimed was the result of allowing GTA Tierra Del Sol,

 

50

----

 

LLC to operate the golf course; (b) utilizing the water on thegolf course in a manner which was contrary to the purposes authorized under thewater rights lease agreement; (c) using the water in amounts in excess ofwhat was permitted under the terms of the water rights lease agreement; and(d) non-payment of taxes under the water rights lease agreement for fiscalyear 1999. We have responded in writing to Mr. Mulvihill disputing thetermination of the water rights lease agreement. We also filed a complaint onJanuary 15, 2002 in the Thirteenth Judicial District Court, County ofValencia, State of New Mexico, against the Mulvihill Estate (Mr. Mulvihilldied in December 2000) and Golf Classic Resorts, LLC. Our complaint soughtvarious forms of relief in relation to the water rights lease agreement and theunderlying purchase of Tierra Del Sol, including, but not limited to,requesting a determination that: (1) the water rights lease agreement hasnot been terminated and remains in effect; (2) the lease, in essence,constitutes a transfer of a fee interest in the water rights; or(3) alternatively requesting a rescission of the 1998 contribution andleaseback agreement pursuant to which the water rights were assigned toMr. Mulvihill, based upon the fraud and misrepresentation of the sellerand Mr. Mulvihill.

 

On February 21, 2003, we entered into an agreement for marketing andjoint sale of property with Mary Louise Mulvihill Skalkos, the executor of theEstate of Terence J. Mulvihill and Golf Classic Resorts, LLC in which theparties agreed jointly to market the assets at the Tierra Del SolGolf & Country Club in Belen, New Mexico which include assets otherthan just the country club such as a 9-hole executive golf course, waterrights, and tennis courts. The term of this agreement is six months and weshall have the option to extend the term of the agreement for three additionalsix-month periods. We recently exercised the third six-month option, whichexpires on February 21, 2005. As a result of entering into this agreement,we agreed with the Estate and Golf Classic Resorts, LLC that all parties wouldforbear from taking further action on the existing lawsuit during the term ofthis agreement.

 

***Stonehenge (Country Club atWildewood and Country Club at Woodcreek Farms)***

 

On April 22, 2002, we filed an action entitled *Golf Trust of America, L.P. and GTA Stonehenge, LLC v. Lyndell LewisYoung and Stonehenge Golf Development, LLC* in the Court of CommonPleas for Richland County. We had asserted causes of action against thedefendant for breach of contract, fraud and unfair trade practices. We wereseeking damages of approximately $172,000, which represents prepaid dues thatwere not disclosed by the defendants. A counterclaim for payment under aconsulting agreement, along with claims for payment of operating/maintenanceand insurance expenses was filed by the defendant against us on June 20,2002; our reply was filed on July 22, 2002 denying the claims and,alternatively, seeking a set-off or recoupment against the defendant’s allegedclaim for the amount of our claim against the defendant. The Court dismissedthe case on May 28, 2003. Under the court rules, the case may be restoredto the active roster within one year and the statute of limitations will havebeen deemed to have been tolled during that year.  If restored outside the one-year period, thenormal three-year statute of limitations would run from the original accrualdate.  That time period would expire inMarch 2005.

 

***Lake OzarkIndustries, Inc. and Everett Holding Company, Inc. v. Golf Trust ofAmerica, et al.***

 

This is an action initiatedin the Circuit Court of Miller County, Missouri, by a contractor, Lake OzarkConstruction Industries, Inc., or LOCI, and its asserted assignee of lienand account rights, Everett Holding Company, Inc., in the Fall of 1999 againstnumerous defendants, including Golf Trust of America, L.P.  Plaintiffs assert LOCI performed constructionservices on, or that benefited, the property of various defendants, includingGolf Trust of America, L.P.  So far asthe action concerns Golf Trust of America, L.P., plaintiffs seek to foreclose amechanic’s lien upon property formerly owned by Golf Trust of America,L.P.  The lien is for the principalamount of $1,276,123, plus interest at 10% per year and attorney fees.  Plaintiffs calculate interest to May 20,1999, just prior to the lien filing, to be $151,180 and interest thereafter tobe $354 per day.  In March 2002 theCourt orally granted a motion for summary judgment filed by Golf Trust ofAmerica, L.P., ruling that plaintiffs’ claimed lien does not comply withrequirements of the Missouri mechanic’s lien statute and is invalid.  The court entered its written order grantingGolf Trust of America, L.P.’s motion for summary judgment inApril 2002.  Since not all claims involvedin this lawsuit were disposed of by that ruling, Plaintiffs’ time to appeal thisruling did not begin to run.  InNovember 2003 the court entered a final judgment, and plaintiffs now haveappealed the ruling in favor of Golf Trust of America, L.P. to the MissouriCourt of Appeals.  The appeal currentlyis in the briefing stage.  A decision bythe court of appeals could be issued by the end of 2004.  At this time, we are unable to assess thelikely outcome of this litigation.

 

51

----

 

***Innisbrook Resort CondominiumOwner Litigation***

 

On June 30, 2004, theInnisbrook Resort, which we now own, served as collateral for a$79 million original balance non-recourse loan we made in 1997 to theInnisbrook Resort’s owner, Golf Host Resorts, Inc. The formerowner/borrower entered into an arrangement with many of the persons who owncondominium units at the Innisbrook Resort whereby the condominiums owned bythese persons are placed in a pool and rented as hotel rooms to guests of theInnisbrook Resort. Certain of the condominium owners (as plaintiffs) initiateda legal action against our former borrower, Golf Host Resorts, Inc., andits corporate parent, Golf Hosts, Inc. (as defendants), regarding variousaspects of this arrangement. We are not presently a party to the lawsuit. It isour understanding, however, that the condominium owners/plaintiffs are seekingto resolve the following issues, among others:

 

•                                          whetherevery condominium owner who is also a member of the Innisbrook Golf and CountryClub has the right to participate in the lessor’s rental pool, so long as thereis a rental pool, by virtue of defendant’s alleged marketing promises to allpurchasers of condominiums at the Innisbrook Resort;

 

•                                          whetherthe condominium unit owners participating in the master lease agreement werecoerced by economic pressure and duress to enter into the master leaseagreement, or guaranteed master lease agreement;

 

•                                          whetherthe guaranteed master lease agreement is invalid by reason of such allegedcoercion and economic duress and, if so, whether the condominium owners whoentered into the guaranteed master lease agreement are entitled to bereimbursed for the difference between the amount of income that was distributedto them under the master guaranteed master lease agreement and the amount ofincome that would have been distributed to them had they remained subject tothe master lease agreement;

 

•                                          whetherthe unit owners who signed the guaranteed master lease agreement have the rightto return to the master lease agreement without penalty, and thereby be entitledto be reimbursed for the difference between the income that they received underthe guaranteed master lease agreement and the income they would have receivedunder the master lease agreement;

 

•                                          whetherthe defendant breached its contract with the unit owners by allowing members ofthe public upon the golf courses, thereby adversely affecting the “private golfcourse” concept of Innisbrook; and

 

•                                          whetherthere has been a diminution in the market value of the individual condominiumunits due to the five factors mentioned above.

 

Deposition of class members andothers, including depositions of prior executives of Golf HostResorts, Inc. have been taken and additional discovery remains to beundertaken. The previously scheduled trial date of February 3, 2003 waspostponed by the Court and a new trial date has not yet been set. InJuly 2003, the judge in the litigation against Golf HostResorts, Inc. reversed an earlier ruling and held that the case could notproceed as a class action. The judge also ruled that the plaintiffs could notseek recovery from the individuals that hold stock in Golf HostResorts, Inc. and its affiliates (rejecting plaintiffs’ attempt to “piercethe corporate veil”). In October 2003, the judge ruled that the claims ofthe former members of the class who were not named as plaintiffs in the lawsuitwere barred by the statute of limitations. These rulings leave approximately 80individual plaintiffs in the lawsuit representing 50 condominium units.  Plaintiffs have appealed each of these rulingsto the court of appeals. The court of appeals summarily affirmed the lowercourt’s ruling that the case could not proceed as a class action and hasaffirmed the lower court’s dismissal with prejudice of the veil piercing case.  No decision on the intervention appeal hasbeen made.  On June 15, 2004,counsel for Golf Host Resorts, Inc. reargued the motion for summary judgment tosummarily dismiss the claims of the remaining 80 individual plaintiffs.  The judge has not rendered a decision on thismotion.

 

Neither GTA nor any of our affiliates is a presently a party to thislawsuit.

 

***Routine Litigation***

 

In addition to litigation between a lessor (such as our operatingpartnership) and our former lessees (and their affiliates), owners andoperators of golf courses are subject to a variety of legal proceedings arisingin the ordinary course of operating a golf course, including proceedingsrelating to personal injury and property damage. Such proceedings are generallybrought against the operator of a golf course, but may also be brought againstthe owner.   Since we are now theoperator of our

 

52

----

 

remaining golf courses, except Innisbrook, we maintain insurance forthese purposes.   As the owner of theInnisbrook Resort, we have also acquired insurance for these purposes to coverInnisbrook.

 

**ITEM 2. CHANGES IN SECURITIES**

 

Not Applicable.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

As previously reported, on July 21, 2003 we defaulted on ourobligation, under our voting agreement with the holder of our Series Apreferred stock, to redeem the Series A shares within 60 days of the holder’sMay 23, 2003 demand.  As a result, theaggregate Series A dividend rate increased from $462,500 per quarter to$625,000 per quarter and the preferred stock holder has a right to appoint twodirectors to our board of directors.  Thepreferred stock holder has that same right under our the Series A ArticlesSupplementary (our charter document relating to the preferred stock) because wehave not paid a preferred stock dividend since the third quarter of 2001 andsuch right arises when preferred stock dividends are in arrears for six or morequarters.  The preferred stock holder hasinformed us that it does not currently intend to exercise that right.  However, it remains free to do so at any time(pursuant to the procedures specified in our charter and the voting agreement).

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

No matters were submitted to a vote of security holders during thethree months ended June 30, 2004.

 

**ITEM 5. OTHER INFORMATION**

 

On July 6, 2004, describing under Item 5 that Roy C. Chapman, amember of our Board of Directors since our IPO in 1997, died unexpectedly.   Mr. Chapman was a member of the Audit,Compensation and Nominating Committees of the Board of Directors.  He was an independent director and served asour “Audit Committee Financial Expert” as defined in Item 401(h) of RegulationS-K.  On July 12, 2004, the Board ofDirectors met and elected Mr. Fred W. Reams, also an independent member of ourBoard of Directors since our IPO in 1997, to serve as our “Audit CommitteeFinancial Expert.”  Mr. Chapman has notbeen replaced on the Board of Directors.

 

On July 15, 2004, we entered into a Settlement Agreement datedJuly 15, 2004 (the “Settlement Agreement”) with GTA-IB, LLC (“GTA-IB”),Golf Host Resorts, Inc. (“Former Borrower”), Golf Hosts, Inc., Golf HostManagement, Inc., Golf Host Condominium, Inc. and Golf Host Condominium, LLCrelating to the settlement of a number of issues between the parties, includingFormer Borrower’s default under the $79 million loan made by us to the FormerBorrower in June 1997.  Pursuant tothe Settlement Agreement, GTA-IB, one of our subsidiaries, settled claimsrelating to the loan to the Former Borrower and took ownership of the WestinInnisbrook Golf Resort.  In connectionwith the Settlement Agreement, GTA-IB and Westin Management Company Southentered into a management agreement providing for Westin’s management of theInnisbrook Resort, and Westin and Troon Golf LLC entered into a facilitymanagement agreement providing for Troon’s management of the golf facilities atthe Innisbrook Resort.  In addition, inconnection with the Settlement Agreement and related agreements, Elk Funding,L.L.C. provided a $2 million loan to us to fund certain capital expendituresand operations of the Innisbrook Resort. We had previously entered in to an agreement with the Former Borrowerand the prospective purchaser of a parcel of undeveloped land within the WestinInnisbrook Golf Resort known as Parcel F. This agreement, known as the Parcel F Development Agreement, wasexecuted on March 29, 2004 and held in escrow pending the closing of thetransactions contemplated by the Settlement Agreement.  The Parcel F Development Agreement providesfor the terms and conditions under which Parcel F may be developed includingrestrictions to avoid interference with the operations of the Innisbrook Resort.  The relevant documents noted above were filedas exhibits to a Current Report on Form 8-K filed on July 29, 2004.

 

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

 

***Exhibits***

 

The exhibits listed on the Exhibit Index, which appears after thesignature page, are included or incorporated by

 

53

----

 

reference in this Quarterly Report.

 

***Form 8-K Filings***

 

During the quarter ended June 30, 2004, we did not file anyCurrent Reports on Form 8-K.

 

54

----

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| ** **                       | **GOLF TRUST OF AMERICA, INC.,**registrant |
|----------------------------------|-------------------------------------------------|
|                             |                                            |   |
| Date:  August 16, 2004 | By:                                             | /s/ W. Bradley Blair, II | ** ** |
|                             |                                            |  W. Bradley Blair, II |
| * *                         | * *                                        | * President  and Chief Executive Officer* |
|                             |                                            |   |
| Date:  August 16, 2004 | By:                                             | /s/ Scott D. Peters |   |
|                             |                                            |  Scott D. Peters |
| * *                         | * *                                        | * Senior  Vice President and Chief Financial Officer* |

 

55

----

 

**EXHIBITINDEX**

 

Pursuant to Item 601(a)(2) of Regulation S-K, this exhibit indeximmediately precedes the exhibits.

 

The following exhibits are part of this Quarterly Report onForm 10-Q (and are numbered in accordance with Item 601 ofRegulation S-K). Items marked with an asterisk (*) are filed herewith.

 
| **No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                 |
|---------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 2.1     |       | Plan of Liquidation and Dissolution of Golf Trust of America, Inc.,  as approved by stockholders on May 22, 2001 and as currently in effect  (previously filed as Exhibit 2.1 to our Company’s Current Report on Form 8-K,  filed May 30, 2001, and incorporated herein by reference).                                                                                                     |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1.1   |       | Articles of Amendment and Restatement of Golf Trust of America, Inc.,  as filed with the State Department of Assessments and Taxation of Maryland on  January 31, 1997, (previously filed as Exhibit 3.1A to our Company’s  Registration Statement on Form S-11 (Commission File No. 333-15965) Amendment  No. 2 (filed January 30, 1997) and incorporated herein by reference). |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1.2   |       | Articles of Amendment of Golf Trust of America, Inc., as filed with  the State Department of Assessments and Taxation of Maryland on June 9,  1998 (previously filed as Exhibit 3.2B to our Company’s Quarterly Report on  Form 10-Q, filed August 14, 1998 and incorporated herein by reference).                                                                               |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1.3   |       | Articles of Amendment of Golf Trust of America, Inc. dated May 22,  2001, as filed with the State Department of Assessments and Taxation of  Maryland on May 25, 2001 (previously filed as Exhibit 3.1 to our Company’s  Current Report on Form 8-K, filed May 30, 2001, and incorporated herein by  reference).                                                                           |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2.1   |       | Articles Supplementary of Golf Trust of America, Inc. relating to the  Series A Preferred Stock, as filed with the State Department of Assessments  and Taxation of the State of Maryland on April 2, 1999 (previously filed  as Exhibit 3.1 to our Company’s Current Report on Form 8-K, filed  April 13, 1999, and incorporated herein by reference).                          |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2.2   |       | Articles Supplementary of Golf Trust of America, Inc. relating to the  Series B Junior Participating Preferred Stock, as filed with the State  Department of Assessments and Taxation of the State of Maryland on  August 27, 1999 (previously filed as Exhibit 3.1 to our Company’s  Current Report on Form 8-K, filed August 30, 1999, and incorporated  herein by reference). |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.3.1   |       | Bylaws of Golf Trust of America, Inc., as amended and restated by the  Board of Directors on February 16, 1998 (previously filed as Exhibit 3.2  to our Company’s Quarterly Report on Form 10-Q, filed May 15, 1998 and  incorporated herein by reference).                                                                                                                           |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.3.2   |       | Bylaws of Golf Trust of America, Inc., as amended and restated by the  Board of Directors on March 27, 2001 (previously filed as Exhibit 3.3 to  our Company’s Quarterly Report on Form 10-Q, filed May 15, 2001 and  incorporated herein by reference).                                                                                                                              |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.3.3   |       | Bylaws of Golf Trust of America, Inc., as amended and restated by the  Board of Directors on August 20, 2001 and as currently in effect (except  for the provision amended by the following exhibit 3.3.4) (previously filed  as Exhibit 3.3 to our Company’s Current Report on Form 8-K, filed  August 30, 2001 and incorporated herein by reference).                          |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.3.4   |       | Bylaws Amendment of Golf Trust of America, Inc., as adopted by the  Board of Directors on February 9, 2004 and as currently in effect  (previously filed as Exhibit 3.3.4 to our Company’s Annual Report on form  10-K, filed March 30, 2004, and incorporated herein by reference).                                                                                             |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.1     |       | Form of Share Certificate for Golf Trust of America, Inc. Common  Stock (previously filed as Exhibit 4.3 to our Company’s Current Report on  Form 8-K, filed August 30, 1999, and incorporated herein by reference).                                                                                                                                                                  |

 

56

----

 
| **No.**   | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                              |
|-----------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.2       |       | Form of Share Certificate for Golf Trust of America, Inc. Series A  Preferred Stock (previously filed as Exhibit 3.2 to our Company’s Current  Report on Form 8-K, filed April 13, 1999, and incorporated herein by  reference).                                                                                                                                                                                                   |
|      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.3       |       | Shareholder Rights Agreement, by and between Golf Trust of America,  Inc. and ChaseMellon Shareholder Services, L.L.C., as rights agent, dated  August 24, 1999 (previously filed as Exhibit 4.1 to our Company’s  Current Report on Form 8-K, filed August 30, 1999, and incorporated  herein by reference).                                                                                                                 |
|      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.4† |       | Voting Agreement, between Golf Trust of America, Inc. and the holder  of all of its outstanding shares of Series A Preferred Stock, AEW Targeted  Securities Fund, L.P., dated February 22, 2001 (previously filed as  Exhibit 4.2 to our Company’s Current Report on Form 8-K, filed March 12,  2001, and incorporated herein by reference).                                                                                 |
|      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.5       |       | Voting Agreement, by and among Golf Trust of America, Inc., Golf  Trust of America, L.P., GTA GP, Inc. and the holders of operating partnership  units named therein, dated as of February 14, 2001 (previously filed as  Exhibit 4.3 to our Company’s Current Report on Form 8-K, filed March 12,  2001, and incorporated herein by reference).                                                                              |
|      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1.1    |       | First Amended and Restated Agreement of Limited Partnership (the  “Partnership Agreement”) of Golf Trust of America, L.P., dated  February 12, 1997 (previously filed as Exhibit 10.1 to our Company’s  Annual Report on Form 10-K, filed March 31, 1997, and incorporated  herein by reference).                                                                                                                   |
|      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1.2    |       | First Amendment to the Partnership Agreement of Golf Trust of  America, L.P., dated as of February 1, 1998 (previously filed as Exhibit  10.1.2 to our Company’s Annual Report on Form 10-K, filed March 31,  1998, and incorporated herein by reference).                                                                                                                                                                    |
|      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1.3    |       | Second Amendment and Consent to the Partnership Agreement of Golf  Trust of America, L.P., as amended, dated as of February 14, 2001  (previously filed as Exhibit 10.3 to our Company’s Current Report on Form  8-K, filed March 12, 2001, and incorporated herein by reference).                                                                                                                                            |
|      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1.4*   |       | Exhibit A to the Partnership Agreement (Schedule of Partnership  Interests) of Golf Trust of America, L.P., as revised through August 9,  2004                                                                                                                                                                                                                                                                                     |
|      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1.5    |       | Designation of Class B Common OP units of Golf Trust of America,  L.P., dated February 1, 1998, which has been added as the first entry in  Exhibit D to the Partnership Agreement (included within the First Amendment  to the Partnership Agreement, which was previously filed as Exhibit 10.1.2 to  our Company’s Annual Report on Form 10-K, filed March 31, 1998, and  incorporated herein by reference).               |
|      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1.6    |       | Designation of Series A Preferred OP units of Golf Trust of America,  L.P., dated April 2, 1999, which has been added to Exhibit D to the  Partnership Agreement (previously filed as Exhibit 10.3 to our Company’s  Current Report on Form 8-K, filed April 13, 1999, and incorporated  herein by reference).                                                                                                                |
|      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1.7    |       | Designation of Series B Preferred OP units of Golf Trust of America,  L.P., dated May 11, 1999, which has been added to Exhibit D to the  Partnership Agreement (previously filed as Exhibit 10.1.6 to our Company’s  Annual Report on Form 10-K, filed March 30, 2000, and incorporated  herein by reference).                                                                                                                    |
|      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1.8    |       | Designation of Series C Preferred OP units of Golf Trust of America,  L.P., dated July 28, 1999, which has been added to Exhibit D to the  Partnership Agreement (previously filed as Exhibit 10.1.7 to our Company’s  Annual Report on Form 10-K, filed March 30, 2000, and incorporated  herein by reference).                                                                                                              |
|      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.2.1    |       | Credit Agreement, dated as of June 20, 1997, by and among Golf  Trust of America, L.P., as Borrower, Golf Trust of America, Inc., GTA GP,  Inc. and GTA LP, Inc., as Guarantors, the Lenders referred to therein, and  NationsBank N.A., as Agent (previously filed as Exhibit 10.1 to our Company’s  Current Report on Form 8-K, dated June 20, 1997 and filed  August 12, 1997, and incorporated herein by reference). |

 

57

----

 
| **No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|---------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2.2  |       | Amended and Restated Credit Agreement, dated as of July 8, 1998,  by and among Golf Trust of America, L.P., as Borrower, Golf Trust of America,  Inc., GTA GP, Inc. and GTA LP, Inc., as Guarantors, the Lenders referred to  therein, and NationsBank N.A., as Agent (previously filed as Exhibit 10.2.2  to our Company’s Amended Annual Report on Form 10-K/A, filed April 1,  1999, and incorporated herein by reference).                                                                                                                                                                                            |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2.3  |       | Amended and Restated Credit Agreement, dated as of March 31,  1999, by and among Golf Trust of America, L.P., as Borrower, Golf Trust of  America, Inc., GTA GP, Inc. and GTA LP, Inc., as Guarantors, the Lenders  referred to therein, NationsBank, N.A., as Administrative Agent, First Union  National Bank as Syndication Agent, and BankBoston, N.A., as Documentation  Agent (previously filed as Exhibit 10.2.3 to our Company’s Annual Report on  Form 10-K, filed March 30, 2000, and incorporated herein by reference).                                                                                        |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2.4  |       | Second Amended and Restated Credit Agreement, dated as of  July 25, 2001, by and among Golf Trust of America, L.P., as Borrower,  Golf Trust of America, Inc., GTA GP, Inc., GTA LP, Inc., Sandpiper-Golf  Trust, LLC, GTA Tierra Del Sol, LLC, and GTA Osage, LLC, as Guarantors, the  Lenders referred to therein, and Bank of America, N.A., as Administrative  Agent, First Union National Bank, as Syndication Agent, and Fleet National  Bank, as Documentation Agent (previously filed as Exhibit 10.1 to our  Company’s Current Report on Form 8-K, filed August 1, 2001, and  incorporated herein by reference). |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3    |       | Credit Agreement, dated as of March 31, 1999, by and among Golf  Trust of America, L.P., as Borrower, Golf Trust of America, Inc., GTA GP,  Inc. and GTA LP, Inc., as Guarantors, the Lenders referred to therein, and  NationsBank, N.A., as Administrative Agent for the Lenders (previously filed  as Exhibit 10.3 to our Company’s Annual Report on Form 10-K, filed  March 30, 2000, and incorporated herein by reference).                                                                                                                                                                                          |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4    |       | Loan Agreement (the “participating mortgage”), dated as of  June 20, 1997, by and between Golf Host Resorts, Inc., as Borrower, and  Golf Trust of America, L.P., as Lender (previously filed as Exhibit 10.2 to  our Company’s Current Report on Form 8-K, dated June 20, 1997 and filed  August 12, 1997, and incorporated herein by reference).                                                                                                                                                                                                                                                         |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5    |       | Form of Participating Lease Agreement (previously filed as Exhibit  10.2 to our Company’s Registration Statement on Form S-11, filed  January 15, 1997, and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6    |       | 1997 Non-Employee Directors’ Plan of Golf Trust of America, Inc.  (previously filed as Exhibit 10.7 to our Company’s Registration Statement on  Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed  January 15, 1997) and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7    |       | 1997 Stock Incentive Plan (the “Original 1997 Plan”) of Golf Trust of  America, Inc. (previously filed as Exhibit 10.6 to our Company’s Registration  Statement on Form S-11 (Commission File No. 333-15965) Amendment No. 1 (filed  January 15, 1997) and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                        |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.8    |       | 1997 Stock-Based Incentive Plan of Golf Trust of America, Inc. (the  “New 1997 Plan”) (previously filed as Exhibit 10.3 to our Company’s Quarterly  Report on Form 10-Q (Commission File No. 000-22091), filed August 15,  1997, and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                              |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.9    |       | Form of Nonqualified Stock Option Agreement for use under the New  1997 Plan (previously filed as Exhibit 10.4 to our Company’s Quarterly Report  on Form 10-Q (Commission File No. 000-22091), filed August 15, 1997, and  incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                 |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.10   |       | Form of Employee Incentive Stock Option Agreement for use under the  New 1997 Plan (previously filed as Exhibit 10.5 to our Company’s Quarterly  Report on Form 10-Q (Commission File No. 000-22091), filed August 15,  1997, and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                           |

 

58

----

 
| **No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                        |
|---------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.11   |       | General Provisions Applicable to Restricted Stock Awards Granted  Under the New 1997 Plan (previously filed as Exhibit 10.14 to our Company’s  Registration Statement on Form S-11 (Commission File No. 333-36847), dated  September 30, 1997 and filed as of October 1, 1997, and  incorporated herein by reference).                  |
|    |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.12   |       | Form of Restricted Stock Award Agreement for use under the New 1997  Plan (previously filed as Exhibit 10.15 to our Company’s Registration  Statement on Form S-11 (Commission File No. 333-36847), dated  September 30, 1997 and filed as of October 1, 1997, and  incorporated herein by reference).                                  |
|    |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.13   |       | 1998 Stock-Based Incentive Plan of Golf Trust of America, Inc.  (previously filed as Exhibit A to our Company’s definitive Proxy Statement,  dated April 1, 1999 and filed March 29, 1999, and incorporated  herein by reference).                                                                                                      |
|    |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.14   |       | Employee Stock Purchase Plan of Golf Trust of America, Inc.  (previously filed as Exhibit 4.1 to our Company’s Registration Statement on  Form S-8 (Commission File No. 333-46659), filed February 20, 1998, and  incorporated herein by reference).                                                                                         |
|    |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.15   |       | Subscription Agreement for use with the Employee Stock Purchase Plan  (previously filed as Exhibit 4.2 to our Company’s Registration Statement on  Form S-8 (Commission File No. 333-46659), filed February 20, 1998, and  incorporated herein by reference).                                                                                |
|    |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.16.1 |       | First Amended and Restated Employment Agreement between Golf Trust of  America, Inc. and W. Bradley Blair, II, dated November 7, 1999  (previously filed as Exhibit 10.15 to our Company’s Annual Report on Form  10-K, filed March 30, 2000, and incorporated herein by reference).                                                    |
|    |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.16.2 |       | Second Amended and Restated Employment Agreement between Golf Trust  of America, Inc. and W. Bradley Blair, II, dated as of February 25, 2001  (previously filed as Exhibit 10.4 to our Company’s Current Report on Form  8-K, filed March 12, 2001, and incorporated herein by reference).                                             |
|    |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.16.3 |       | Letter Agreement to the Second Amended and Restated Employment  Agreement between Golf Trust of America, Inc. and W. Bradley Blair, II,  dated as of March 22, 2004 (previously filed as Exhibit 10.16.3 to our  Company’s Annual Report on Form 10-K, filed March 30, 2004, and incorporated  herein by reference).               |
|    |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.17.1 |       | Second Amended and Restated Employment Agreement between Golf Trust  of America, Inc. and Scott D. Peters, dated November 7, 1999 (previously  filed as Exhibit 10.16 to our Company’s Annual Report on Form 10-K, filed  March 30, 2000, and incorporated herein by reference).                                                        |
|    |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.17.2 |       | Third Amended and Restated Employment Agreement between Golf Trust of  America, Inc. and Scott D. Peters, dated as of February 25, 2001  (previously filed as Exhibit 10.5 to our Company’s Current Report on Form  8-K, filed March 12, 2001, and incorporated herein by reference).                                                   |
|    |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.17.3 |       | Fourth Amended and Restated Employment Agreement between Golf Trust  of America, Inc. and Scott D. Peters, dated as of August 29, 2003  (previously filed as Exhibit 10.1 to our Company’s Current Report on Form  8-K, filed October 9, 2003, and incorporated herein by reference).                                                   |
|    |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.17.4 |       | General Release related to the Fourth Amended and Restated Employment  Agreement between Golf Trust of America, Inc. and Scott D. Peters, dated as  of August 29, 2003 (previously filed as Exhibit 10.2 to our Company’s  Current Report on Form 8-K, filed October 9, 2003, and incorporated  herein by reference).                   |
|    |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.18   |       | Stock Purchase Agreement, dated April 2, 1999, by and among Golf  Trust of America, Inc., Golf Trust of America, L.P., GTA GP, Inc., GTA LP,  Inc. and AEW Targeted Securities Fund, L.P. (previously filed as Exhibit 10.1  to our Company’s Current Report on Form 8-K, filed April 13, 1999, and  incorporated herein by reference). |
|    |       |                                                                                                                                                                                                                                                                                                                                                   |
| 10.19   |       | Registration Rights Agreement, dated April 2, 1999, by and  between Golf Trust of America, Inc. and AEW Targeted Securities Fund, L.P.  (previously filed as Exhibit 10.2 to our Company’s Current Report on Form  8-K, filed April 13, 1999, and incorporated herein by reference).                                                    |

 

59

----

 
| **No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|---------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.20.1 |       | Purchase and Sale Agreement, between Golf Trust of America, L.P., as  seller, and Legends Golf Holding, LLC, as buyer, dated as of  February 14, 2001 (previously filed as Exhibit 10.1 to our Company’s  Current Report on Form 8-K, filed August 14, 2001, and incorporated  herein by reference).                                                                                                                                   |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.20.2 |       | First Amendment to Purchase Agreement, Fifth Amendment to Lease  Agreement (Bonaventure Golf Club) and Settlement Agreement by and among Golf  Trust of America, L.P., Legends Golf Holding, LLC, Legends at Bonaventure,  Inc., Larry Young and Danny Young, dated as of July 30, 2001 (previously  filed as Exhibit 10.2 to our Company’s Current Report on Form 8-K, filed  August 14, 2001, and incorporated herein by reference). |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.21   |       | Confidentiality and Standstill Letter Agreement between Golf Trust of  America, Inc. and The Legends Group, dated as of February 14, 2001  (previously filed as Exhibit 10.2 to our Company’s Current Report on Form  8-K, filed March 12, 2001, and incorporated herein by reference).                                                                                                                                                |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.22.1 |       | Loan Agreement, dated as of March 18, 2004, by and among  GTA-Stonehenge, LLC, as Borrower, Golf Trust of America, L.P., as Guarantor,  and Textron Financial Corporation as the Lender (previously filed as Exhibit  10.22.1 to our Company’s Annual Report on Form 10-K, filed on March 30,  2004, and incorporated herein by reference).                                                                                            |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.22.2 |       | Mortgage Security Agreement and Fixture Filing, dated as of  March 18, 2004, from Golf Trust of America, L.P. in favor of Textron  Financial Corporation (previously filed as Exhibit 10.22.2 to our Company’s  Annual Report on Form 10-K, filed on March 30, 2004, and incorporated  herein by reference).                                                                                                                           |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.23   |       | Settlement Agreement dated July 15, 2004 by and among Golf Trust  of America, L.P., GTA-IB, LLC, Golf Host Resorts, Inc., Golf Hosts, Inc.,  Golf Host Management, Inc., Golf Host Condominium, Inc. and Golf Host  Condominium, LLC. (previously filed as Exhibit 10.1 to our Company’s Current  Report on Form 8-K, filed July 29, 2004, and incorporated herein by  reference).                                                          |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.24   |       | Defense and Escrow Agreement dated July 15, 2004 by and among  Golf Host Resorts, Inc., GTA-IB, LLC, Golf Trust of America, L.P., Golf Trust  of America, Inc. and Chicago Title Insurance Company (previously filed as  Exhibit 10.2 to our Quarterly Report on Form 8-K, filed July 29, 2004, and  incorporated herein by reference).                                                                                                          |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.25   |       | Operational Benefits Agreement dated July 15, 2004 by and among  Golf Host Resorts, Inc., Golf Hosts, Inc., GTA-IB, LLC, and Golf Trust of  America, L.P. (previously filed as Exhibit 10.3 to our Quarterly Report on  Form 8-K, filed July 29, 2004, and incorporated herein by reference).                                                                                                                                                    |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.26   |       | Management Agreement dated July 15, 2004 by and between Westin  Management Company South and GTA-IB, LLC. (previously filed as Exhibit 10.4  to our Quarterly Report on Form 8-K, filed July 29, 2004, and incorporated  herein by reference).                                                                                                                                                                                                   |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.27   |       | Assignment, Consent, Subordination and Nondisturbance Agreement dated  July 15, 2004 by and among GTA-IB, LLC, Golf Trust of America, L.P. and  Westin Management Company South (previously filed as Exhibit 10.5 to our  Quarterly Report on Form 8-K, filed July 29, 2004, and incorporated herein by  reference).                                                                                                                             |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.28   |       | Facility Management Agreement dated July 15, 2004 by and between  Troon Golf L.L.C. and Westin Management Company South (previously filed as  Exhibit 10.6 to our Quarterly Report on Form 8-K, filed July 29, 2004, and  incorporated herein by reference).                                                                                                                                                                                     |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.29   |       | Loan Agreement dated July 15, 2004 by and between Golf Trust of  America, L.P. and Elk Funding, L.L.C. and related Notes A and B (previously  filed as Exhibit 10.7 to our Quarterly Report on Form 8-K, filed July 29,  2004, and incorporated herein by reference).                                                                                                                                                                            |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.30   |       | Parcel F Development Agreement dated March 29, 2004 by and among  Golf Hosts Resorts, Inc., Golf Trust of America, L.P. and Innisbrook F, LLC,  formerly known as Bayfair Innisbrook, L.L.C. (previously filed as Exhibit  10.8 to our Quarterly Report on Form 8-K, filed July 29, 2004, and  incorporated herein by reference).                                                                                                                |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 14.1    |       | Code of Ethics, adopted by the Board of Directors of Golf Trust of  America, Inc. on February 9, 2004 (previously filed as Exhibit 14.1  to our Company’s Annual Report on Form 10-K, filed on March 30, 2004,  and incorporated herein by reference).                                                                                                                                                                            |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 21.1*   |       | List of Subsidiaries of Golf Trust of America, Inc.                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.1*   |       | Certification of W. Bradley Blair II under Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                       |

 

60

----

 
| 31.2*  |   | Certification of Scott D. Peters under Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                           |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                  |
| 32.1*  |   | Certifications under Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                  |
| 99.1   |   | Charter of the Audit Committee of the Board of Directors of Golf  Trust of America, Inc. (previously filed as Appendix A to our Company’s  definitive proxy statement on Schedule 14A, filed October 15, 2001,  and incorporated herein by reference). |

 

----

*                                         Filed herewith

†                                          Portions ofthis exhibit have been omitted pursuant to a request for confidentialtreatment.

 

61

----