** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

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**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: March 31, 2004** |
|                                               |   |                                                                                                                                                                                                                       |
| **o**                                              |   | **Transition  report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                              |
|                                               |   |                                                                                                                                                                                                                       |
|                                               |   | **for the transition period from                 to               ** |

 

**Commission FileNumber 000-22091**

 

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**GOLF TRUST OF AMERICA, INC.**(Exact name of registrant as specified in its charter)

 

| **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)         |

 

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Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such report(s) and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý  No o.

 

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

 

On May 7,2004, there were 7,741,153 common shares outstanding of the registrant’s onlyclass of common stock. On May 7, 2004, there were 800,000 shares outstanding ofthe registrant’s 9.25% Series A Cumulative Convertible Preferred Stock,which is the registrant’s only class of outstanding preferred stock.

 

The Exhibit Index begins on page 49.

 

 

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**GOLF TRUST OFAMERICA, INC.Form 10-Q Quarterly ReportFor the Three Months Ended March 31, 2004**

 

**INDEX**

 
| **PART I. FINANCIAL INFORMATION** |              |
|-----------------------------------|-------------------|
|                              | **Item 1.**       | **Liquidation Basis Financial Statements** |   |
|                              |              | Condensed Consolidated Statements of Net  Assets as of March 31, 2004 (unaudited) and December 31, 2003 |   |
|                              |              | Condensed Consolidated Statements of  Changes in Net Assets (unaudited) for the Three Months Ended March 31, 2004  and 2003 |   |
|                              |              | Condensed Consolidated Statements of Cash  Flows (unaudited) for the Three Months ended March 31, 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** |   |

 

**Cautionary Note Regarding Forward-LookingStatements**

 

The following report contains forward-lookingstatements within the meaning of Section 27A of the Securities Act and Section21E of the Exchange Act. Forward-looking statements are statements that predictor describe 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 limited informationcurrently available to us and speak only as of the date on which this reportwas filed with the SEC. Our continued internet posting or subsequentdistribution of this dated report does not imply continued affirmation of theforward-looking statements included in it. We undertake no obligation, and weexpressly disclaim any obligation, to issue any updates to our forward-lookingstatements, even if subsequent events cause our expectations to changeregarding the matters discussed in those statements. Future events areinherently uncertain. Moreover, it is particularly difficult to predictbusiness activity levels at the Innisbrook Resort with any certainty.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.

 

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**GOLF TRUST OFAMERICA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF NETASSETS (LIQUIDATION BASIS)**

**ASOF MARCH 31, 2004 (unaudited) AND DECEMBER 31, 2003****(in thousands, except per share amounts)**

 
|                                                                                                  |   | **March 31,  2004** |   | **December 31,  2003** |   |
|-------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-----------------------------|--------|
|                                                                                                  |   | **(unaudited)**     |   |                        |   |
|                                                                                                  |   |                |   |                        |   |
| **ASSETS**                                                                                            |   |                |   |                        |   |
| Real estate and mortgage note receivable —  held for sale                                        |   | $                   | 57,042 |                        | $      | 57,042 |   |
| Cash and cash equivalents                                                                             |   | 1,290               |   | 601                         |   |
| Receivables — net                                                                                |   | 3,165               |   | 3,672                       |   |
| Other assets                                                                                          |   | 266                 |   | 233                         |   |
| Total assets                                                                                          |   | 61,763              |   | 61,548                      |   |
|                                                                                                  |   |                |   |                        |   |
| **LIABILITIES**                                                                                       |   |                |   |                        |   |
| Debt                                                                                                  |   | 1,090               |   | —                      |   |
| Accounts payable and other liabilities                                                                |   | 2,857               |   | 2,528                       |   |
| Dividends payable                                                                                     |   | 5,539               |   | 4,914                       |   |
| Reserve for estimated costs during the  period of liquidation                                         |   | 6,059               |   | 6,823                       |   |
| Total liabilities                                                                                     |   | 15,545              |   | 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                                                                 |   | 35,545              |   | 34,265                      |   |
|                                                                                                  |   |                |   |                        |   |
| **NET ASSETS IN LIQUIDATION**  (available to holders of common stock and OP units)                    |   | $                   | 26,218 |                        | $      | 27,283 |   |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

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**GOLF TRUST OFAMERICA, INC.**

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

**FORTHE THREE MONTHS ENDED MARCH 31,****2004 AND2003**

**(in thousands)(unaudited)**

 
|                                                                        |   | **Three  Months Ended  March 31, 2004** |   | **Three  Months Ended  March 31, 2003** |   |
|-----------------------------------------------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|
|                                                                        |   |                                    |   |                                    |   |
| Revenues                                                                    |   |                                    |   |                                    |   |
| Rent                                                                        |   | $                                       | — |                                    | $      | 452 |   |
| Revenue from managed golf course operations                                 |   | 1,596                                   |   | 2,434                                   |   |
| Total revenues                                                              |   | 1,596                                   |   | 2,886                                   |   |
|                                                                        |   |                                    |   |                                    |   |
| Expenses:                                                                   |   |                                    |   |                                    |   |
| General & administrative                                                |   | 390                                     |   | 731                                     |   |
| Direct expenses from managed golf course  operations                        |   | 1,321                                   |   | 2,305                                   |   |
| Total expenses                                                              |   | 1,711                                   |   | 3,036                                   |   |
|                                                                        |   |                                    |   |                                    |   |
| Operating loss                                                              |   | (115                                    | )      | (150                                    | )      |
|                                                                        |   |                                    |   |                                    |   |
| Other income (expense):                                                     |   |                                    |   |                                    |   |
| Interest income                                                             |   | 46                                      |   | 56                                      |   |
| Interest expense                                                            |   | (19                                     | )      | (821                                    | )      |
| Total other income (expense)                                                |   | 27                                      |   | (765                                    | )      |
|                                                                        |   |                                    |   |                                    |   |
| Loss before adjustment for liquidation  basis                               |   | (88                                     | )      | (915                                    | )      |
| Adjustment for liquidation basis of  accounting                             |   | (19                                     | )      | —                                  |   |
| Net loss available to common stockholders                                   |   | (107                                    | )      | (915                                    | )      |
|                                                                        |   |                                    |   |                                    |   |
| Value of common stock redeemed                                              |   | (333                                    | )      |                                    |   |
| Preferred dividends                                                         |   | (625                                    | )      | (463                                    | )      |
|                                                                        |   |                                    |   |                                    |   |
| Net change in net assets available to  holders of common stock and OP units |   | $                                       | (1,065 | )                                       | $      | (1,378 | ) |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

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**GOLF TRUST OFAMERICA, INC.**

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

**FOR THE THREE MONTHSENDED MARCH 31, 2004 AND 2003**

**(in thousands,unaudited)**

 
|                                                                                                        |   | **Three  Months Ended  March 31, 2004** |   | **Three  Months Ended  March 31, 2003** |   |
|-------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                        |   |                                    |   |                                    |   |
| **Cash flows from operating activities:**                                                                   |   |                                    |   |                                    |   |
| Change in loss available to holders of  common stock before preferred dividends and common stock redemption |   | $                                       | (107   | )                                       | $      | (915 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:                                |   |                                    |   |                                    |   |
| Adjustment to liquidation basis of  accounting                                                              |   | 19                                      |   | —                                  |   |
| Decrease (increase) in other assets and  receivables-net                                                    |   | (65                                     | )      | 482                                     |   |
| Increase in accounts payable and other  liabilities                                                         |   | 329                                     |   | 319                                     |   |
| Decrease in liquidation liabilities                                                                         |   | (554                                    | )      | (1,154                                  | )      |
| Net cash used in operating activities                                                                       |   | (378                                    | )      | (1,268                                  | )      |
|                                                                                                        |   |                                    |   |                                    |   |
| **Cash flows from investing activities:**                                                                   |   |                                    |   |                                    |   |
| Golf course improvements                                                                                    |   | (15                                     | )      | (61                                     | )      |
| Net proceeds from golf course dispositions                                                                  |   | —                                  |   | 39,564                                  |   |
| Decrease (increase) in notes receivable                                                                     |   | (8                                      | )      | 20                                      |   |
| Net cash (used in) provided by investing  activities                                                        |   | (23                                     | )      | 39,523                                  |   |
|                                                                                                        |   |                                    |   |                                    |   |
| **Cash flows used in financing activities:**                                                                |   |                                    |   |                                    |   |
| Borrowings under revolving line of credit                                                                   |   | 1,090                                   |   | —                                  |   |
| Net repayments on debt                                                                                      |   | —                                  |   | (39,439                                 | )      |
| Net cash provided by (used in) financing  activities                                                        |   | 1,090                                   |   | (39,439                                 | )      |
|                                                                                                        |   |                                    |   |                                    |   |
| Net decrease in cash                                                                                        |   | 689                                     |   | (1,184                                  | )      |
| Cash and cash equivalents, beginning of  period                                                             |   | 601                                     |   | 7,990                                   |   |
| Cash and cash equivalents, end of period                                                                    |   | $                                       | 1,290  |                                    | $      | 6,806 |   |
| **Supplemental Disclosure of Cash Flow  Information**                                                       |   |                                    |   |                                    |   |
| Interest paid during the period                                                                             |   | $                                       | 2      |                                    | $      | 774 |   |
| **Non-cash transactions:**                                                                                  |   |                                    |   |                                    |   |
| Cancellation of note receivable                                                                             |   | $                                       | 547    |                                    | $      | — |   |
| Note receivable from sale of asset                                                                          |   | $                                       | — |                                    | $      | 2,300 |   |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

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**GOLF TRUST OFAMERICA, INC.Form 10-Q Quarterly ReportFor the Three Months Ended March 31, 2004**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

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

 

On February 25, 2001 our board ofdirectors adopted, and on May 22, 2001 our common and preferredstockholders approved, a plan of liquidation for our Company. The plan ofliquidation contemplates the sale of all of our assets and the payment of, orprovision for, our liabilities and expenses, and authorizes us to establish areserve to fund our contingent liabilities. The plan of liquidation gives ourboard of directors the power to sell any and all of our assets without furtherapproval by our stockholders. However, the plan of liquidation constrains ourability to enter into sale agreements that provide for gross proceeds below thelow end of the range of gross proceeds that our management initially estimatedwould be 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 our Company and our stockholders. Pursuantto the plan of liquidation, as of May 7, 2004, we have sold 38 of the 47(eighteen-hole equivalent) golf courses we once held interests in.

 

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 date of stockholders’ approvalon May 22, 2001. 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 notoccurred, and we now know that, as described below, realizing the range ofliquidating distributions per share set forth in the applicable proxy statementwill not occur, 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 then corporatestrategy; (ii) various possible strategic alternatives available to uswith a view towards determining the best approach of maximizing stockholdervalue in the context of our existing plan of liquidation; and (iii) otherstrategic alternatives independent of the plan of liquidation. Houlihan Lokeyevaluated our lender’s mortgage interest in the Innisbrook Resort under twodifferent scenarios, both of which assumed that we would obtain a fee simpleinterest in the asset by either successfully completing a negotiated settlementwith our borrower or foreclosing on our borrower’s interest in the mortgageencumbering the asset. Under the first scenario, Houlihan Lokey analyzed ourimmediate liquidation of the asset, and under the second scenario, HoulihanLokey analyzed our holding the asset until no later than December 31, 2005to seek to realize a modest recovery in the financial performance levels of theasset based on historical financial results. Following receipt of HoulihanLokey’s report on March 15, 2002, and after consideration of otherrelevant facts and circumstances then available to us, our board of directorsunanimously determined to proceed with our plan of liquidation withoutmodification. In February 2003, we, at the direction of our board, againengaged Houlihan Lokey to assist us in updating our projected range ofliquidating distributions in light of the actual sale prices we had obtainedduring the prior year and other relevant factors. Following receipt of HoulihanLokey’s updated report on March 18, 2003, and after consideration of otherrelevant facts and circumstances then available to us, our board of directorsunanimously reaffirmed their decision to proceed with our plan of liquidationwithout modification. As a result, we value the participating mortgage on ourbalance sheet based on our estimate of the resale value of the Resort at theconclusion of the holding period. At June 30, 2003, we carried theparticipating mortgage on our books at $60.0 million, based on theassumptions that we would take ownership of the Resort, that the Resort’soperations would begin to recover in 2004 and that by the end of the 2005holding period the Resort would have realized a modest recovery generally inline with historical results (among other assumptions). At September 30, 2003,we wrote down the value of the participating mortgage from a value of $60.0million to $44.2 million as described below.

 

During the latter half of 2003, we continued to negotiate for a globalsettlement of claims resulting from the borrower’s default of the participatingmortgage of the Innisbrook Resort. However, these negotiations were delayed inOctober when we received from the Westin Hotel Company (which operates thehotel and conference facilities at the Resort) an updated forecast for theResort for the year end results for 2003 and the calendar year 2004. Asdisclosed in our press release dated October 20, 2003, the updatedforecast from Westin was materially less favorable than the forecasts we hadreceived earlier from Westin regarding the same periods. The revised forecastfrom Westin included a forecast for golf operations at the Resort prepared byTroon Golf (which operates the golf courses at the Resort and which is anaffiliate of Westin). Following our receipt of the

 

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revised forecast and the corresponding 2004 budget, we reviewed thebudget methodology and economic assumptions underlying the 2004 budget fromWestin in a series of meetings with Westin and Troon. The decline in therevised forecast from Westin resulted primarily from fewer than anticipatedgroup bookings at the Resort in 2003 and the decrease in the number of advancebookings for 2004 currently on the books as compared to the same time lastyear, which led Westin to believe that the adverse economic conditions of thepast two years at the 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 Resort’s recovery would begin in 2004. However, based on thelimited information then available, Westin did not expect any significantimprovement in corporate group spending at the Innisbrook Resort (or othersignificant new Innisbrook Resort bookings) in 2004, even if the lodgingindustry 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.

 

We are continuing to negotiate with the owner of the Innisbrook Resortregarding a possible consensual foreclosure or a possible conveyance to us inlieu of our foreclosure upon the borrower’s interest in the Resort.  However, we can provide no assurance as towhether we will be able to reach any consensual resolution or settlement withthe owner/borrower. If no consensus resolution is reached, judicial action mayensue and the litigation might be protracted and expensive, and even in theevent that we prevail in any such litigation, the owner/borrower might not meetits obligations to us as might be ordered by the court or it might declarebankruptcy. If this occurs and we decide to pursue judicial foreclosure of theborrower’s interest, it would likely be expensive and time-consuming and there isa risk to us that the owner/borrower might seek to obtain bankruptcy and/orother judicial protection. Even if we obtain ownership of the InnisbrookResort, we expect to face the difficult task of seeking to realize a recoveryin the financial performance levels at the Resort.

 

**2.****     Organizationand Basis of Presentation**

 

Golf Trust ofAmerica, Inc., or GTA, was incorporated in Maryland on November 8,1996. We were originally formed to be a real estate investment trust, or REIT,however, as of fiscal year 2002 we no longer have our REIT status as a resultof our repossession and operation of golf courses following the default oftheir original third-party lessees.  OnJanuary 30, 2003, we sold our last property (3.5 golf courses) that was under aparticipating lease.  We own and operatethe remaining golf courses in our portfolio, excluding Innisbrook. In our SECfilings, we often state golf course quantities in terms of 18-hole equivalents.Therefore, one 27-hole golf course property would be counted as 1.5 golfcourses. As of May 7, 2004, we have interests in five properties whichrepresent nine golf courses. Five of these nine golf courses are owned by usand four (namely, the Innisbrook Resort golf courses) are collateral for a30-year participating mortgage wherein we are the lender. The five golf coursesthat we own are held by us in fee simple. The nine golf courses are located inFlorida (6), South Carolina (2), and New Mexico. Title to our golf courses isgenerally held by Golf Trust of America, L.P., a Delaware limited partnership.We refer to Golf Trust of America, L.P. as our “operating partnership” or “OP”and we refer to the operating partnership and GTA (together with all of theirsubsidiaries) collectively as “we”, “us” or our “Company.” Golf Trust ofAmerica, Inc., through its wholly owned subsidiaries GTA GP, Inc.(“GTA GP”) and GTA LP, Inc. (“GTA LP”) holds a 99.4 percent interestin our operating partnership as of May 7, 2004. GTA GP is the sole generalpartner of our operating partnership and owns a 0.2 percent interesttherein. GTA LP is a limited partner in the operating partnership and owns a99.2 percent interest therein. These percentages give effect to alloutstanding preferred OP units on an as-converted basis. One of our formerlessees held the only remaining minority interest in our operating partnershipwhich was recently transferred from our former lessee to the current lessor(buyer) of this property (3.5 golf courses).

 

**Adjustment to Liquidation Basis of Accounting**

 

As a result ofour board of directors’ adoption of our plan of liquidation and its approval byour stockholders, as required we adopted the liquidation basis of accountingfor all periods subsequent to May 22, 2001. Accordingly, on May 22,2001, our assets were adjusted to their estimated fair value and ourliabilities, including estimated costs associated with implementing the plan ofliquidation, were adjusted to their estimated settlement amounts. The valuationof real estate held for sale, including the real estate pledged as collateralunder our participating mortgage note receivable, as of March 31, 2004 is basedon current contracts and estimates of sales values based on indications ofinterest from the marketplace, certain

 

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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 March 31, 2004.  An adjustment of$19,000 is included in the March 31, 2004 consolidated statement of changes innet assets to reflect the amount of the reserve for capital expenditures at thegolf courses that we own and manage. There were no other liquidation basis of accounting adjustments for thethree months ended March 31, 2004.

 

**Reserve for Estimated Costs During the Periodof Liquidation**

 

Under theliquidation basis of accounting, we are required to estimate and accrue thecosts associated with implementing the plan of liquidation. These amounts canvary significantly due to, among other things, the timing and realized proceedsfrom golf course sales, the costs of retaining personnel and others to overseethe liquidation, including the costs of insurance, the timing and amountsassociated with discharging known and contingent liabilities and the costsassociated with cessation of our operations. These accruals do not provide for any operating cash shortfalls that mayoccur from assets that we own and/or manage now or in the future.  These costs are estimated and are expectedto be paid out over the liquidation period.

 

The followingtable summarizes the changes in the Reserve for Estimated Costs During thePeriod of Liquidation:

 
|                   |   | **December  31,  2003** |      | **Payments** |   | **Adjustments** |   | **March 31,  2004** |     |
|------------------------|--------|-------------------------|-----------|--------------|--------|-----------------|--------|---------------------|----------|
|                   |   |                    |      |         |   |            |   |                |     |
| Severance              |   | $                       | 2,201,000 |         | $      | (68,000         | )      | $                   | —   |   | $ | 2,133,000 |   |
| Professional fees      |   | 1,569,000               |      | (246,000     | )      | —          |   | 1,323,000           |     |
| Financial advisor fees |   | 451,000                 |      | —       |   | —          |   | 451,000             |     |
| Capital expenditures   |   | 11,000                  |      | (14,000      | )      | 19,000          |   | 16,000              |     |
| Other                  |   | 2,591,000               |      | (241,000     | )      | (214,000        | )      | 2,136,000           |     |
| Total                  |   | $                       | 6,823,000 |         | $      | (569,000        | )      | $                   | (195,000 | ) | $ | 6,059,000 |   |

 

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 anadditional performance milestone payment of approximately $1,234,000, plusaccrued interest, due to the repayment of the outstanding balance under ourthen applicable 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. The severance payments in the table above of$68,000 were made pursuant to severance obligations that we have to otheremployees.

 

Included inthe total payments under the Other category above is  $175,000 in payments ($119,000 which represents a 35% downpaymentand two monthly installment payments) under our current directors and officersinsurance policy which renewed on February 7, 2004 and expires on February 7,2005.  Also, included in the totalpayments under the Other Category above is $42,000 in commitment fees paid toour lender under the revolving line of credit, $11,000 in diligence relatedcosts paid to other third-parties in obtaining the revolving line of credit and$13,000 in interest paid on golf course property taxes.  The “Other” category also includes anon-cash adjustment of $214,000 which represents the difference in theredemption value of the 143,790 shares of our common stock that were pledged ascollateral under a note receivable between the company and our chief executiveofficer, W. Bradley Blair, and the outstanding balance due under the relatednon-recourse note receivable.  On March22, 2004, these shares were transferred to the company by our chief executiveofficer and the related note receivable was cancelled (*see Note 6 for further discussion*).

 

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**3.****     Summaryof Significant Accounting Policies**

 

*Interim Statements*

 

Theaccompanying condensed consolidated financial statements for the three monthsended March 31, 2004 and 2003 have been prepared in accordance with (i)generally accepted accounting principles (“GAAP”), and under the liquidationbasis of accounting following stockholders’ approval of the plan of liquidationon May 22, 2001, and (ii) the instructions to Form 10-Q andArticle 10 of Regulation S-X. These financial statements have notbeen audited by independent public accountants, however, they includeadjustments (consisting of normal recurring adjustments) which are, in thejudgment of management, necessary for a fair presentation of the net assets,financial condition, results of operations and cash flows for such periods.However, these results are not necessarily indicative of results for any otherinterim period or for the full year. In particular, revenues from golf courseoperations are seasonal.

 

Certaininformation and footnote disclosures normally included in financial statementsin accordance with GAAP have been omitted as allowed in quarterly reports bythe rules of the Securities and Exchange Commission, or the SEC. Managementbelieves that the disclosures included in the accompanying interim financialstatements and footnotes are adequate to make the information not misleading,but also believes that such information should be read in conjunction with theconsolidated financial statements and notes thereto included in our annualreport on Form 10-K for the year ended December 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 is 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 resort, Westin HotelCompany, guaranteed up to $2.5 million of debt service for each of thefirst five years, which guarantee has been 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 is 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 wemade the loan to them (for a total of 353,702 shares) continue to be pledged assecurity for the borrower’s performance under the participating loan. Prior tothe 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,the borrower failed to pay us interest when due, in arrears, for the month ofOctober 2001. (Previously, the borrower’s affiliate, Lost Oaks, L.P. (thelessee of our Lost Oaks Golf Club), failed to pay us monthly golf course rentwhen due, in arrears, for September 2001.) On November 6, 2001, wenotified Lost Oaks, L.P. that its failure to pay rent (as well as late chargesand interest) for the month of September 2001 constituted an event ofdefault under its participating lease.

 

The 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 a an eventof default under our participating mortgage. We also sent a notice of defaulton November 14, 2001 to the borrower based upon the cross-default of itsaffiliate, Lost Oaks, L.P., under its participating lease. Subsequently, onJune 30, 2002, the Lost Oaks participating lease was terminated and, onJanuary 13, 2003 this golf course was sold.

 

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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 borrower. Westin has contested ourclaim that it breached the subordination agreement.

 

Also on March 8, 2002, we delivered a legal notice to the borroweraccelerating the entire amount of its indebtedness to us as a result of its continuingdefault under the participating mortgage loan. The participating mortgage loanis a non-recourse loan. Accordingly, following an event of default thereunder,we cannot bring a legal action directly against the borrower to compel payment.Rather, our only recourse is to proceed against the guarantors and/or toforeclose upon the Innisbrook Resort (other than the condominium units whichare owned by third parties) and any other property of the borrower that hasbeen pledged as collateral to us to secure our loan to the borrower. Since thedefault, we have been seeking a negotiated foreclosure or settlement with theborrower as described in more detail below. We have been negotiating a globalresolution of all aspects impacting the past, present and future performance ofInnisbrook Resort.

 

We expect to finalize formal documentation of the global resolution inthe near term; however, we can provide no assurances as to the terms or timingof any global settlement.

** **

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

 

*Stonehenge (Country Club at Wildewood andCountry 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 have asserted causes of action against the defendant for breach ofcontract, fraud and unfair trade practices. We are 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 withinone year and the statute of limitations will have been deemed to have beentolled during that year. If restored outside the one-year period, the normalthree-year statute of limitations would run from the original accrual date.That time 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 prior directors,Larry D. Young (together with Danny L. Young, Kyle N. Young, the Young FamilyIrrevocable Trust and The Legends Group, Ltd.), against our independentauditors, BDO Seidman, LLP (together with one current BDO partner and twoformer BDO partners) and our company (together with our executive officers).The complaint alleges that the BDO defendants engaged in professionalmalpractice, misrepresentation, breach of fiduciary duty and fraud bycounseling plaintiffs to participate in a type of tax shelter transaction, heldillegal by the IRS. The complaint has seven counts, the last of which appliesto all defendants (the first six apply only to BDO and its partners). Theseventh 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. We and theplaintiffs have agreed that we will respond to the complaint by May 18, 2004.

 

*Lake OzarkIndustries, Inc. and Everett Holding Company, Inc. v. Golf Trust ofAmerica, et al.*  This is anaction initiated in the Circuit Court of Miller County, Missouri, by acontractor, Lake Ozark Construction Industries, Inc., or LOCI, and itsasserted assignee of lien and account rights, Everett Holding Company, Inc., inthe Fall of 1999 against numerous defendants, including Golf Trust of America,L.P.  Plaintiffs assert LOCI performedconstruction services on, or that benefited, the property of variousdefendants, including Golf Trust of America, L.P.  So far as the action concerns Golf Trust of America, L.P.,plaintiffs seek to foreclose a mechanic’s lien upon property formerly owned byGolf Trust of America, L.P.  The lien isfor the principal amount of $1,276,123, plus interest at 10% per year andattorney fees.  Plaintiffs calculateinterest to May 20, 1999, just prior to the lien filing, to be $151,180and interest thereafter to be $354 per day. In March 2002 the Court orally granted a motion for summary judgmentfiled by Golf Trust of America, L.P., ruling that plaintiffs’ claimed lien doesnot comply with requirements of the Missouri mechanic’s lien statute and isinvalid.  The court entered its writtenorder granting Golf Trust of America, L.P.’s

 

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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 our remaininggolf courses, excepting Innisbrook, we maintain insurance for these purposes.We are not currently 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 atMarch 31, 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.****     OtherAssets**

 

Receivables—net consists of the following:

 
|                                     |   | **(Liquidation  Basis)** |      |
|------------------------------------------|--------|--------------------------|-----------|
|                                     |   | **March 31,  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 |   | 641,000                  |      | 601,000 |   |
| Receivables—net                     |   | $                        | 3,165,000 |   | $ | 3,672,000 |   |
|                                          |        |                          |           |  |  |  |  |

 

The notereceivable taken in sale of this asset represents the $2.5 million note wereceived from the buyer of the Eagle Ridge Inn & Resort, plus accruedinterest less a discount reserve of $200,000 (i.e., in the event that theborrower has not caused any uncured event of default to occur under the note upto its maturity, the borrower shall have the right to reduce its paymentobligations under the note by $200,000 plus any interest paid on that sumduring the term of the note upon borrower’s payment of the balance of the note,subject to certain prepayment prohibitions).

 

*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. Pursuant to the terms of our officers’ amended and restatedemployment agreements, dated as of February 25, 2001, we made non-recourseloans of $1,595,000 to our executive officers on February 25, 2001 for thepayment of personal income taxes arising from the acceleration of theirrestricted stock grants and the forgiveness of their outstanding debt to usthat occurred on such date. These loans were evidenced by promissory notes fromthe executives and secured by their holdings of 199,415 shares of our commonstock valued at $8 per share at the time of the issuance of these loans.Interest accrued on these loans at 5.06% per annum (the applicable federal rateon the date of the loan) and is due at maturity. The outstanding balance ofthese loans at June 30, 2002, principal and interest, was $1,655,000.Effective

 

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July 1, 2002, wediscontinued accruing interest on these loans for financial reporting purposesbecause the total outstanding balance exceeded the value of the collateralshares of common stock, computed based on the net assets available to commonshareholders. Loans to officers were subject to an allowance for doubtfulaccounts of $897,000 to reflect the difference between the computed value ofour officers’ pledged shares of their common stock compared to their value atthe time that the shares were pledged, which was $8 per share. These loansmature at the earliest of the following: (i) February 25, 2006;(ii) three years following termination of the executive/borrower’semployment; or (iii) the date of the final distribution under the plan ofliquidation.

 

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).  Mr. Blair’soutstanding loan balance as of March 22, 2004 was $547,000 (including accruedand unpaid interest through June 30, 2002 of $44,000 and after application ofhis portion of the allowance for doubtful accounts of $647,000).  The assigned shares of common stock werevalued 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 March 31, 2004 after the allowance for doubtful account of$250,000) remains outstanding.  Thisloan is secured by our chief financial officer’s holdings of 55,625 shares ofour common stock.

 

At any time when the loan is over-secured, the executive/borrower hasthe right to sell the common stock securing the loan, provided that allproceeds of the sale are first applied to the then outstanding balance of theloan. All distributions (including any liquidating distributions) on the commonstock securing the loan are applied against the loan. The related promissorynotes are non-recourse to the executive/borrower.

 

The other miscellaneous receivables include approximately $384,000 ofmember, trade and other miscellaneous receivables of our managed golf coursesand $257,000 in notes receivable, including accrued interest, taken inparticipating 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 maximum permissibleoutstanding loan amount not to exceed $2,100,000. This loan is collateralizedby a security interest in our golf courses in Columbia, South Carolina, CountryClub at Wildewood and Country Club at Woodcreek, collectively known asStonehenge. The term of the loan is for two years and the interest rate is theprime rate plus 1.75% per annum paid monthly. We paid a one-time commitment feeto Textron Financial of $42,000 to obtain this credit line and we will pay toTextron a monthly fee of 0.25% per annum of the unused line balance in arrearson the first day of each month for the immediately preceding month and on thematurity date. This loan requires that the operations at Stonehenge for theimmediately preceding twelve month period is sufficient to meet a debt servicecoverage ratio, as defined in the mortgage of at least 1.20, as measuredmonthly. The funds drawn under this credit line will be used for workingcapital as needed from time to time as we continue to proceed through the planof liquidation. The principal balance outstanding under the revolving line ofcredit as of March 31, 2004 is approximately $1,090,000. The initial drawresulting in this outstanding balance includes estimated amounts for workingcapital needs and closing costs, such as documentary stamp taxes that will bedue upon the expected closing of the global settlement for the InnisbrookResort.  Additional draw requests arepermitted monthly on the first day of each month commencing May 1, 2004.

 

**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. TheSeries A preferred stock is convertible, in whole or in part, at theoption of the holder at any time into our common stock at an implicitconversion price of $26.25 per share of common stock, subject to

 

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adjustment in certain circumstances. We contributed the net proceeds toour operating partnership in exchange for 800,000 Series A preferred OPunits with analogous terms.

 

AggregateSeries A preferred stock dividends accrued, until July 20, 2003, at arate of $462,500 per quarter. Effective July 21, 2003 the rate increasedto $625,000 per quarter (see further discussion of this increase below). As ofMarch 31, 2004, we have accrued and not paid eleven quarters ofSeries A preferred stock dividends (including the dividend otherwisepayable in respect of the quarter ended March 31, 2004). Under ourSeries 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 itstransferee), had the right to elect two additional directors to our board ofdirectors at our annual meeting that was held on November 17, 2003, whoseterms as directors would continue until we fully pay all accrued but unpaidSeries A dividends.  Although AEWdid not exercise this right, it may do so in the future in accordance with theterms of our charter and 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. 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.

 

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**GOLF TRUST OF AMERICA, INC.Form 10-Q Quarterly ReportFor the Three Months Ended March 31, 2004**

 

**ITEM 2.****          MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Golf Trust ofAmerica, Inc., or GTA, was incorporated in Maryland on November 8, 1996.We are engaged in a liquidation of our assets pursuant to a plan of liquidationapproved by our stockholders.  We wereoriginally formed to be a real estate investment trust, or REIT, however, as offiscal year 2002 we no longer have our REIT status as a result of ourrepossession and operation of golf courses following the default of theiroriginal third-party lessees.  We soldour last property (3.5 golf courses) that was subject to a participating leaseon January 30, 2003.  We own and operategolf courses, subject to our efforts to market the same for sale tothird-parties.  In our SEC filings, weoften state golf course quantities in terms of 18-hole equivalents. Therefore,one 27-hole golf course property would be counted as 1.5 golf courses. As ofMay 7, 2004, we have interests in five properties which represent nine golfcourses. Five of these nine golf courses are owned by us and four (namely, theInnisbrook Resort golf courses) are collateral for a 30-year participatingmortgage wherein we are the lender. The five golf courses that we own are heldby us in fee simple. The nine golf courses are located in Florida (6), SouthCarolina (2), and New Mexico. Title to our golf courses is generally held byGolf Trust of America, L.P., a Delaware limited partnership. We refer to GolfTrust of America, L.P. as our “operating partnership” or “OP” and we refer tothe operating partnership and GTA (together with all of their subsidiaries)collectively as “we”, “us” or our “Company.” Golf Trust of America, Inc.,through its wholly owned subsidiaries GTA GP, Inc. (“GTA GP”) and GTALP, Inc. (“GTA LP”) holds a 99.4 percent interest in our operatingpartnership as of May 7, 2004. GTA GP is the sole general partner of ouroperating partnership and owns a 0.2 percent interest therein. GTA LP is alimited partner in the operating partnership and owns a 99.2 percentinterest therein. These percentages give effect to all outstanding preferred OPunits on an as-converted basis. One of our former lessees holds the only remainingminority interest in our operating partnership.

 

**SignificantEvents since the filing of our annual report on Form 10-K on March 30, 2004**

 

No significantevents have occurred since March 30, 2004 (the filing date of ourForm 10-K for the year ended December 31, 2003).

 

**Our Participating Mortgage secured by theInnisbrook Resort**

 

***Recent InnisbrookDevelopments***

 

During the first quarter of 2004, wecontinued to negotiate for a potential settlement of claims resulting from theborrower’s default under the participating mortgage at the Innisbrook Resort.We expect to resolve this matter in the near term, however, we can provide noassurances as to the finalization of a negotiated resolution, or as to theterms or timing of any such resolution.

 

***InnisbrookBackground***

 

We are the lender under an original principal balance $79 millionnon-recourse loan, secured by a first mortgage on the Innisbrook Resort (otherthan the Resort’s condominium units). The Innisbrook Resort, located nearTampa, Florida, is a destination golf resort that includes four high-end golfcourses and adjacent condominium and conference facilities. We originated thisloan in June 1997 as the lender. The borrower, Golf HostResorts, Inc., owns the Innisbrook Resort (other than the condominiumunits). The borrower entered into an arrangement with many of the persons whoown condominium units at the Resort. Under this arrangement, the condominiumsowned by these participating persons are placed in a securitized pool andrented as hotel rooms to guests of the Innisbrook Resort. There are no separatehotel rooms. This group of condominums is known as the “rental pool”.Accordingly, maintaining condominium owner participation in the rental pool iscritical to the continued economic success of the Innisbrook Resort. Theborrower also entered into an agreement with Troon Golf, LLC for Troon tomanage the golf courses, and a separate management agreement with Westin HotelCompany for Westin to manage the condominium unit rental-pool and the conferencefacilities. Troon Golf, Westin Hotel Company and the borrower are allaffiliates.

 

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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. Werefer to this loan as a participating mortgage because the required mortgagepayments include an interest component related to the borrower’s revenues from Resortoperations. However, operations at the Resort have not resulted in anyparticipating interest payments (as distinct from base interest payments) since1999 (see note 4 to our condensed consolidated financial statements).

 

In addition to the Innisbrook Resort itself, the collateral securingthe borrower’s performance under the participating mortgage currently includes365,380 shares of GTA common stock owned by the borrower (and held by GTA, asthe secured party) and three condominium units owned by the borrower at theInnisbrook Resort. The borrower’s parent, Golf Hosts, Inc., guaranteed allof the borrower’s loan payment obligations, however, Golf Hosts, Inc. hasno significant assets other than its interest in the borrower. In June, 1997,Westin and the borrower entered into an agreement pursuant to which Westinagreed to advance, in specified circumstances, up to $2.5 million per yearto the borrower for five years in the event that the Resort did not generatethe levels of cash flow specified in that agreement. Westin, the borrower andGTA entered into a subordination agreement whereby Westin agreed to make suchpayments directly to GTA in specified circumstances, and GTA agreed that in theevent of foreclosure, Westin would continue to manage the resort pursuant tothe existing management agreement.

 

Following September 11, 2001, the borrower informed us that due tothe erosion in the lodging industry performance resulting from the decline inthe economy and the significant impact of the events of September 11th onthe Resort’s operating performance, the borrower might default on its mortgagepayments to us. Shortly thereafter, the borrower’s affiliate, Lost Oaks, L.P.(the lessee of our Lost Oaks Golf Club), failed to pay us monthly golf courserent when due, in arrears, for September 2001. The borrower then failed topay us interest when due, in arrears, for the month of October 2001. OnNovember 6, 2001, we notified Lost Oaks, L.P. that its failure to pay rent(as well as late charges and interest) for the month of September 2001constituted an event of default under its participating lease. OnNovember 14, 2001, we sent a notice to the borrower that its interestpayment was overdue. On that same day, we sent a notice of default to the borrowerbased upon the cross-default of its affiliate, Lost Oaks, L.P., under itsparticipating lease. (The participating lease at Lost Oaks golf course wasterminated on June 30, 2002 and the golf course was subsequently sold onJanuary 13, 2003.) On November 29, 2001, we notified the borrowerthat its failure to cure its non-payment of the October 2001 interestpayment within ten days of our previous notice constituted an event of defaultof the borrower under our participating mortgage.

 

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 borrower. Westin has contested ourclaim that it breached the subordination agreement. No litigation has beenfiled in this regard. We are seeking a resolution of this dispute as part ofthe global Innisbrook settlement discussed below.

 

Also on March 8, 2002, we delivered a notice to the borroweraccelerating the entire amount of its indebtedness to us as a result of itscontinuing default under the participating mortgage. The participating mortgageloan is a non-recourse loan. Accordingly, following an event of defaultthereunder, we cannot bring a legal action directly against the borrower tocompel payment. Rather, our only recourse is to proceed against the guarantorsand/or to foreclose upon the Innisbrook Resort (other than the condominiumunits which are owned by third parties) and any other property of the borrowerthat has been pledged as collateral to us to secure our loan to the borrower.Since the time of the notice of the default, we have been seeking to resolvecomplex open issues in furtherance of a negotiated foreclosure or settlementwith the borrower as described in more detail below.

 

***Rental Pool***

 

In addition to the current rental pool agreement dated January 1,2002, the current owner of the Innisbrook Resort agreed with the condominiumowners association that the 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 willbe amortized and reimbursed to participating condominium owners (or transfereesof their condominium unit) over the five-year period beginning in 2005 asreflected in the table below. The reimbursement is contingent on the unitsremaining in the rental pool from the time of the refurbishment of their unitthroughout the reimbursement period (2005 to 2009). If the unit does not remainin the pool during the reimbursement period of 2005 through 2009, the owner orsuccessor owner forfeits any unpaid installments at the time the unit isremoved from the pool. We understand from Golf Host that the refurbishment ofall 617 rental pool units has now been completed.

 

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| **Year**  |   | **Principal** |          | **Interest** |   |
|-----------|--------|---------------|---------------|--------------|--------|
|      |   |          |          |         |   |
| 2005      |   | $             | 721,535       |         | $      | 347,227 |   |
| 2006      |   | 1,082,303     |          | 304,379      |   |
| 2007      |   | 1,443,071     |          | 243,493      |   |
| 2008      |   | 1,803,839     |          | 164,569      |   |
| 2009      |   | 2,164,606     |          | 67,588       |   |
| **Total** |   | **$**         | **7,215,354** | ** **   | **$**  | **1,127,256** | ** ** |

 

Certain of the condominium owners (as plaintiffs) initiated legalaction against the borrower, Golf Host Resorts, Inc., and its corporateparent, Golf Hosts, Inc. (as defendants), regarding various aspects of theprior rental pool arrangement. We are not a party to the lawsuit. It is ourunderstanding, however, that the condominium owners/plaintiffs allege breachesof contract, including breaches in connection with the prior rental poolarrangement. 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 eithercondominium owners, members, their accompanied guests, or guests of the Resort.

 

Neither GTA nor any of our affiliates is a party to that lawsuit;however, it affects us insofar as any costs imposed on the borrower by thelawsuit might reduce the borrower’s willingness and ability to (a) makeany participating mortgage payments to us to cure its default, or(b) enter into a settlement agreement with us regarding its currentparticipating mortgage default (described below) on terms we believe areacceptable. Moreover, we believe the lawsuit clouds the value of the InnisbrookResort in the near-term and thereby impairs the value of the collateral whichsecures our participating loan.

 

***Innisbrook Strategy***

 

In general, we have been facing a potentialtrade-off between (a) seeking to sell the participating mortgage on theInnisbrook Resort at the present time, as a distressed loan, which would likelyresult in a significant loss on our investment, but would likely hasten thecompletion of our liquidation, and (b) seeking to resolve the problemswith our borrower and others associated with the Resort through a negotiatedsettlement or foreclosure of the Innisbrook Resort loan, after which we, inconjunction with the Resort operators, namely Westin, as the Resort Manager(and Troon, the golf manager, through Westin), would seek to realize a modestrecovery, based on past historical results. The latter alternative might allowus to recoup more of our investment, but would take considerably more time;therefore, our board will consider selling the Resort earlier if a reasonableoffer is received.

 

When our financial advisor, Houlihan Lokey,evaluated our interest in Innisbrook in March 2002 and again inMarch 2003, they valued this asset under two different scenarios: a“forced liquidation” and an “orderly liquidation.” Both scenarios assumed thatwe would obtain a fee simple interest in the asset, either by completing anegotiated settlement or by foreclosing on our mortgage interest, by the end ofthe second quarter of 2003. Under the “forced liquidation” scenario, HoulihanLokey projected the range of total value we could reasonably expect to receiveupon an immediate sale of the Innisbrook Resort. Under the “orderlyliquidation” scenario, Houlihan Lokey then projected the range of total valuewe could reasonably expect to receive if we were to hold the asset for a periodof approximately 30-months (ending on or about December 31, 2005) andduring that time we and the Resort’s operators, namely Westin (and Troon,through Westin) were to successfully realize a modest recovery based on pasthistorical results. In a letter dated March 15, 2002, subject to variouslimiting assumptions, Houlihan Lokey’s then analysis projected that we wouldreceive 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 we received on March 18, 2003, subject tovarious limiting assumptions, Houlihan Lokey’s then analysis projected that wewould receive between $40 and $47 million under the forced liquidationscenario, and between $58 and $70 million under the orderly liquidationscenario.

 

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 value we may obtain from our participatingmortgage interest might be much lower. Houlihan Lokey’s estimates were based onseveral assumptions about future events, including assumptions that we willsuccessfully obtain fee simple title to the

 

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Innisbrook Resort and then successfully realize a modest recovery inthe financial performance of the Resort (which is dependent on the success ofthe Resort operators and a recovery in the travel and leisure sectors of theU.S. economy) and an assumption that we would not be subject to any materialliability under any of the lawsuits we were defending at that time and in somecases are currently defending. Any or all of these assumptions might prove tobe incorrect. Moreover, Houlihan Lokey’s projections were not based on anyappraisals of the asset or any independent litigation risk assessments.Accordingly, we have not and you should not place undue reliance upon theseprojections.

 

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. Afterconsideration of that report and other relevant facts, circumstances andassumptions and review of the alternatives then available to us, our boarddetermined that it would be in our stockholders’ interests to seek a negotiatedresolution to the borrower’s default in order to allow us to best preserve thevalue of our collateral. In view of the potentially advantageous result for ourstockholders, our board approved a strategy of seeking to obtain title to theInnisbrook Resort and thereafter hold the asset until no later thanDecember 31, 2005 to seek to realize a modest recovery in its financialperformance levels, based on historical financial results, prior to disposingof the asset.

 

Following review of Houlihan Lokey’s March 2003 report andconsideration of other relevant facts, circumstances and analyses, managementand the board of directors continue to believe that seeking a recovery in theResort’s financial performance and a resolution of issues with the borrower (asopposed to actively marketing our Innisbrook interests for sale at a distressedprice), is in our stockholders’ best interest. To that end, we have beennegotiating with our borrower, as well as with Westin and Troon Golf, in aneffort to seek a global resolution of all contractual defaults at theInnisbrook Resort. Because the borrower is insolvent, it cannot generally makedistributions to its equity owners. We have also received confirmations fromthe Innisbrook Resort’s management that all cash generated by the business isretained in the operating entity. (These confirmations are consistent with itsunaudited financial statements.) We currently expect to enter into a settlementagreement with our borrower and take control of the Innisbrook Resort (and allother assets of the operating entity) in the near term. As part of the globalsettlement, we expect (but cannot assure) the following:

 

•              to obtain a feesimple title to the Innisbrook Resort real property and personal property(including all accounts) and take over all operations at the Resort through anumber of companies under common ownership by our newly-formed, wholly-ownedsubsidiary, GTA-IB, LLC;

 

•              to enter into asettlement agreement with the borrower, Golf Hosts Resorts, providing for anorderly transition of ownership of the Resort to us and limiting our liabilityfor pre-transition events;

 

•              to enter, throughone of our subsidiary LLCs, into new management agreements with Westin, as theResort manager, (and with Troon Golf, as the golf manager, through Westin),which we expect will incorporate a broad range of new revenue enhancementpossibilities, accountability and reporting provisions;

 

•              to enter, throughone of our subsidiary LLCs, into an agreement with our borrower regarding theresidential development of an adjacent parcel of land, commonly called ParcelF, whereby both parties benefit  (whichhas occurred);

 

•              to assume, throughone of our subsidiary LLCs, the responsibilities of the current Resort ownerregarding the administration of the condominium unit rental pool (theday-to-day operation of which shall be subject to a contract with Westin), andas part of this transition we expect that our subsidiary LLC will become asuccessor SEC filer to Golf Host Resorts under Exchange Act rule 15d-5;

 

•              to continue toimprove the relationship with the Innisbrook condominium association; and

 

•              to support anear-term settlement of the lawsuit (of which we are not a party) brought bycertain condominium owners against the Resort owner, which settlement would bein the best interest of the Resort.

 

In the third quarter of 2003 we continued to negotiate for a globalsettlement of claims resulting from the borrower’s default. However, thesenegotiations stalled in October when we received from the Westin Hotel Company(which operates the hotel and conference facilities at the Resort) an updatedInnisbrook forecast for the fourth quarter of 2003 and the calendar year 2004.As disclosed in our press release dated October 20, 2003, the updatedforecast we received from Westin was materially less favorable than forecastswe had received earlier from Westin regarding the same periods. Westin’srevised forecast included

 

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a forecast for golf operations at the Resort prepared by Troon Golf(which currently operates the golf courses at the Resort and which is anaffiliate of Westin). Following our receipt of the revised Westin forecast andthe corresponding 2004 Westin budget, we reviewed the budget methodology andeconomic assumptions underlying the 2004 Westin budget in a series of meetingswith Westin and Troon. The decline in the revised Westin forecast resultedprimarily from fewer than anticipated group bookings at the Resort in 2003 andthe decrease in the number of advance bookings for 2004 as compared to the sametime last year, which led Westin to believe that the adverse economicconditions of the past two years at the Resort would continue throughout 2004.

 

Some of the assumptions underlying our estimate of the participatingmortgage’s value, as recorded on our December 31, 2002 and June 30,2003 statements of net assets, were more favorable than the updated assumptionscontemplated in the revised forecast. Specifically, at that time we had assumedthat the Resort’s recovery would begin in 2004. However,, Westin advised usthat it did not expect any significant improvement in corporate group spendingat the Innisbrook Resort (or other significant new Innisbrook Resort bookings)in 2004, based on the information then available to it, even if the lodgingindustry as a whole does begin to recover in 2004. Thus, while it is too earlyto be certain, based on the asset’s disappointing 2003 performance, and thethen Westin forecast of 2004 performance, which was below our expectations, weface the risk that any economic recovery for this asset will be delayed by ayear or more. In our prior SEC filings we have consistently stated that ourassessment of the participating mortgage’s fair value may decline at somefuture date, based on facts and circumstances prevailing at that time, and thatthe asset may be written-down in future periods. After we received and reviewedthe revised Westin forecast and the 2004 Westin budget and attended the 2004Westin budget review meeting with Golf Host Resorts, Westin and Troon, wedetermined based on the newly received facts that our prior assessment of theparticipating mortgage’s fair value had declined and that a write-down wasnecessary to reflect the new information.

 

***Factors Consideredin Preparing our Revised Estimate of the Resale Value of the Resort.***In our effort to determine the proper extent of the write-down, we consideredthe following information, among other factors.

 

•              ***Booking Information in 2003***. As mentionedabove, Westin’s bookings for the Resort in 2003 were disappointing and the lackof bookings resulted in a significant revenue decline as of year-end 2003 ascompared to the prior year. Based on the Resort’s historical experience, we donot expect to be able to discern any near term 2004 booking trends for theResort until the end of the peak season which typically concludes at the end ofApril. To compound the problem, advance booking data is becoming less useful asa leading indicator of the Resort’s performance because, in response toincreased competition from discount Internet travel sites and other factors,booking windows have narrowed resulting in Resort reservations increasinglybeing booked within shorter time periods in advance of the stay.

 

•              ***Extended Westin Forecasts for the Resort***. Weobtained Innisbrook Resort earnings forecasts from Westin for the years 2004through 2007, which predicted relatively slow, steady growth from the Westinforecasted 2004 levels described above. In general, these long-term Westinprojections do not appear to assume a sharp recovery or rapid rebound from thedepressed performance that the Resort has experienced in 2003. If the economydoes recover strongly in 2004, Westin is assuming only marginal positive impactdue in part to the effect on their 2003 performance of competition from two newresorts in their market.

 

•              ***Discussions with Westin Management****.*Following receipt of Westin’s 2004 through 2007 forecasts we, together withrepresentatives of our financial advisor, met again with Westin representativesto discuss any differences in our view of the asset. The main difference seemsto be that we believe greater potential is possible at the Resort over the nextfew years if Westin broadens the scope of its marketing approach to includerelatively smaller business and personal groups, golf packages, transient staysand vacation bookings rather than focusing primarily on large corporate groupbookings. Westin has informed us that they will attempt to broaden theirmarketing strategy for the Resort. As lender to the Resort owner, at thepresent time, we have no contractual control over how Westin manages theproperty pursuant to its management agreement with the owner (borrower),however, we have proposed modifications thereto pursuant to the proposednegotiated settlement with Golf Host and Westin.

 

•              ***Estimate of Fair Value.*** The single mostimportant factor we considered in arriving at our then revised estimate of theResort’s fair value was the result of a study that we commissioned in July of2003 in anticipation of our taking ownership of the Resort by the end of 2003and needing to allocate the implicit purchase price among different assetcategories on our balance sheet at that time. This study included an estimateof the market value of the Resort’s real estate, an estimate of the fair marketvalue in continued use of

 

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the Resort’s furniture, fixtures and equipment, or FF&E, inventoryand an estimate of the fair value of the Resort’s identified contractualintangible assets. At our request, this study was expanded to include anestimate of the fair value of the Resort’s non-contractual but identifiable intangibleitems. The estimate of the fair market value of each of these asset groups arebased on facts and circumstances known to us as of October 2003.Accordingly, these estimates could change (and they could change in adverseways) based on changes in events and circumstances.

 

***Estimated Value ofthe Participating Mortgage/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 Resort’s resale value as a going concern atthe end of the 2005 holding period) to be $44.2 million. Accordingly, forthe quarter ended September 30, 2003, we recorded a write-down of$15.8 million against the participating mortgage’s December 31, 2002and June 30, 2003 value of $60 million. In arriving at this revisedfair value estimate, we made several assumptions about future events, which maynot occur, including the following:

 

•              we assumed that wewill successfully obtain fee simple title to the Resort (and that thecondominium owners litigation will be concurrently settled) in 2004;

 

•              we assumed that theResort’s performance will begin to recover toward historical trend levels, butthat this operational recovery will not begin at the Resort until 2005 (atleast a year later than previously expected). We believe the timing of theResort’s ultimate recovery (if any) depends heavily upon: the marketing andmanagement skills of Westin (and Troon, as the golf manager, through Westin) asthe Resort’s operator; the restoration of the corporate travel and meetingbudgets to historical levels; and, a recovery in Florida’s resort and lodgingindustry and general improvement in travel, resort and lodging spendingnationwide;

 

•              we assumed that wewill have sufficient liquidity and capital resources to hold and operate theResort through the end of the anticipated holding period. We face the risk thatwe might have insufficient liquidity and capital resources to hold the Resortfor the current or any extended holding period. During the holding period, wecurrently anticipate that our liquidity and capital resources will come from:sales of our remaining five golf courses, representing four separate properties(for which we currently have a purchase agreement for one of these properties,but do not have purchase agreements or letters of intent on the other three ofthese properties); a decision by our board to seek short-term financing (whichhas occurred); and potential positive cash flows from the operations ofInnisbrook and/or our other remaining properties; and

 

•              we assumed that theResort will be operated by Westin, as Resort manager (and Troon, as golfmanager, through Westin), in a manner that generally approaches the level ofoperating performance we believe can be generated by the Resort during the anticipatedholding period. We face the risk that Westin and Troon might not manage theResort at the levels we believe are attainable. We anticipate that suchattainment will depend upon: the marketing and management skills of Westin, asResort manager (and Troon, as golf manager, through Westin) as the Resort’soperator; and the successful implementation of the process to broaden themarketing focus from primarily large corporate group bookings to smallerbusiness and personal groups, golf packages, transient stays and vacationbookings. (Although we expect to have influence over Westin’s operatingdecisions, we have no contractual right to manage the asset and we continue toexpect that the Resort will remain subject to a management agreement withWestin even after we take possession of the Resort. Accordingly, our directability to oversee such a change in marketing focus is limited.)

 

Since our October 20, 2003 press release regarding Westin’s newforecast for Innisbrook, we have received preliminary third-party indicationsof interest regarding a potential acquisition of the Resort, however, we havereceived no firm written offers. Our board might decide to sell our interest inthe Resort prior to the end of the currently-anticipated holding period (i.e., priorto December 31, 2005) in response to a reasonable offer, if afterconsideration of the facts and circumstances at that time our board determinesthat the sale would be in the best interest of our stockholders. However, wecannot presently predict what events, signals, factors or outcomes might causeour board to alter the orderly liquidation strategy in favor of an immediatesale. We face the risk that our efforts to preserve the value of the Resortmight be unsuccessful and, therefore, that we might

 

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ultimately sell our interest in the Resort for less than our currentestimates of its fair value. Finally, it is possible that at some future dateour assessment of the asset’s fair value may change, and the asset may be againbe written-down.

 

As previously discussed, we are seeking tofinalize open issues and legal agreements on the consensual foreclosure ofInnisbrook in the near term, however, we can provide no assurances as to theterms, timing or likelihood of any possible global settlement, if any. If wedecide to pursue judicial foreclosure of the Resort, we expect that it would beexpensive and time-consuming and there is a risk to us that the borrower mightpursue and obtain bankruptcy and/or other judicial protection. We also face therisk that our negotiations with Westin might not be successful. If oursettlement negotiations with Westin do not succeed, but we nonetheless becomethe owner of the Resort, we may become involved in potentially costlylitigation with Westin regarding the effect of the subordination agreement andother issues. Any such litigation would likely focus on the extent, if any, towhich we, as successor owner of the Resort, must assume the borrower’soutstanding liabilities to Westin under the original management agreement,among other issues. Nothing herein shall imply a view that we have any suchobligation or that we do not have defenses to any allegations that we have suchan obligation. Even if we successfully obtain ownership of the Resort, we,along with the 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 Resort’s performance, which is currently hindered inpart by the delay in and/or lack of any meaningful economic recovery in therelevant sectors of the U.S. economy. Because the borrower is insolvent, itcannot generally make distributions to its equity owners. We have also receivedconfirmations (and corresponding unaudited financial statements) from theResort’s management that all cash generated by the business is retained in theoperating entity and is being utilized to cover Resort financial obligations.

 

At this time, no settlement of the essential elements of our disputeswith the borrower has been reached, however, we have an expectation of reachinga comprehensive settlement in the near term. As we previously noted, we facethe risk that we might be unable to reach any consensual resolution orsettlement with the borrower or the other parties. Litigation may ensue, whichmight be protracted and expensive, and even in the event that we prevail in thelitigation, the other parties might not meet their respective obligations tous. Because of the complexity of the issues surrounding the Innisbrook Resort,our efforts to recoup our investment in that asset could take many monthsand/or years. Our board of directors will continue to monitor and evaluate allof our options from time to time in its efforts to preserve stockholder valueand to further implement the plan of liquidation.

 

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 our common stockholders 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.

 

**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 events and considerations leading our board toadopt the plan of liquidation are described in our proxy statement datedApril 6, 2001, and are summarized in 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. The plan of liquidation gives our board ofdirectors the power to sell any and all of our assets without further approvalby our stockholders. However, the plan of liquidation constrains our ability toenter into sale agreements that provide for gross proceeds below the low end ofthe range of gross proceeds that our management estimated would be receivedfrom the 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 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 concernabout our

 

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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 alternatives under consideration at that time included:

 

•              merger of ourcompany with other companies;

 

•              sale of our company;

 

•              issuance by ourcompany of equity in a private placement;

 

•              establishment oracquisition of a management company;

 

•              recapitalization ofour company;

 

•              sale of some of ourcompany’s assets; and

 

•              termination of ourstatus 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. BAScontacted a number of potential buyers or potential merger partners andsolicited bids to acquire our company, however, the proposals that we receivedwere all below our expectations and common stock price at that time. We neverreceived 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 followingfive important factors, among others.

 

The first important factor that the board considered was an oversupplyin the golf course industry in 1999 and 2000. Most of our revenue came fromlease payments made by lessees of our golf courses, and we depended on theability of our lessees to generate sufficient income from golf course operationsto pay their lease payments to us. However, the environment for golf courseoperators and owners, including our lessees, had become increasinglycompetitive over the prior two years. This was primarily a result of thesignificant number of new golf course openings and increases in the overallnumber of golf courses, which offset the growth in participation rates and theoverall 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, in March 1999, Meditrust divested itsportfolio of 45 golf courses, known as its Cobblestone assets, for aggregateconsideration of approximately $393 million, which was approximately $210 millionless than it had paid for those golf courses in 1998. Moreover, two of thelargest golf course operators, Clubcorp, Inc. and American GolfCorporation had reported declines in net income for the first nine months of2000, compared to the same period a year before, with Clubcorp reporting a netloss for the period. Also in 2000, another operator, Arnold Palmer Golf, unableto complete its proposed initial public offering, had been unsuccessfullymarketed for sale. And Family Golf Centers, Inc. an owner and operator ofgolf practice facilities was suffering from liquidity troubles and adeteriorating stock price and, as a result, filed for bankruptcy relief inMay 2000. Finally, Golden Bear Golf, Inc., a diversified golfproducts and services company that went public in August 1996 at $16 pershare, after suffering from cumulative net losses, delisted in July 2000in a going private transaction in which publicly held shares were convertedinto the right 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 for REITs. Ingeneral, the market prices of publicly-traded REIT securities began a declinein mid-1998. The declining investor interest in REIT stocks restricted theability of REITs to obtain public equity. REITs completed very few equityofferings in the public markets from the beginning of 1998 through 2000, andfaced debt markets with significantly diminished liquidity. According to theNational Association of Real Estate Investment Trusts, an industry association,total REIT capital raising through 2000 was only $10.4 billion, comparedto $17.2 billion in 1999, $38.4 billion in 1998 and$45.3 billion in 1997. Although we were able to issue $20 million ofpreferred stock in a direct offering on April 2, 1999, we had been unableto obtain additional public equity since then on acceptable terms. This limitedour ability to complete acquisitions, fund growth opportunities, improve our balancesheet and enhance stockholder value.

 

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A third important factor that our board considered was the restrictionsour corporate structure placed on our operations. As a specialty REIT, we weregenerally prevented by law from managing our own assets. Instead, we leased ourproperties to independent lessees. The inability of a REIT to operate its ownspecialty properties can result in the problem known as lessee leakage. Thisrefers to the fact that the profit from successful operation of the REIT’sassets “leaks out” to the lessee/operator rather than accruing to theREIT/owner. We attempted to address the problem of leakage by entering intoparticipating leases with our lessees in which the rent lessees pay includes anincome-related component. Our participating leases were designed to provide uswith limited participation in the economic upside from golf course operations,while leaving the economic downside risk with the lessee. However, many of ourlessees were special purpose entities with limited capital and were unable tofund their rent payments from any source other than operations. If the lessee’soperations were not sufficient to pay the fixed minimum lease payments, thelessee would likely default on its participating lease obligations. We intendedto protect 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, our golf course acquisitions were structured sothat the seller would contribute its golf course to our operating partnershipin exchange for operating partnership interests, or OP units, and our operatingpartnership would then lease the golf course back to a newly-formed affiliateof the seller. Our collateral for the lessee’s obligations usually consisted ofa pledge of the seller’s OP units, with a value generally initially equal toapproximately 15% of the purchase price. This collateral generally approximated16 months of rent. The OP units are convertible into our common stock and,thus, their value fluctuates with our common stock price. As our stock pricedeclined, beginning in mid-1998, the value of our collateral at each golfcourse steadily declined. This decline both made defaults by the lessees morelikely and reduced the value of the collateral that we could turn to in theevent of a lessee default.

 

A fourth important factor considered by ourboard during its then review of our strategic alternatives was that material defaultsby lessees had occurred under participating leases at a number of our golfcourses. In 1999, several of our lessees generated losses, and byMarch 2000, we had declared events of default under leases against ourlessees at 12 golf courses (though the defaults at seven such golf courses werecured by their respective lessees). By the time we solicited stockholders’approval for the plan of liquidation, we had taken possession of five of ourgolf courses from the lessees as a result of defaults by those lessees thatresulted in eviction or voluntary relinquishment of the golf course by thelessees. In addition, at that time, we believed, based on information from thelessees, that the financial performance of the lessees of 25 of our golfcourses was inadequate to support the payments required under the respectiveparticipating leases. The potential for additional defaults under ourparticipating leases reduced the value of our golf courses and of our companyto a potential buyer. In addition, lease defaults reduced the amount that wecould borrow under our credit agreement, pursuant to a formula in the creditagreement. Under laws applicable to REIT’s, if we terminated a participatinglease as a result of a lessee default, we were faced with the options ofleasing the golf course to a new lessee, operating the golf course through ataxable subsidiary, engaging a management company to manage the golf course, orselling the golf course within 90 days in order to prevent the operatingincome from becoming disqualified income for REIT tax purposes. If we were tocontinue to operate the golf course and received too much disqualified incomeduring a taxable year, we would lose our REIT status (unless we were entitledto relief under 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 in our operating income triggered defaultsunder our credit agreement. It was also likely to result in our inability tocomply with a financial covenant in our charter governing the rights of ourpreferred stock, which might have then prevented us from selling assets.Moreover, we were concerned that an inability to repay our obligations underour credit agreements by selling assets might induce our lenders to accelerateour obligations under the credit agreement, which could have resulted in a bankruptcyfiling.

 

##### ***Adoption and Initial Implementation 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 board authorized us to enter into non-binding orbinding letters of intent and definitive agreements for the sale of one or moreof our golf courses.

 

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In connection with the plan of liquidation,we entered into a voting agreement with our sole preferred stockholder, AEWTargeted Securities Fund, L.P., or AEW. Under the voting agreement, AEW agreed,among other things, to vote in favor of the plan of liquidation. We agreedunder the voting agreement, in the event that common stockholders approve theplan of liquidation and the agreement is not otherwise terminated, to redeemall of the shares of Series A preferred stock for $25 per share plusdividends accrued and unpaid thereon through the date of the final redemptionpayment. We agreed to so redeem the Series A preferred stock promptlyafter we determine in good faith that we have received sufficient net proceedsfrom the disposition of our assets and/or operations to redeem all of thepreferred shares without violating any legal or contractual obligations. Wefurther agreed that after paying dividends on the common stock for the firstand second quarter of 2001, each in an amount not to exceed $0.25 per share, wewould make no further regular dividend distributions on the common stockwithout AEW’s consent until the preferred stock was redeemed, other thandistributions required to maintain our status as a REIT and other distributionsthat we might be required to make to avoid the payment of certain taxes resultingfrom the sale 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-holeequivalent) golf courses leased by Legends. In addition, single-purposeaffiliates of Legends would be released from their obligations to repay limitedrecourse working capital loans in the aggregate amount of approximately$6.6 million. Pursuant to the purchase and sale agreement, we could acceptsuperior offers for these golf courses (other than the five Myrtle Beach golfcourses) upon payment of a break-up fee to Legends. Because Mr. Youngcontrolled Legends and was at that time a member of our board, a conflict ofinterest would have existed if Mr. Young participated in the board’sconsideration and/or decision to approve the sale of these golf courses toLegends. The special committee, which was aware of Mr. Young’s interest inthe Legends transaction, unanimously recommended that our board approve thetransaction between us and Legends. In addition, both BAS and Houlihan LokeyHoward & Zukin Financial Advisors, Inc. advised the specialcommittee that, as of the date of their opinions, the consideration to bereceived by our operating partnership in the Legends transaction was fair toour operating partnership from a financial point of view. Mr. Young didnot participate as a board member in any of the board discussions regarding theLegends agreement, and he recused himself from all board discussions afterSeptember 27, 2000. Mr. Young did appear before the board in hiscapacity as a prospective purchaser of the Legends golf courses. Thenegotiations among us, Legends and Legends’ lenders were protracted and did notresult in a signed purchase and sale agreement until February 25, 2001.The purchase and sale agreement was effective as of February 14, 2001.Mr. Young was represented by separate counsel during these negotiations. Mr. Youngresigned from our board immediately after the Legends purchase and saleagreement 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. Ourproposed plan of liquidation was approved by a 98% affirmative vote of theshares present or represented by proxy at our special stockholders meeting(constituting a 77% affirmative vote of all outstanding common shares) onMay 22, 2001. One hundred percent of our preferred stock voted in favor ofthe plan of liquidation. As required by generally accepted accountingprinciples, or GAAP, we adopted the liquidation basis of accounting for allaccounting periods beginning on or after May 22, 2001.

 

##### ***Annual Updates to the 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 solicitingstockholders’ approval for the plan of liquidation, dated April 6, 2001,management then 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’sestimate at that time was based on numerous assumptions, notably includingasset-by-asset estimated price ranges. (For assets covered by definitivepurchase and sale agreements or letters of intent at that time, the thenestimates were based on the prices specified in those documents, rather than arange.) These and other management estimates were included within a financialmodel developed with the assistance of Banc of America Securities, LLC in orderto produce our overall estimated range of liquidating distributions. We use theterm “Original 2001 Range” to refer to this 2001 projection of the range withinwhich total liquidating distributions to common stockholder were contemplated.(As the context requires, the term “Original 2001 Range” also refers to thecomponent estimate prices or price

 

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ranges for one or more particular golf courses, all of whichcontributed to the overall projected range of liquidating distributions.) 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 planof liquidation constrains our ability to enter into sale agreements thatprovide for gross proceeds below the low end of the golf course’s respectiveOriginal 2001 Range absent a fairness opinion, an appraisal, or other evidencesatisfactory to our board of directors that the proposed sale is in the bestinterest of our company and our stockholders.

 

 ***Houlihan Lokey’s 2001 Range****.*  At the time management prepared the Original2001 Range, one of our financial advisors, Houlihan Lokey, estimated thatliquidating distributions to common stockholders would be lower, in the rangeof $9.53 to $13.26 per share. We refer to this projection as “Houlihan Lokey’s2001 Range,” which term also refers to its component per-course estimated saleprice ranges, as the context requires.

 

 ***Updated 2002 Range****.*  Conditions in the golf resort industry declined significantly inlate 2001 and early 2002 primarily as a result of a decline in travel andleisure spending after the September 11th terrorist attacks. Mostimportantly for us, the borrower under our participating mortgage went intopayment default, significantly reducing the resale value of our interest, asthe lender, in our mortgage loan secured by the Innisbrook Resort. In light ofthese changed conditions, during the first quarter of 2002 our board re-engagedHoulihan Lokey to help the board analyze, among other things, whether it wouldbe preferable to sell the participating mortgage immediately, in its distressedcondition, or seek to restore the operating performance of the InnisbrookResort first, before liquidating our interest therein. As explained above (see“Our Participating Mortgage Secured by the Innisbrook Resort”), based in parton Houlihan Lokey’s report, the board decided that seeking to restore theResort’s performance would be in our stockholders’ 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 inpart on Houlihan Lokey’s report dated March 15, 2002, in the Spring of2002 we projected at that time that our total liquidating distributions tocommon stockholders would be within the range 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 assumedthat we, along with the Innisbrook Resort’s operators, namely Westin and TroonGolf, would successfully achieve a modest recovery, based on historicalfinancial results, in the financial performance of the Innisbrook Resort; thatall of our golf course assets would be sold by the end of 2002 (other than ourinterest in the Innisbrook Resort, which this estimate assumed would beliquidated in 2005); and that the condominium owner litigation at theInnisbrook Resort would be resolved by the time that we sold those properties,among many other limiting assumptions 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 HoulihanLokey’s report dated March 18, 2003, and subject to many limitingassumptions and uncertain estimates, we projected at that time that totalliquidating distributions to our common stockholders over the remainder of ourorderly liquidation would be within the range 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). While there were several factors thatcontributed to the net variance, the primary reason for the net decrease wasdue to the reduction in the expected net free cash flow from Innisbrook for thefour year period 2002 through 2005 (including a significant number of whichwere 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 severalassumptions about future events, including, among others, the following:

 

•              an assumption thatwe would successfully obtain ownership of the Innisbrook Resort;

 

•              an assumption thatwe, in conjunction with the Resort’s operators, namely Westin (and Troon Golf,through Westin), would be able to realize a modest recovery, based onhistorical financial results, in the financial performance of the InnisbrookResort by year-end 2005 (which implicitly assumes that economic recovery wouldbegin sufficiently in advance of that date to support regular business andgroup leisure activity at the Innisbrook Resort by late 2005); and

 

•              an assumption thatwe would not be subject to any material liability under any of the lawsuitsthat we were defending at that time (February 2003).

 

 ***No New Range of Liquidating Distributions****:*  We have recorded the value of our golfcourses and our participating mortgage *(discussed in detail in an earlier section titled“Factors Considered in Preparing our Revised Estimate of the Resale Value ofthe*

 

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*Resort”)*,at our current best estimates of fair value. However, at the present time we donot believe 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 to the following caveats, we do, however,believe that it may be possible to do so in future periods as the quality andreliability of information necessary to make estimates of cash flow and,correspondingly, value become more reliable. However, we can make no assurancesthat the quality and reliability of all such necessary information will developto the degree necessary to allow us to derive a reliable estimate of the rangeof liquidation distributions.

 

Among other reasons, 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 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 Resort. Thefactors giving rise to this uncertainty include, without limitation, thefollowing:

 

•              the fact that wehave not been able to obtain accurate forecasts from Westin regarding operatingperformance, among other factors, including, without limitation, the cash flowand bookings at the Resort caused by compressed group booking windows,unexpected group cancellations (caused by outside circumstances unrelated tothe Resort), unexpected group slippage (groups filling less rooms than theyoriginally book), and increased competition in the marketplace. According toindustry sources, corporate restrictions on travel have hurt bookings and meetingbusiness has been soft and many companies are now in the habit of bookingevents much closer to the time they need the space than in past years;

 

•              the fact that thefinancial performance at the Resort has not begun to realize any positiveimpact from the economic rebound that has begun and that the Resort presentlyseems to be experiencing a modest downward trend, which is somewhat contrary torecent industry trends. Westin has evaluated and restructured their salespersonnel as well as implemented new sales and marketing programs in an effortto reverse the Resort’s current trend and to realize the modest recoverycurrently being seen in the industry;

 

•              the fact that sincethe Resort is managed by a third-party management company, we presently do nothave control and have only limited influence in the management or performanceat the Resort, and that fact will not change after we take title to the Resort,whether pursuant to a global settlement or a foreclosure of the loan we hold atthe Resort, because the loan, including the collateral interest in the realestate, are effectively subordinate to the management agreement with Westin;

 

•              the fact that theglobal settlement related to the pending disputes with (i) our borrowerwho is currently in default, and (ii) the Resort manager, Westin, have notbeen financially resolved or finally concluded, even though we contemplate theresolution thereof this year;

 

•              the fact that thelitigation between our borrower and the homeowners association at the Resort(of which we are not a party) continues to cloud the future of the Resort froma valuation perspective, notwithstanding periodic, interim successes in thelitigation by our borrower as reported to us by our borrower;

 

•              the fact of thethreat of litigation with our borrower and/or Westin or the timing of ourclosing on the global settlement, creates uncertainty insofar as corporatemeeting planners are concerned when contracting for large corporate groups andwhich is used as a competitive advantage by our competitors when marketingtheir resort against the Resort;

 

•              the fact that wehave not as yet received any firm offers from third-parties desiring to acquirethe Resort which are of the type to allow us to reliably establish a value forthe Resort; and

 

•              the fact ofcontinued threats of terrorism and the impact thereof on the travel and lodgingindustry.

 

As a result of the foregoing, at the presenttime, we will continue to refrain from making any adjustments (positive ornegative) to any earlier reported range of distributions or proposing a newrange. 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.  However, we can make no assurances that thequality and reliability of all such necessary information will develop to thedegree necessary to allow us to develop a reliable estimate of the range ofliquidation distributions.

 

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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. We currently expect liquidating distributionsto our common stockholders to begin after the sale of the Innisbrook Resort,originally planned for late 2005 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. The historical projections are based on numerousestimates and limiting assumptions, including those listed above, any or all ofwhich might prove to be incorrect in materially adverse ways. None of theprojections are based on any appraisals of any of our assets, except Innisbrookwhich is based on a commissioned asset study, or any independent litigationrisk assessments. The actual amount of our liquidating distributions could belower than our historical projections (we are not providing any currentprojections), and the actual timing of our liquidating distributions could belater than our historical projections. Accordingly, you should not place unduereliance on the assumptions or historical projections above. Important factorsthat could cause such variances are discussed herein under the caption “Risksthat might Delay or Reduce our Liquidating Distributions.”

 

Moreover, preparing financial projectionssuch as those above is difficult and time consuming. Except as may be requiredby applicable law, we have no current intention to produce any further updatesto our projected range of liquidating distributions. In the future, the merefact that we have not updated our historical projections does not indicate thatwe continue to endorse those historical projections or that they have notdeclined further; in fact, we believe the historical projections may be morefavorable than the current facts if we were able to ascertain the currentfacts. All projections are inexact and subject to numerous risks anduncertainties. You should not place undue reliance on any projections.

 

##### ***Progress of our Liquidation Compared to our Original Projections***

 

As of May 7, 2004, we have sold 29 of our 34 properties. (Statedin 18-hole equivalents, we have sold 38 of our 47 golf courses). Any equityredemption component of each sale price is valued as agreed upon by the partiesat the time of sale. In the aggregate, our gross sales proceeds of$301.4 million are within the combined per-course ranges for the golfcourses sold to date, as estimated during the preparation of Houlihan Lokey’s2001 Range. However, our gross sales proceeds are $15.6 million, or 4.9%,below the low end of the combined Original 2001 Range. Of the twelve propertiesthat have been sold below the low end of the Original 2001 Range, all but twowere sold after September 11, 2001 (four in late 2001, three in 2002 andfour in 2003). The events of September 11th, as well as thecontinuing decline in the economy after that date, negatively impacted ourability to close sales transactions within the originally contemplated range ofprices. Although no fairness opinions or appraisals were obtained, based on theboard’s observations of the environment in which we and the nation wereoperating in at the time of each sale and other evidence regarding each salebelow the low end of the range, our board determined that each of these twelvetransactions at prices below the Original 2001 Range was fair to, and in thebest interest of, the company and our stockholders.

 

For the period January 1, 2003 through May 7, 2004, we havedisclosed comparisons of asset sale prices primarily against the Updated 2003Range.  For the remainder of 2004, weintend to continue to disclose price comparisons (if at all) for the propertiesremaining 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 our common stockholders 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 assetsof $26,218,000 at March 31, 2004 result in a liquidation distribution per shareof $3.58.  The $3.58 is based on the netassets at a particular point in time (i.e., March 31, 2004) and does nottake account of our corporate overhead expenses or the potential Resortoverhead expenses which we expect will arise in the event that we assumeownership of the Resort during our anticipated holding period, but suchcorporate expenses will impact our ultimate liquidating distributions to ourholders of common stock.  The $3.58 alsodoes not take account of any positive operating cash flows that may be realizedfrom any of our golf course assets, including the potential positive cash flowsthat may be realized from the Resort in the event we assume ownership thereofwhich will also impact our liquidating distributions to our holders of commonstock.  The $3.58 is derived by dividingthe net assets of $26,218,000 less loans to officers of $211,000 by the numberof shares of common stock and common operating partnership units outstanding(7,777,000 less 506,000) after consideration of those shares that will becancelled prior to the distribution of the net assets, which total 506,005,described as follows (i) 365,380 shares of common stock owned by an affiliateof the borrower under the participating mortgage at the Resort and pledged tous as collateral under the participating mortgage, (ii) 55,625 shares of commonstock pledged to us as security for the

 

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payment of our executive officers’ promissory notes, and (iii) 85,000shares of common stock pledged to us as security for the payment andperformance of the obligations and liabilities of the pledgor under a commonstock redemption agreement executed concurrently with the sale of Royal NewKent 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 of commonstock pursuant to the plan of liquidation is less than $10.74 per share.

 

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

 

The followingchart identifies each of our unsold properties:

 

**Properties Held for Sale as of May 7, 2004**

 
| **Property**                               |   | **Location**    |   | **18-Hole  Equivalent** |   |
|--------------------------------------------|--------|-----------------|--------|-------------------------|--------|
|                                       |   |            |   |                    |   |
| Black Bear                                 |   | Orlando, FL     |   | 1.0                     |   |
| Wekiva                                     |   | Orlando, FL     |   | 1.0                     |   |
| Innisbrook Participating Mortgage          |   | 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 May 7, 2004, we have entered into the following arrangement forthe disposition of one of our golf courses. This disposition is pending and weface the risk that it might not occur in the time and manner anticipated. We donot intend to issue any updates regarding this arrangement unless and until aclosing occurs. After we enter into a purchase agreement, the buyer’sobligation to close is often subject to conditions, some of which might bewithin the buyer’s control. Accordingly, this sale could fail to close, inwhich case we would attempt to locate an alternate buyer and enter a newpurchase agreement or seek to renegotiate the sale with the original buyer. Anysuch alternate or renegotiated transaction might be on terms less favorablethan described below.

 

 *Tierra Del Sol Sale Agreement.*  On January 27, 2004, we entered into adefinitive agreement for the disposition of the Tierra Del Sol Country Club toFalcon Ridge Development, LLC, for a price of $1.775 million, however, theproceeds of this sale are subject to the Agreement for Marketing and Joint Saleof Property whereby 17.5% of these proceeds will be paid to the Estate ofTerrence J. Mulvihill and Golf Classic Resorts, LLC, the owner of the waterrights and the executive 9-hole golf course at Tierra Del Sol. The buyer willalso assume a liquor license note payable for $125,000. Under the terms of thesale agreement, the purchase price will be paid in cash at closing, subject toclosing conditions and adjustments. The proposed buyer has requested an extensionto complete the due diligence phase of the purchase process.  Assuming completion of the diligence phasewithin the extension timeline, the closing is expected to occur beforeMay 31, 2004.

 

## **Application of CriticalAccounting Policies**

 

##### ***Liquidation Basis of Accounting***

 

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 real estate pledged as collateral under ourparticipating mortgage note receivable and the five golf courses (fourproperties) that we own and manage. Our most significant estimate is the fairvalue of our interest in the Innisbrook Resort, which was determined aspreviously described under the section titled “*Factors Considered in Preparing ourRevised Estimate of the Resale Value of the Resort”*. The valuationof our four other properties is based on

 

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estimates of sales values based on indications of interest from themarketplace, certain assumptions by management specifically applicable to eachproperty, and on the property value ranges.

 

##### ***Estimated Liquidation Value of our Participating Mortgage NoteReceivable on the Innisbrook Resort.***

 

We hold a participating mortgage, as the first lender, secured by theInnisbrook Resort. The borrower is in default under the mortgage. Our estimateof the fair value of our interest, as lender, in the participating mortgage, asrecorded on our books prior to September 30, 2003, was $60 million.This value was toward the low end of the valuation range estimated by HoulihanLokey in its March 2003 valuation report (the low end of Houlihan Lokey’sorderly liquidation range for this asset was $58.0 million and the highend of this range was $70.4 million). The March 2003 valuation rangeassumes, among other things, that we will acquire direct ownership of theResort and that the Resort will successfully realize a modest recovery infinancial performance levels, based on historical results, within the following30-month period ending on or about December 31, 2005. As part of itsvaluation process, Houlihan Lokey also analyzed the immediate liquidation valueof our lender’s mortgage interest in the Innisbrook Resort, which its March 2003report estimated to be between $40.5 and $47.3 million (compared to anestimate of between $45 and $50 million in the March 2002 report).Based on the then current facts and circumstances, we recorded a write-down tothe Resort’s value of $15,760,000 in the three months ended September 30,2003 and the value of our lender’s mortgage interest in the Innisbrook Resortwas then recorded and continues to be recorded at March 31, 2004 at$44.2 million on our balance sheet.

 

##### ***Reserve for Estimated Costs During the Period of Liquidation***

 

Under the liquidation basis of accounting weare required to estimate and accrue the costs associated with implementing theplan of liquidation. These amounts can vary significantly due to, among otherfactors, the timing and actual receipt of proceeds from golf course sales, thecosts of retaining personnel and others to oversee the liquidation, includingthe costs of insurance, the timing and amounts associated with dischargingknown and contingent liabilities and the costs associated with cessation of ouroperations. These costs are estimated and are expected to be paid over theliquidation period.

 

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

 

With respect to the golf courses that we arecurrently managing, revenue from green fees, cart rentals, food and beveragesales, merchandise sales, and range income are generally recognized at the timeof sale. Membership dues are recognized ratably over the applicable 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 March 31, 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 ofoperations for the three months ended March 31, 2004 and 2003***

 

For the threemonths ended March 31, 2004 and 2003, we recognized $1,596,000 and $2,886,000,respectively, in revenue from the operations of the golf courses that we manageand the participating leases that were formerly in place.  The decrease in revenues of $1,290,000,or  45%, is due to lost rental revenueof approximately $452,000 from the sale of Eagle Ridge (3.5 golf courses) thatwas sold in January 2003 together with $935,000 in lost operating revenue from3.5 golf courses that we managed and subsequently sold in 2003 (1.0 in January2003, 1.5 in April 2003 and 1.0 in June 2003), with the most significant beingSandpiper.  These decreases were offsetby an increase of $97,000 in the revenue from the operations of the 5.0 golfcourses that were managed throughout the three months ended March 31, 2004 and2003.  Revenue from the operations ofthe 5.0 golf courses that we managed during the three months ended March 31,2004 totaled $1,596,000.  For the sameperiod in 2003, we managed 8.5 golf courses from which we recorded $2,434,000in revenue from managed golf

 

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course operations.  Of these 8.5golf courses, 5.0 were also managed during this period in 2004 and 3.5 weresold prior to the first quarter of 2004.

 

Expensestotaled $1,711,000 and $3,036,000 for the three months ended March 31, 2004 and2003, respectively.  The period overperiod decrease was $1,325,000, or 44%, of which $984,000 represents thedifference between the direct operating expenses of $1,321,000, in theaggregate, from the 5.0 golf courses that we managed during the three monthsended March 31, 2004 compared to $2,305,000 in direct operating expenses of the8.5 golf courses that we managed (for varying periods of time) during the threemonths ended March 31, 2003. The net operating income for the managed coursesfor the three months ended March 31, 2004 and 2003 was $275,000 and $129,000,respectively.  As noted above in therevenue discussions, we managed the 5.0 golf courses that we currently stillown throughout the periods ended March 31, 2004 and 2003.  In the aggregate, these five golf coursesrecorded net income of $275,000 for the three months ended March 31, 2004,while they recorded a net loss of $7,000 for the three months ended March 31,2003.  The change in the aggregateresults period over period of $282,000 was due to a 6% growth in aggregaterevenue and a 12% decrease in aggregate expenses (which is attributed almostsolely to expense reductions at Tierra Del Sol located in Belen, New Mexico).

 

 Subsequent to the period endedMay 22, 2001 (the date of our shareholders’ approval of our plan ofliquidation), we adopted the liquidation basis of accounting in accordance withthe requirement that we do so which requires that we accrue all anticipatedexpenses associated with our execution of the plan of liquidation.  Therefore, the majority of our expensesincurred in the three months ended March 31, 2004 and 2003, respectively, werespecifically related to items that we provided for in our liquidation accrual.The general and administrative expenses incurred during the three months endedMarch 31, 2004 and not specifically related to the plan of liquidation andaccrued for in our liquidation accrual were approximately $390,000. Of thisamount, approximately $225,000, or 58%, was salaries and benefits, $56,000, or14%, was general counsel legal fees not specifically related to the plan ofliquidation, $28,000, or 7%, was shareholder service related fees and expensessuch as board fees and the remaining $81,000, or 21%, included rent, utilitiesand office expenses, general audit and tax fees, travel and all other operatingexpenses.  This compares to general andadministrative expenses of $731,000 incurred during the same period in2003.  As we continue to liquidate ourassets, we expect further, but more minor in nature, general and administrativeexpense reductions.  Of this amount forthe three months ended March 31, 2003, approximately $379,000, or 52%, wassalaries and benefits, $196,000, or 27%, was general counsel legal fees notspecifically related to the plan of liquidation, $45,000, or 6%, wasshareholder service related fees and expenses such as board fees and theremaining $111,000, or 34%, included rent, utilities and office expenses,general audit and tax fees, travel and all other operating expenses.

 

For the threemonths ended March 31, 2004, interest expense was $19,000 compared to $821,000for the three months ended March 31, 2003. The decrease of $802,000 is due tothe fact that we paid in full the outstanding balance under our credit facilityon June 19, 2003.  The interest expenseof $19,000 for the three months ended March 31, 2004, 2003 represents $2,000for a partial month of interest on our revolving credit line with TextronFinancial Corporation and $17,000 in interest accruing to our executiveofficers on their remaining earned milestone payment.

 

We accrued aquarterly preferred dividend of $625,000 and $462,500 for the three months endedMarch 31, 2004 and 2003, respectively. The interest rate on the preferred stock increased to 12.5% from 9.25%effective on July 22, 2003 (see further discussion below under the caption “*Cash flowsfor the three months ended March 31, 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 on suchdate to facilitate the plan of liquidation) (see further discussion below underthe caption *“ContractualObligations, Contingent Liabilities and Commitments”*).  These shares were valued at the 10-daytrailing stock price of $2.32 for a total redemption value of approximately$333,000.  We applied this amount to theoutstanding loan balance and we cancelled the remainder of the loan balance(which, by its terms was non-recourse and, thus, following our receipt of allof the collateral, was effectively unsecured and uncollectible).  The remainder of the unreserved loan balanceof approximately $214,000 was written off against the “other” category of theliquidation accrual.

 

As a result of the foregoing, we recorded anet change in net assets available to holders of common stock and OP unitholders of ($1,065,000) compared to ($1,378,000) recorded for the three monthsended March 31, 2004 and 2003, respectively.

 

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**Adjustmentto 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 were adjustedto their estimated fair value and our liabilities, including estimated costsassociated with implementing the plan of liquidation, were adjusted to theirestimated settlement amounts. The minority interest in our operatingpartnership was reclassified to net assets because the holders of commonlimited partnership units, which we call OP units, do not have preferentialdistribution rights over the common stockholders.

 

Real estate held for sale includes the real estate pledged ascollateral under our participating mortgage note receivable and the five golfcourses (at four properties) that we own and manage. As of March 31, 2004,the valuation of the 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 Resort’s furniture, fixtures and equipment, or FF&E, and an estimate ofthe fair value of the Innisbrook Resort’s identified contractual and non-contractualbut identifiable intangible assets. The valuations of our five golf courses arebased on current contracts and estimates of sales values based on indicationsof interest from the marketplace, certain assumptions by managementspecifically applicable to each property and on the property value ranges.

 

For the threemonths ended March 31, 2004, an adjustment of $19,000 was included in theconsolidated statement of changes in net assets to reflect the capitalexpenditure reserve for the golf courses that we currently manage.  There were no other liquidation basis ofaccounting adjustments for the three months ended March 31, 2004.

 

**TaxConsideration**

 

We do notcurrently project any income tax liability for the remainder of our liquidationas a result of our net losses for 2002 and 2003 and our net operating losscarryforwards, which we currently expect to be sufficient to offset any taxableincome for the remainder of our liquidation.

 

**Liquidity and Capital Resources**

 

Our ability to meet our obligations in the near term is contingent uponour ability to sell our remaining four properties (except Innisbrook), torealize positive operating cash flow from the golf courses that we manage, torealize positive operating cash flows from Innisbrook (upon and assuming wetake control thereof), or secure short-term financing (which has occurred).Currently, our only sources of cash flow are the monthly interest income wereceive on a note receivable and a negligible distribution of net operatingincome from the four golf courses we own and manage; therefore, onMarch 18, 2004, we entered into a loan agreement and related mortgage withTextron Financial for a revolving line of credit with a maximum permissibleoutstanding loan amount not to exceed $2,100,000. This loan is collateralizedby a security interest in our golf courses in Columbia, South Carolina, CountryClub at Wildewood and Country Club at Woodcreek, collectively known asStonehenge. The term of the loan is for two years and the interest rate is theprime rate plus 1.75% per annum paid monthly. We paid a one-time commitment feeto Textron Financial of $42,000 to obtain this credit line and we will pay toTextron a monthly fee of .25% per annum of the unused line balance in arrearson the first day of each month for the immediately preceding month and on thematurity date. This loan requires that the operations at Stonehenge for theimmediately preceding twelve month period is sufficient to meet a debt servicecoverage ratio, as defined in the mortgage of at least 1.20, as measuredmonthly. The funds drawn under this credit line will be used for workingcapital as needed from time to time as we continue to proceed through the planof liquidation. The principal balance outstanding under the revolving line ofcredit as of May 7, 2004 is approximately $1,090,000. The initial drawresulting in this outstanding balance includes estimated amounts for workingcapital needs and closing costs, such as documentary stamp taxes that will bedue upon the expected closing of the global settlement for the InnisbrookResort. Additional draw requests are permitted monthly on the first day of eachmonth commencing with May 1, 2004.

 

We currently estimate that if we are able to sell our remaining assetsas planned and we are able to maintain the revolving line of credit to addressour cash needs between asset sales we will be able to pay our obligationspursuant to the plan of liquidation, however, there can be no assurances of theoutcome of such plan or the accuracy of our estimates.

 

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##### ***Cash flows for the three months ended March 31, 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 December 31, 2003, we haveaccrued and not paid ten quarters of Series A preferred stock dividends(including the dividend otherwise payable in respect of the quarter endedDecember 31, 2003). Under our Series A charter document, because wenow have at least six quarters of accrued and unpaid Series A preferredstock dividends, 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 accrue such dividends and thepreferred shares shall remain outstanding until such time as we have cashavailable to redeem the Series A preferred stock, at which time we intendto redeem the Series A preferred stock.

 

Cash flow used in operating activities for the three months ended March31, 2004 was $378,000 compared to cash flow used in operating activities forthe three months ended March 31, 2003 of $1,268,000. The primary components ofthe cash fluctuations in operating activities were liquidation liabilitypayments and adjustments and working capital changes. The decrease in cashflows from operating activities for the three months ended March 31, 2004 wasprimarily due to the lost revenue, either from rents or direct revenue fromoperations, from the 3.5 golf courses sold in January of 2003 (Eagle Ridge),and the 1.0 golf course (Sandpiper) sold in June of 2003. Also affecting cashflow from operations were changes in other assets and liquidation liabilities.The liquidation liabilities were accrued as of the approval of our plan ofliquidation on May 22, 2001 and, subsequently adjusted based on paymentsand updated estimates of future liabilities. The decrease in the liquidationliabilities from December 31, 2003 is primarily due to insurance premiumpayments made related to the renewal of our directors and officers insurancepolicy on February 7, 2004 and professional fees incurred in connection withour plan of liquidation.

 

We invested approximately $15,000 in golf course capital expendituresat the golf courses that we managed during the three months ended March 31,2004 compared to $61,000 in the three months ended March 31, 2003. We didnot have any cash flow provided by investing activities in the three monthsended March 31, 2004; however, our investing activities for the first threemonths of 2003 provided $39,564,000 in cash flow from the sales of 4.5 golfcourses.  Additionally, we had interestincome of $8,000 on a note receivable originally taken in connection with thetermination of a participating lease. During the three months ended March 31,2003, we received $20,000 in payments on two notes receivable originally takenin connection with the termination of participating leases.

 

During the three months ended March 31, 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 $39,439,000 to pay down ouroutstanding debt under our credit agreement which was paid in full and retiredwith our last payment on June 19, 2003.

 

**OffBalance Sheet Arrangements**

 

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

 

As of March 31, 2004, we have no unconsolidated subsidiaries.

 

We do not have any relationships withunconsolidated entities or unconsolidated financial partnerships of the typeoften referred to as structured finance or special purpose entities, i.e.,unconsolidated entities established for the purpose of facilitating off-balancesheet arrangements or other contractually narrow or limited purposes. Further,we have not guaranteed any

 

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obligations of unconsolidated entities (except as described below) nordo we have any commitment or intent to provide additional funding to any suchentities (except potentially in connection with the Innisbrook Resort, asdiscussed previously). Accordingly, we believe we are not materially exposed toany market, credit, liquidity or financing risk that could arise if we hadengaged in such relationships.

 

We have guaranteed an equipment operating lease for the InnisbrookResort (with a maximum exposure of $145,000). This is an operating lease withmonthly payments of $3,033 per month (made by Innisbrook) that expires in 2007.We have also guaranteed a second equipment operating lease for the InnisbrookResort (with a maximum exposure of $162,000). This is an operating lease withmonthly payments of $3,246 (made by Innisbrook) that expires in 2007.

 

##### ***Innisbrook Resort Financial Performance***

 

We believe one of our most valuable assets at this point in time is ourinterest as the lender in the participating mortgage secured by the InnisbrookResort. The third-party borrower is in default under the mortgage. We areengaged in discussions to obtain ownership of the Innisbrook Resort, togetherwith the business and assets of the Resort’s owner, Golf Hosts Resorts (and itsvarious related parties associated with operations at the Innisbrook Resort).The consolidated financial results of these entities are discussed below. Uponthe closing of any such transaction, we expect to include these newly acquiredsubsidiaries within our consolidated financial reporting group.

 

Even though we have not yet obtained ownership of the InnisbrookResort, the asset study prepared by third-party experts in October 2003included a then estimate of the market value of the Resort’s real estate, anestimate of the fair market value of the Resort’s furniture, fixtures andequipment, or FF&E, and an estimate of the fair value of the Resort’sidentified contractual intangible assets. At our request, this study was expandedto include an estimate of the fair value of the Resort’s non-contractual butidentifiable intangible items. The estimate of the fair market value of each ofthese asset groups was based on facts and circumstances known to us as ofOctober 2003. Accordingly, these estimates could change (and they couldchange in materially adverse ways) based on changes in events andcircumstances. As earlier discussed, at the present time, we do not believe weare able to reliably project the value of the Resort and, correspondingly, theamount of the total liquidating distributions we will make to our commonstockholders over the remainder of the orderly liquidation period. We haveearlier discussed the reasons for this conclusion. Accordingly, you should notrely on the valuations or ranges earlier provided as representative of ourcurrent views on the subject. We have identified our valuation of theparticipating mortgage as a critical accounting estimate, and it is discussedbelow under the caption  *“Applicationof Critical Accounting Policies.”*

 

We expect to assume ownership at the Innisbrook Resort in the near termsubject to the possible completion of new Westin and Troon managementagreements. While the economy in general appears to be slowly rebounding, theResort continues to be impacted by effects of the economic recession andincreased competition. Throughout the last year and a half, corporate meetingplanners have been booking in shorter booking windows (45-90 days fromdate of stay where historically it had been 6-12 months prior to date ofstay with some windows even wider), however, there have recently been someindications that booking windows may gradually be returning to traditionalbooking patterns for a destination resort. However, Corporate planners may continue to be more focused on planningaround convenience 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).  Also,recreation and social aspects of the corporate travel budgets have not yet beenrestored to historical levels, which 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 2000 levels (although it is tooearly to be certain), the recovery of the corporate group business segmentcontinues to be a challenge.  At thistime, we do not expect to see any marked improvement until the latter half of2004 or possibly 2005 for the reasons earlier discussed.

 

Based upon the financial results submitted tous by Golf Hosts Resorts, Inc., the net operating income of the property forthe three months ended March 31, 2004 was approximately $1,036,000, which is adecrease in income from the same period in the prior year of approximately$331,000, or 24.2%. During the three months ended March 31, 2004, grossrevenues declined approximately $260,000, or 2.1%, from the same period in theprior year.  Shortly before the end ofMarch 2004, and too late in the quarter to replace the business, one of theCompany’s long-standing customers was acquired by an unaffiliated entity.  Because of the acquisition, the customer hadto postpone the scheduled conference at the resort until later in theyear.  Normally, this customer wouldhave produced approximately $1,000,000 within the first quarter of the year.Room nights for the period were down by 3.6% while room night spending levelswere up by $7.93 per room night or 1.6%. The combined reduction in room nightsand increase in average spending resulted in the reduction of gross revenuesnoted

 

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above. Total operating expenses before depreciation and amortizationwere down by approximately $190,000, or 1.8%, for the three months ended March31, 2004 as compared to the same period for the prior year. In addition,depreciation and amortization increased in the aggregate amount ofapproximately $261,000. As compared to the budget, revenue was approximately $281,000or 2.2% below budget while net operating income was approximately 21.0% belowbudget for the three months ended March 31, 2004.

 

For the trailing twelve months ended March 31, 2004, net operatingincome is down approximately $1,013,000 or 60.8%, when compared to the trailingtwelve months ended March 31, 2003. While operational revenues for thecomparative twelve-month period were up by approximately $708,000, the netrevenues were down for the comparative period by approximately $13,000 due tothe recognition of income in December 2002 as a result of accountingadjustments.  Those adjustments weremade to recognize the reclassification of income as it related to lease versuscapital assets in the approximate amount of $295,000 and the offsetting of managementfees against capital assets under the Westin management agreement in theapproximate amount of $426,000.  REVPAR(revenue per available room), which is a standard operating measurement toolwithin the hotel industry, is in our judgment not a useful analytical tool atthe Resort due to the rental pool arrangement and other significant revenuesources at the Resort, namely golf operations. Revenue per room night and occupied room nights were approximately equalin the comparative twelve month trailing periods.  Operating expenses for the trailing twelve month period endedMarch 31, 2004 increased by approximately $1,533,000 or 4.2% over the twelvemonths ended March 31, 2003. Other expenses, which include participatinginterest, straight-line interest, income tax benefits and non-cash charges fordepreciation and amortization are down by approximately $222,000. Thisreduction in other items is primarily the result of a decrease in therecognition of depreciation and amortization in the amount of approximately$532,000 and an increase in interest expense of approximately $310,000.  These fluctuations culminated in an increaseof approximately $1,324,000 or 12.2%, in the loss for the trailing twelvemonths ended March 31, 2004, when compared to the same period in the prioryear.

 

These results are unaudited and are providedby our borrower and not generated internally by us. Accordingly, we can provideno assurance as to the accuracy of these financial results.

 

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

 

The following table summarizes our contractual obligations at March 31,2004, and the effect such obligations are expected to have on the liquidity andcash flow of our company (or our successors in interest under the applicablecontracts, 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                                                                            |   | $                           | 2,133  |   | $ | 1,921 |   | $ | 212 |   | $ | — |   | $ | — |   |
| Liquor license note payable (applies to a  certain managed golf course)(1)                                                           |   | 125                         |   | — |   | — |   | 125 |   | — |   |
| Operating lease agreements at the managed  golf courses                                                                              |   | 1,036                       |   | 353 |   | 514 |   | 169 |   | — |   |
| Advertising, service, equipment maintenance  and other contracts and software license and support agreements at the  managed courses |   | 17                          |   | 10 |   | 5 |   | 2 |   | — |   |
| Lease agreements for corporate office                                                                                                |   | 109                         |   | 39 |   | 70 |   | — |   | — |   |
|                                                                                                                                 |   |                        |   |   |   |   |   |   |   |   |   |
| Total                                                                                                                                |   | $                           | 3,420  |   | $ | 2,323 |   | $ | 801 |   | $ | 296 |   | $ | — |   |

 

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(1)           included in accountspayable on the statement of net assets in liquidation.

 

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

 

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***EmploymentAgreements.*** Under the existing amended and restated employment agreements,performance milestone payments aggregating approximately $2,526,000 were paidto our executives upon our repayment of our obligations under our securedcredit facility led by Bank of America, N.A. Pursuant to the fourth amended andrestated employment agreement of Mr. Peters, our chief financial officer,which was effective August 29, 2003, twenty-five percent of the remainingearned milestone payment, $165,230 plus accrued interest, was paid to him onSeptember 30, 2003 and a payment of twenty-five percent of the remainingearned milestone payment plus accrued interest will be paid to him upon thesale of our golf course assets whereby we receive more than $1,200,000 of netcash proceeds. The remaining fifty percent of the remaining earned milestonepayment, plus accrued interest, shall be paid to Mr. Peters upon the saleof our golf course assets whereby we receive more than $2,500,000 of net cashproceeds and such receipts are not subject to holdback, claw-backs or anyescrow or other limitations. Commencing October 1, 2003, interest beganaccruing on the unpaid portion of Mr. Peters’ remaining earned milestonepayment at five percent (5%) per annum. Our chief executive officer, Mr. Blair,is also entitled to the final performance milestone payment of approximately$1,234,000, plus accrued interest, due to the repayment of the outstandingbalance under our then applicable credit facility. Such payment will be made indue course; no outstanding conditions to this payment exist. Any severancepayments otherwise payable under the amended and restated employment agreementswill be reduced by the amount of the above performance milestone payments thatwe have made. In addition, we have severance obligations to other employeesaggregating $404,000 which have been provided 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 of Mr. Peters’)shares of our common stock valued at $8 per share at the time of the issuanceof these loans. Interest accrues on these loans at 5.06% per annum (theapplicable federal rate on the date of the loan) and is due at maturity.Effective July 1, 2002, we discontinued accruing interest on these loansbecause the total outstanding balance of each loan exceeded the value of thecollateral, common stock, computed based on the current net assets available tocommon stockholders. The outstanding balance of these loans at June 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 share and thecomputed value based on the net assets in liquidation at December 31, 2003and 2002, respectively. Subsequently, as a result of a letter agreement that weentered into with Mr. Blair on March 22, 2004, Mr. Blair agreedto, among other things, irrevocably assign to us the shares of GTA common stockwhich secured the above-mentioned non-recourse loan (made to Mr. Blair in2001 in the amount of $1,150,319.95) and we cancelled the remainder of the loanbalance (which, by its terms was non-recourse and, thus, following our receiptof all of the collateral, was effectively 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.

 

*** 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 restricts 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 LeaseAgreements.*** In the normal course of operating the golf courses that we manage, wehave entered into operating lease agreements to lease golf course maintenanceequipment, golf course vehicles, golf carts, and office equipment at themanaged courses. The terms of these leases range from twelve to sixty months.

 

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***Advertising,service, equipment maintenance and other contracts and software license andsupport agreements at the managed courses.***  In the normal course of operating the golfcourses that we manage, we have entered into contracts for services such asadvertising, waste management, equipment maintenance, software support, etc.The terms of these contracts range from 12 to 24 months and in certaincases with renewal options annually.

 

***Lease agreements forGTA corporate office.***  This represents the office space lease for our 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, AEW TargetedSecurities 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.

 

AggregateSeries A preferred stock dividends accrued, until July 20, 2003, at arate of $462,500 per quarter. Effective July 21, 2003 the rate increasedto $625,000 per quarter (see further discussion of this increase below). As ofMarch 31, 2004, we have accrued and not paid eleven quarters ofSeries A preferred stock dividends (including the dividend otherwise payablein respect of the quarter ended March 31, 2004). Under our Series Acharter document, because we now have at least six quarters of accrued andunpaid Series A preferred stock dividends, the holder of the Series Apreferred stock, AEW Targeted Securities Fund, L.P. (or its transferee), hadthe right to elect two additional directors to our board of directors at ourannual meeting that was held on November 17, 2003, whose terms asdirectors would continue until we fully pay all accrued but unpaid Series Adividends. Although AEW did not exercise this right, it remains free to do soat any time (pursuant to the procedures specified in our charter and the votingagreement).

 

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. For example, our participating mortgage interest as lenderat the Innisbrook Resort provides for automatic annual interest increases(however, our borrower thereunder is currently in payment default and not meetingany of its obligations as they accrue) and our golf course fees at theproperties we operate are relatively flexible and can be increased, subject toconstraints imposed by competition and, in some cases, patrons’ yearlymembership privileges.

 

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**Seasonality**

 

The golfindustry is seasonal in nature because of weather conditions, with feweravailable tee times in the rainy season and the winter months. Conversely,revenues fall at the Innisbrook Resort during the summer months as a result ofthe hot Florida weather being less appealing for group golf outings andvacation destination golfers along with the fact that business conventions andmeetings are typically held October through April, when business customers arerelatively less likely to be on family vacations. In October 2003, theInnisbrook Resort hosted, and will host thereafter through 2006, a nationallytelevised PGA event, the Chrysler Championship, that brings some of the highestprofile golfers to the Resort for several days for the tournament, as well ashigh profile golf industry sponsors and vendors. Historically, revenues pick-upin the fourth quarter but are generally the greatest during the first quarterwith guests coming form the northeast and other regions to enjoy the warmweather.  The Resort uses seasonalpricing (peak, shoulder, off-peak) to maximize revenues.  The effects of seasonality at our golf coursescan be partially offset at daily-fee golf courses by varying greens fees basedon changes in demand. Under our prior (now defunct) participating leasestructure, we expected to be insulated from the effects of seasonality in thatthe participating leases required our lessees to pay us base rent ratablythroughout the year. Now that we manage our golf courses directly (exceptInnisbrook), we are experiencing some seasonal variability in our operatingresults, which seasonality is expected to increase in the event that we assumeoperations at the Innisbrook Resort.

 

**RISK FACTORS**

 

**Risks that mightDelay or Reduce our Liquidating Distributions**

 

In our 2002 annual report on Form 10-K filed on March 31,2003, we reported an updated projected range of liquidating distributions tocommon stockholders and an updated projection as to when liquidatingdistributions to common stockholders might commence. We refer to theseprojections as our Updated 2003 Range. Our expectations at that time regardingthe amount of liquidating distributions we would then make and when we wouldthen make them were based on many factors, including input from our financialadvisors and our then estimates and assumptions. We face the risk that actualevents might prove to be less favorable than those estimates and assumptions.Several important factors that could cause such a difference are describedbelow. Although we have attempted to account for the following risks during thepreparation of the Updated 2003 Range, we might have underestimated theireffects, and perhaps in substantial respects. As a result, the actual amount ofliquidating distributions we may pay to our common stockholders might besubstantially less than our Updated 2003 Range of projected liquidatingdistributions. We also face the risk that the underestimation of the effects ofthese risks could result in no liquidating distributions to stockholders. Anyliquidating distributions that are ultimately available might be paidsubstantially later than historically projected. Factors that could causeactual payments to be later or lower than the Updated 2003 Range include thematters discussed below.

 

We have recorded the value of our golf courses and our participatingmortgage at our best estimates of fair value as of May 7, 2004. However, at thepresent time we do not believe that we are able to reliably project the amountof the total liquidating distributions we will make to our common stockholdersover the remainder of the orderly liquidation period. Subject to the followingcaveats, we do, however, believe that it may be possible to do so in the eventthat the quality and reliability of information necessary to make reliableestimates of cash flow and, correspondingly, value become more reliable.However, we can provide no assurances that the quality and reliability of allsuch necessary information will develop to the degree necessary to allow us toderive a reliable estimate of the range of liquidation distributions.

 

Among other reasons, we do not believe we are able at this time toproject the amount of the total liquidating distributions we will make to ourcommon stockholders over the remainder of the orderly liquidating periodbecause we have not been able to obtain sufficiently stable financial data withrespect to the Resort’s performance which is necessary to establish a reliablevaluation of the Resort. The factors giving rise to this uncertainty include,without limitation, the following:

 

•              the fact that wehave not been able to obtain accurate forecasts from Westin regarding operatingperformance, among other factors, including, without limitation, the cash flowand bookings at the Resort caused by compressed group booking windows,unexpected group cancellations (caused by outside circumstances unrelated tothe Resort), unexpected group slippage (groups filling less rooms than theyoriginally book), and increased competition in the marketplace. According toindustry sources, corporate restrictions on travel have hurt bookings andmeeting business has been soft and many companies are now in the habit ofbooking events much closer to the time they need the space than in past years;

 

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•              the fact that thefinancial performance at the Resort has not begun to realize any positiveimpact from the economic rebound that has begun and that the Resort presentlyseems to be experiencing a modest downward trend, which is somewhat contrary torecent industry trends. Westin has evaluated and restructured their salespersonnel as well as implemented new sales and marketing programs in an effortto reverse the Resort’s current trend and to realize the modest recoverycurrently being seen in the industry;

 

•              the fact that sincethe Resort is managed by a third-party management company, we do not presentlyhave control and have only limited influence in the management or performanceat the Resort; and that fact will not change after we take title to the Resort,whether pursuant to a global settlement or a foreclosure of the loan we hold atthe Resort, because the loan, including the collateral interest in the realestate, are effectively subordinate to the management agreement with Westin;

 

•              the fact that theglobal settlement related to the pending disputes with (i) our borrowerwho is currently in default, and (ii) the Resort manager, Westin, have notbeen financially resolved or finally concluded, even though we contemplate theresolution thereof this year;

 

•              the fact that thelitigation between our borrower and the homeowners association at the Resort(of which we are not a party) continues to cloud the future of the Resort froma valuation perspective, not withstanding periodic, interim successes in thelitigation by our borrower as reported to us by our borrower;

 

•              the fact of thethreat of litigation with our borrower and/or Westin or the timing of our closingon the global settlement, creates uncertainty insofar as corporate meetingplanners are concerned when contracting for large corporate groups and which isused as a competitive advantage by our competitors when marketing their resortagainst the Resort;

 

•              the fact that wehave not received any firm offers from third-parties desiring to acquire theResort which are of the type to allow us to reliably establish a value for theResort; and

 

•              the fact ofcontinued threats of terrorism and the impact thereof on the travel and lodgingindustry.

 

As a result of the foregoing, at the present time, we will refrain frommaking any adjustments (positive or negative) to any earlier reported range ofdistributions or proposing a new range. We may, however, be able to do so infuture periods in the event that the quality and reliability of all informationnecessary to make estimates of cash flow and, correspondingly, value becomesmore reliable.  However, we can make noassurances that the quality and reliability of all such necessary informationwill develop to the degree necessary to allow us to develop a reliable estimateof the range of liquidation distributions.

 

You should not assume that the liquidating distributions have notdeclined, perhaps in material amounts, from the historical projections earlierprovided.

 

***Stockholderlitigation related to the plan of liquidation could result in substantial costsand distract our management.***

 

Extraordinary corporate actions, such as our plan of liquidation, oftenlead to securities class action lawsuits and derivative litigation being filedagainst companies such as ours. We became involved in this type of litigationin connection with our plan of liquidation (and the transactions associatedwith it) in a legal action we refer to as the *Crossley* litigation. Duringthe second quarter of 2003, 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 anon-monetary settlement with the plaintiff whereby the plaintiff agreed not toappeal the dismissal and we agreed not to seek reimbursement of our legal costsfrom the plaintiff. Even though the *Crossley* litigation has been dismissed, weface the risk that other claims might be brought against us. Any suchlitigation would likely be expensive and, even if we ultimately prevail, theprocess would divert management’s attention from implementing the plan ofliquidation and otherwise operating our business. If we do not prevail in anysuch litigation, we might be liable for damages. We cannot predict the amountof such damages, if any, but they might be significant and would reduce ourcash available for distribution and the ultimate amount of our liquidatingdistributions to common stockholders.

 

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***Golf Host Resorts, Inc., the borrower under our $79 millionparticipating mortgage on the Innisbrook Resort, has failed to make requiredpayments to us since November 1, 2001 and our collateral is the subject oflitigation among others. Consequently, the current resale value of our lender’sinterest in the participating mortgage is impaired. If we are unable to resolvethe borrower’s continuing default by negotiation, we intend to foreclose uponthe collateral, which could be time-consuming and expensive and our ultimaterecovery might be reduced, delayed or prevented by court order and/ordiminished by the pending litigation.***

 

We are the lender under a $79 million original balanceparticipating loan secured by a mortgage on the Innisbrook Resort, near Tampa,Florida. The Innisbrook Resort consists of rental condominiums and conferencefacilities, currently managed by Westin Hotel Company, and four upscale golfcourses, currently managed by Troon Golf. Westin and Troon are affiliated withStarwood Hotels & Resorts. The borrower, Golf Host Resorts, Inc.,owns the Resort, other than the separately-owned condominium units. Our firstpriority mortgage extends to all real property at the Innisbrook Resort, otherthan the separately owned condominium units. A majority of the condominium unitowners participate in a rental pool whereby their condominium units are madeavailable as hotel rooms to guests of the Resort. Some of the condominiumowners have initiated legal action against the borrower regarding theborrower’s management of the rental pool.

 

Currently, the borrower is in monetary default under our participatingmortgage due to the borrower’s failure, commencing on November 1, 2001, tomake base interest payments to us. We may in the future determine thatadditional non-monetary defaults exist. We delivered a legal notice to the borroweron March 8, 2002, accelerating the entire amount of the participatingmortgage as a result of the borrower’s default. We also sent a legal notice toWestin Hotel Company on March 8, 2002, asserting that Westin failed tocomply with the terms of a subordination agreement between us and Westin, whichWestin has contested, and we are attempting to negotiate a resolution of ourdispute with Westin**.** We might become involved in litigationwith Westin if we and Westin are unable to agree on our respective rights andobligations pursuant to Westin’s management agreement with the borrower and oursubordination agreement with Westin. Any litigation might be expensive andtime-consuming. We are negotiating with the borrower regarding a possibleconsensual foreclosure or a possible conveyance in lieu of foreclosure. In anegotiated resolution, we might agree to assume certain contingent liabilitiesof the borrower, potentially including liabilities and costs of the borrowerrelated to the pending condominium owners’ legal action against the borrowerand the advances under the Westin guarantee. If we agree to assume some of theborrower’s liabilities, if any, to the condominium owners (or other contingentliabilities), we will face the risk that our ultimate liability might begreater than we expected. In that case, a large verdict against us (or othercontingent payout) would significantly reduce our cash available fordistribution and the ultimate amount of our liquidating distributions to commonstockholders.

 

The participating mortgage loan is a non-recourse loan, which meansthat following an event of default by the borrower we cannot bring a legalaction directly against the borrower to compel payment, but instead ourrecourse is to proceed against the guarantors and/or to foreclose upon theInnisbrook Resort (other than the individually owned condominium units) and anyother property of the borrower that has been pledged by the borrower to secureour loan. If we decide to pursue judicial foreclosure against the borrower, itwould be expensive and time-consuming and there is a risk that the borrowermight obtain judicial or bankruptcy protection. Even if we obtain ownership ofthe Innisbrook Resort, we would face the difficult task of seeking torevitalize its revenues. The terms of the management agreement with Westinrequire that Westin be retained as the operator of the Resort after aforeclosure.

 

As a result of these problems, the current resale value of ourparticipating mortgage is impaired, our recovery with respect to this assetmight be significantly delayed, and the aggregate amount we ultimately receive,either (a) as repayment from the borrower, or (b) upon a sale of ourlender’s interest in the participating mortgage, or (c) upon a sale of theInnisbrook Resort following foreclosure, might be substantially less than theamount we are currently owed.

 

We are seeking to conclude a negotiated resolution with the borrower asearly as practicable in 2004 whereby the borrower’s interest in the InnisbrookResort would be transferred to us or one of our affiliates. However, we canprovide no assurance of a resolution, of the terms of any resolution, or thetiming thereof.

 

***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 the Innisbrook Resort for an amount less thanour current estimate of its fair value, which would reduce our liquidatingdistributions to common stockholders.***

 

Our estimate of the fair value of our participating mortgage interestin the Innisbrook Resort, as recorded on our books at March 31, 2004, is$44.2 million, which is lower than the $60 million valuation recordedin periods prior to September 30,

 

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2003.  If there were no otherchanges to the factors underlying our Updated 2003 Range (and we cannot assurethat fact or result), this difference in the valuation of the Innisbrook Resortwould cause the Updated 2003 Range to shift lower by $1.90. Although we havenot yet obtained ownership of the Innisbrook Resort, as previously disclosed,we have based our calculation of the participating mortgage’s liquidation valueon an estimate of the future going-concern value of the Resort’s operations onthe assumption that we will take possession of the Resort (subject to anamended management contract with Westin) and hold the Resort until the Resort’soperating revenues realize a modest recovery. The currently contemplated holdingperiod, as determined by our board, extends to the end of 2005. InOctober 2003, we received from the Resort’s operator, Westin, an updatedforecast of the net cash flow expected to be generated by the Innisbrook Resortin the fourth quarter 2003 and for the year 2004. Westin’s updated forecast wasmaterially less favorable than Westin’s earlier forecasts for the same periods,which were among the factors considered by our management when arriving at theprior valuation. The decline in the Westin forecast resulted primarily fromfewer than anticipated group bookings in the fourth quarter and the assumptionthat this trend would continue into 2004. In response to Westin’s forecast andour inquiries into Westin’s budget methodologies and the basis for Westin’sprojections, as of September 30, 2003, we revised our estimate of theResort’s fair value at the end of the holding period to $44.2 million.This valuation is above the low end of the valuation range for the InnisbrookResort under the “forced liquidation” scenario, as estimated by Houlihan Lokeyin both their March 2002 and March 2003 analyses (as described inmore detail in our annual report on Form 10-K filed on March 31,2003). We have identified our valuation of the participating mortgage as a criticalaccounting estimate, and it is discussed under the caption “Application ofCritical Accounting Policies.”

 

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 make to our commonstockholders over the remainder of the orderly liquidation period. We haveearlier discussed the reasons for this conclusion. Accordingly, you should notrely on the valuations or ranges earlier provided as representative of ourcurrent views on the subject.

 

We do not rule out the possibility that wemight decide to sell our lender’s interest in the Innisbrook Resort prior tothe end of the anticipated holding period (i.e., December 31, 2005) inresponse to any reasonable offer, even if the offered amount is less than$44.2 million if, after consideration of the facts and circumstances atthat time, our board determines that the sale would be in the best interest ofour stockholders. However, we cannot presently predict what events, factors oroutcomes might cause our board to cease pursuing the “orderly liquidation”strategy in favor of an immediate sale. It is also possible that our boardmight decide to extend the currently contemplated holding period of this assetpast 2005 if our board determines that to do so would be in our stockholders’best interest in hope of realizing a better recovery on the asset after 2005.In any case, we face the risk that our efforts to preserve the value of theInnisbrook Resort might be unsuccessful and we might ultimately sell ourinterest in the Innisbrook Resort for less than our last estimates of its fairvalue. Accordingly, at some future date, our assessment of the asset’s fairvalue may change, perhaps in a material adverse manner based on facts andcircumstances at that time, and the asset may again be written-down.

 

***If the borrower under our participating mortgage declares bankruptcy,our efforts to foreclose upon the mortgage collateral (the Innisbrook Resort)could be substantially delayed and our recoveries reduced, which could delayand reduce our liquidating distributions.***

 

Under the federal bankruptcy code, the filing of a bankruptcy petitionby or against the borrower under our participating mortgage would stay (i.e.,temporarily suspend) our efforts to collect past due payments owed to us. Inthe case of our participating mortgage, a bankruptcy filing would alsotemporarily prevent our ability to commence or continue a judicial foreclosureaction. Additionally, the bankruptcy trustee (or the borrower asdebtor-in-possession) would have special powers to avoid, subordinate ordisallow debts. In some circumstances, it is possible that our claims may besubordinated to financing obtained by the borrower subsequent to itsbankruptcy.

 

Further, in the case of our lender’s interest in the participatingmortgage, if the bankruptcy court were to determine that the value of theInnisbrook Resort is less than the principal balance of the participatingmortgage, the court may reduce our amount of secured indebtedness to thethen-current value of the resort. Such an action would make us a generalunsecured creditor for the difference between the then-current value of theresort and the amount of the outstanding indebtedness. Unsecured creditors areless likely than secured creditors to recover all of the amounts owed to themby a bankrupt borrower. A bankruptcy court also may:

 

•              grant the borrowertime to cure a payment default on the loan;

 

•              reduce monthlypayments due under the loan;

 

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•              change the rate ofinterest due on the loan;

 

•              otherwise alter theloan’s repayment schedule;

 

•              change other termsof the loan; and,

 

•              prevent us from enforcingour borrower’s assignment of rents under the participating mortgage.

 

The legal proceedings necessary to resolve these issues would likely betime-consuming and expensive and might significantly delay our receipt ofrevenue from the affected asset.

 

***If we are unable to retain at least one of our key executives andsufficient staff members to complete the plan of liquidation in a reasonablyexpeditious manner, our liquidating distributions might be delayed or reduced.***

 

Our ability to complete any golf course sales currently under contract(of which we have one), or subject to letters of intent (of which we do nothave any as of the date of this filing), and to locate buyers for our otherinterests in golf courses and negotiate and complete those sales depend to alarge extent upon the experience and abilities of W. Bradley Blair, II, whoserves as our chief executive officer and president, and Scott D. Peters, whoserves as our senior vice president and chief financial officer (who iscurrently on a reduced schedule), and their experience and familiarity with ourassets, our counter-parties and the market for golf course sales. We believe itis important that we retain at least one of these key executives in orderpotentially to achieve a relatively favorable settlement of our borrower’sdefault under the participating mortgage. We believe our liquidation hasprogressed to the point that the resignation of one (but not both) of ourexecutives would not likely cause significant adverse consequences. However, aloss of the services of both of these individuals could materially harm ourability to complete the plan of liquidation in a reasonably expeditious mannerand our prospects of selling our assets at the best potential prices.

 

We face the risk that both of our key executives might resign. Inparticular, our payment in full of our outstanding obligations under our creditfacility, which occurred in the second quarter, was the last remainingmilestone under Mr. Blair’s amended employment agreement and, therefore,his performance bonus is now due and payable by us**.**  Accordingly, our executives might conclude that they no longerhave meaningful financial incentives to remain employed especially consideringthe reduction in their annual salaries. Following the disposition of ourSandpiper property in mid-2003 and the corresponding reduction in demands onMr. Peters’ time, the compensation committee of our board of directorsdetermined that management should seek to negotiate a reduced time commitmentand a reduced salary arrangement with Mr. Peters and, therefore, weentered into an amended and restated employment agreement with Mr. Peterson August 29, 2003. Under this amended and restated employment agreement,Mr. Peters is expected to devote a specified number of hours per calendarquarter to our company, representing a substantially reduced time commitmentfrom Mr. Peters’ former full-time commitment . Mr. Peters willcontinue to serve as our senior vice president, secretary and chief financialofficer, as well as continuing to serve on our board of directors. Under theamended and restated agreement, we will pay Mr. Peters a salary of $12,000per quarter. To the extent that we require more of Mr. Peters’ time, wewill pay him on an hourly basis, up to a capped amount per diem. Additionally,under this amended and restated agreement Mr. Peters, is not entitled tothe balance of his remaining milestone payment until certain golf course salesthresholds are met, as earlier described. Unless terminated earlier by us orMr. Peters, this arrangement will terminate on June 30, 2004.Additionally, on March 22, 2004, we entered into a letter agreement withMr. Blair, which, among other things, provides for Mr. Blair toreceive a reduced base salary from us as of April 1, 2004, which is aresult of an expected future reduction in the amount of time he is required todevote to our company and its business. As a result, effective April 1,2004, Mr. Blair will receive 75% of his current base salary of $381,654,or $286,241. In addition, effective January 1, 2005, Mr. Blair willreceive a further reduced annual base salary of $190,827, which is 50% of hiscurrent base salary as of March 31, 2004.

 

The resignation of Mr. Blair poses a relatively greater risk atthis time in light of Mr. Peters’ reduced time commitment to our company.If Mr. Blair were to resign, we would likely ask Mr. Peters’ toincrease his time commitment to our company or seek to hire a replacement forhim. We face the risk that Mr. Peters might have made other commitmentsunrelated to us by that time and, therefore, might be unwilling or unable toreturn to full time employment with our company. The cost to us of hiring areplacement would likely depend upon the experience and skills required of suchan individual in light of our financial condition, our assets remaining to beliquidated, and the complexity of any issues bearing on our company and theliquidation at that time. If and when the issues surrounding Innisbrook (ourlast significant asset in liquidation) are resolved, our need for a full-timeexecutive may be less significant.

 

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Our ability to complete the plan of liquidation in a timely manner alsodepends on our ability to retain our key non-executive employees. Our employeesmay seek other employment rather than remain with us throughout the process ofliquidation, even though they generally would lose their eligibility forseverance payments by resigning. If we are unable to retain enough qualifiedstaff to complete our plan of liquidation in a reasonably expeditious manner,liquidating distributions might be delayed or reduced.

 

***If we are unable to find buyers for the Innisbrook Resort or our othergolf courses at our revised estimates of value, our liquidating distributionsmight be delayed or reduced.***

 

In addition to the four golf courses at theResort, we have four other properties (or five eighteen-hole equivalent golfcourses), one of which is currently subject to a sale agreement and the otherthree are not currently subject to sale agreements or letters of intent. Incalculating our projected liquidating distribution, we assumed that we will beable to find buyers for the Innisbrook Resort and these other golf courses atamounts based on our estimates of their fair market values based on currentindications of interest from potential buyers. However, we may haveoverestimated the sales prices that we will ultimately be able to obtain in thesale of these golf courses. The analysis performed by Houlihan Lokey as ofMarch 18, 2003 (upon which our Updated 2003 Range was based in part, andupon which you should not rely at this point) is neither an appraisal nor anopinion. Assumptions underlying our Updated 2003 Range might prove to be incorrectand, therefore, our projections might overstate the ultimate net proceeds wewill receive. For example, in order to find buyers in a reasonably expeditiousmanner, we might be required to lower our asking price below our estimate of agolf course’s fair value. If we are not able to find buyers for these golfcourses in a reasonably expeditious manner or if we have overestimated thesales prices we will ultimately receive, our liquidating payments to our commonstockholders will be delayed or reduced, perhaps in substantial ways.

 

As earlier discussed, at the present time, we do not believe we areable to reliably project the value of the Innisbrook Resort, nor as a result,the amount of the total liquidating distributions we will make to our commonstockholders over the remainder of the orderly liquidation period. We haveearlier discussed the reasons for this conclusion. Accordingly, you should notrely on the valuations or ranges earlier provided as representative of ourcurrent views on the subject.

 

***If we are unable to realize the value of a promissory note taken aspart of any purchase price, our liquidating distributions might be reduced.***

 

In some golf course sales, we may agree to receive promissory notesfrom the buyer as a portion of the purchase price. Promissory notes can beilliquid. If we are not able to sell the promissory note without a greatdiscount, or in the case of a short-term note, if we hold it to maturity andthe purchaser ultimately defaults, our liquidating distributions might be reduced.

 

***Decreases in golf course values caused by economic recession and/oradditional terrorist activity might reduce the amount for which we can sell ourassets.***

 

The value of our interests in golf courses might be reduced, andsubstantially so, by a number of factors that are beyond our control, includingthe following:

 

•              adverse changes inthe economy, prolonged recession and/or additional terrorist activity againstthe United States or our allies or other war-time activities might increasepublic pessimism and decrease travel and leisure spending, thereby reducinggolf course operators’ revenues (particularly destination-resort golf courserevenues) and diminishing the resale value of the affected golf courses;

 

•              increasedcompetition, such as increasing numbers of golf courses being offered for salein our markets or nationwide;

 

•              continuing plight ofthe golf course industry (over supply facing decreasing demand); and

 

•              changes in realestate tax rates and other operating expenses.

 

Any reduction in the value of our golf courses would make it moredifficult for us to sell our assets for the amounts and within the time-framesthat we have estimated. Reductions in the amounts that we receive when we sellour assets could decrease or delay our payment of liquidating distributions tostockholders, perhaps in substantial ways.

 

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***If our liquidation costs or unpaid liabilities are greater than weexpect, our liquidating distributions might be delayed or reduced, potentiallyin a substantial manner.***

 

Before making the final liquidating distribution to commonstockholders, we will need to pay all of our transaction costs pertaining tothe liquidation and all valid claims of our creditors, which we expect will besubstantial. Our board may also decide to acquire one or more additionalinsurance policies covering unknown or contingent claims against us, including,without limitation, additional directors’ and officers’ liability insurance,for which we would pay an additional premium based upon market pricesprevailing at the time of purchase. We have estimated such transaction costs incalculating the amount of our projected liquidating distributions. To theextent that we have underestimated costs and expenses in calculating ourhistorical projections, our actual aggregate liquidating distributions will belower than we have historically projected, and perhaps in substantial amounts.As earlier discussed, we have not updated our projections.

 

***Our loss of REIT status exposes us to potential income tax liability inthe future, which could lower the amount of our liquidating distributions.***

 

In order to maintain our historical qualification as a REIT, at least95% of our annual gross income was required to be derived from real propertyrents, mortgage interest and a few other categories of income specified in thetax code, which importantly do not include income from golf course operations.Although we did not affirmatively intend to revoke our REIT status, businessconditions 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 fail toqualify as a REIT for the year 2002, which will prevent us from re-qualifyingfor at least four years. Accordingly, we were then and are currently subject tofederal income tax as a regular corporation.

 

However, our operations resulted in a net operating loss for income taxpurposes during 2002 and 2003. Therefore, no income tax will be due on ouroperating income/loss or proceeds from the sale of properties that occurredduring 2002 and 2003. As of March 31, 2004, we believe we have sufficientnet operating loss carryovers to offset any gains we might recognize throughour liquidation. If we were to recognize taxable gains in a year beforeconsideration of net operating loss carryovers, we could be subject to alternativeminimum tax. Generally, for tax years ending after December 31, 2002, theuse of net operating loss carryovers to reduce alternative minimum taxableincome is limited to 90% of alternative minimum taxable income. Therefore, taxat a rate of 20% could be imposed on our alternative minimum taxable incomethat cannot be reduced by net operating loss carryovers. The resulting taxliabilities would reduce the amount of cash available for liquidatingdistributions.

 

***The holder of our Series A preferred stock might exercise itsright to appoint two directors to our board of directors, which might result indecisions that prejudice the economic interests of our common stockholders infavor of our preferred stockholders.***

 

We entered into a voting agreement with the holder of our preferredstock, AEW Targeted Securities Fund, L.P., pursuant to which the holder agreedto vote in favor of the plan of liquidation. The voting agreement provided thatif 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 to redeem it.We received such a demand from the preferred stock holder on May 23, 2003,but we do not have enough cash available to redeem the preferred stock. Ourdefault in making a timely redemption payment gives the preferred stock holderthe right under the voting agreement to appoint two new directors to our board.Our charter also gives the preferred stock holder the right to elect two newdirectors if and when dividends on the Series A shares are over sixquarters in arrears. Currently, dividends on the Series A shares areeleven quarters in arrears. These director election rights are not cumulative,which means that the preferred stock holder may elect two, but not four, newdirectors. The current holder of the preferred stock, AEW Targeted SecuritiesFund, L.P., has informed us that it does not currently intend to exercise thatright. However, we face the risk that it might decide to exercise such right inthe future. The appointment of such directors to our board might reduce theefficiency of our board’s decision-making or result in decisions that prejudicethe economic interests of our common stockholders in favor of our preferredstock holder.

 

***Distributinginterests in a liquidating trust may cause you to recognize gain prior to thereceipt of cash.***

 

At some point during our liquidation, as expressly permitted by ourplan of liquidation, we may elect to contribute our remaining assets andliabilities to a liquidating trust. Our stockholders would receive interests inthe liquidating trust and our corporate existence would terminate. The SEC hashistorically allowed liquidating trusts to stop filing quarterly reports onForm 10-Q and to file unaudited annual financial statements onForm 10-K. Accordingly, if the SEC were to grant similar relief

 

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to any successor liquidating trust we may form, we might realizesubstantial legal and auditing cost savings over the remainder of our liquidation,as well as general and administrative cost savings such as corporate governancecosts, certain insurance costs, and printing and reporting costs of a publiclytraded company, among others. However, the plan of liquidation prohibits usfrom contributing our assets to a liquidating trust unless and until ourpreferred stock has been redeemed in full or until which time as they consentto such a contribution.

 

For tax purposes, the creation of the liquidating trust should betreated as a distribution of our remaining assets to our stockholders, followedby a contribution of the same assets to the liquidating trust by ourstockholders. As a result, we will recognize gain or loss inherent in any suchassets, with any gains offset by available net operating loss carry-overs(discussed above).  In addition, astockholder would recognize gain to the extent his share of the cash and thefair market value of any assets received by the liquidating trust was greater thanthe stockholder’s basis in his stock, notwithstanding that the stockholderwould not contemporaneously receive a distribution of cash or any other assetswith which to satisfy the resulting tax liability.

 

In addition, it is possible that the fair market value of theInnisbrook Resort and the other assets received by the liquidating trust, asestimated for purposes of determining the extent of the stockholder’s gain atthe time interests in the liquidating trust are distributed to thestockholders, will exceed the cash or fair market value of property ultimatelyreceived by the liquidating trust upon its sale of the assets, in which casethe stockholder may not receive a distribution of cash or other assets withwhich to satisfy any tax liability resulting from the contribution of theassets to the liquidating trust. In this case, the stockholder would recognizea loss in a taxable year subsequent to the taxable year in which the gain wasrecognized, which loss might be limited under the tax code.

 

If we do not distribute our assets to a liquidating trust and, instead,continue to operate as a regular corporation until all of our assets are sold,we would recognize gains or losses upon the sale of assets for federal incometax purposes. Since we are no longer a REIT, we could be subject to income taxon any recognized gains. However, as of December 31, 2002, we believe wehave sufficient net operating loss carryovers to offset any recognized gains.If we were to recognize taxable gains in a year before consideration of netoperating loss carryovers, we could be subject to alternative minimum tax.Generally, for tax years ending after December 31, 2002, the use of netoperating loss carryovers to reduce alternative minimum taxable income islimited to 90% of alternative minimum taxable income. Therefore, tax at a rateof 20% could be imposed on our alternative minimum taxable income that cannotbe reduced by net operating loss carryovers. If a liquidating trust is formed,our net operating loss carryovers will not be available to reduce any gains recognizedwithin the trust. However, the trust will have a tax basis equal to the fairmarket value of its assets at the date the 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 golf courses in a timelymanner, we may experience severe liquidity problems, not be able to meet thedemands of our creditors and, ultimately declare bankruptcy.***

 

Our ability to meet our financial obligations to our creditors iscontingent upon our ability to sell our remaining four assets (including the InnisbrookResort). In the event we are not able to do so in a reasonable period of timeand for reasonable amounts, we may experience severe liquidity problems, andnot be able to meet the demands of our creditors in a timely manner. Subject toour liquidity through the Textron revolving line of credit, we may ultimatelydeclare bankruptcy if we cannot meet our obligations to our creditors in atimely manner.

 

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**ITEM3****.  QUANTITATIVEAND QUALITATIVE DISCLOSURES 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 May 7, 2004, subject tointerest rate exposure is $1,090,000. A 25 basis point movement in the interestrate on the floating rate debt would result in an approximate $2,726 annualizedincrease or decrease in interest expense and cash flows (see Note 7 to ourConsolidated Financial Statements for additional debt information). Althoughour participating mortgage loan receivable is also floating rate such that theperiodic interest rate payments we are entitled to receive are subject tointerest rate volatility, the participating mortgage has been in default sincelate 2001 and we do not currently expect it ever to be fully paid according toits terms.

 

We have notentered into any transactions using derivative commodity instruments. We are nolonger subject to market risk associated with changes in interest rates sincewe retired the outstanding obligations under our credit facility.  Reference is made to Note 7 to theCondensed Consolidated Financial Statements of Item 1 for additional debtinformation.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

We maintaindisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in our Exchange Act reports is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and our Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure. Our management assesses the costs and benefits of such controls andprocedures based upon the prevailing facts and circumstances, includingmanagement’s reasonable judgment of such facts.  As we neither control nor manage the Innisbrook Resort at thistime, our disclosure controls and procedures with respect to such persons andentities are necessarily more limited than those we maintain with respect toour own corporate operations.

 

As of March31, 2004, we carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer and ourChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures pursuant to Exchange ActRule 13a-14. Because our Company only has seven employees, excluding golfcourse employees, two of the seven of which are the CEO and the CFO, allmatters of a disclosable nature are typically addressed and handled by thesetwo individuals. Based upon the foregoing, our Chief Executive Officer and ourChief Financial Officer concluded that as of March 31, 2004, our disclosurecontrols and procedures are effective in timely alerting them to materialinformation relating to our Company (including our consolidated subsidiaries)required to be included in our Exchange Act reports. There have been nosignificant changes in our internal controls or in other factors which couldsignificantly affect internal controls subsequent to the date we carried outour evaluation.

 

**PART II. OTHER INFORMATION**

 

**ITEM1:  Legal Proceedings.**

 

We arecurrently involved in (or affected by) the following material legalproceedings:

 

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. We and theplaintiffs have agreed that we are to respond to the complaint by May 18, 2004.

 

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***Pete Dye Golf Club***

 

On March 18, 2003, we filed a lawsuit inthe Circuit Court for the Ninth Judicial District, the State of South Carolina,against Burning Embers Corporation, Golf and Fairway, L.L.C., Golf CourseLeasing, LLC, James D. LaRosa, James J. LaRosa and Leigh Ann LaRosa, as jointand several co-borrowers, for collection of all sums due and owing, ofapproximately $220,000 plus accrued interest at March 24, 2003, under thepromissory note due and owing to us that matured on December 19, 2002. Onepayment of $10,000 has been received since the maturity date and has beenapplied to the outstanding principal and interest on the promissory note due tous. The promissory note was executed by the buyer in favor of us in connectionwith our sale of the Pete Dye Golf Club on December 19, 2001 to anaffiliate 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.

 

***Tierra Del Sol Country 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,LLC to operate the golf course; (b) utilizing the water on the golf coursein a manner which was contrary to the purposes authorized under the waterrights lease agreement; (c) using the water in amounts in excess of whatwas 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 marketingand joint sale of property with Mary Louise Mulvihill Skalkos, the executor ofthe Estate 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 we shallhave the option to extend the term of the agreement for three additionalsix-month periods. We recently exercised the second six-month option, whichexpires on August 21, 2004. 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 (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 have asserted causes of action against the defendant for breach ofcontract, fraud and unfair trade practices. We are 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 rosterwithin one year and the statute of limitations will have been deemed to havebeen 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 in March 2005.

 

45

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***Innisbrook ResortCondominium Owner Litigation***

 

The Innisbrook Resort serves as collateralfor a $79 million original balance non-recourse loan we made to theResort’s owner, Golf Host Resorts, Inc., in 1997. The owner/borrower hasentered into an arrangement with many of the persons who own condominium unitsat the Resort whereby the condominiums owned by these persons are placed in apool and rented as hotel rooms to guests of the Innisbrook Resort. Certain ofthe condominium owners (as plaintiffs) initiated a legal action against theborrower, Golf Host Resorts, Inc., and its corporate parent, GolfHosts, Inc. (as defendants), regarding various aspects of thisarrangement. We are not a party to the lawsuit. It is our understanding,however, that the condominium owners/plaintiffs are seeking to resolve thefollowing issues, among others:

 

•              whether everycondominium owner who is also a member of the Innisbrook Golf and Country Clubhas the right to participate in the lessor’s rental pool, so long as there is arental pool, by virtue of defendant’s alleged marketing promises to allpurchasers of condominiums at the Resort;

 

•              whether thecondominium unit owners were coerced by economic pressure and duress to enterinto the master lease agreement, or guaranteed lease agreement;

 

•              whether theguaranteed lease agreement is invalid by reason of such alleged coercion andeconomic duress and, if so, whether the condominium owners who entered into theguaranteed lease agreement are entitled to be reimbursed for the differencebetween the amount of income that was distributed to them under the guaranteedlease agreement and the amount of income that would have been distributed tothem had they remained subject to the master lease agreement;

 

•              whether the unitowners who signed the guaranteed lease agreement have the right to return tothe master lease agreement without penalty, and thereby be entitled to bereimbursed for the difference between the income that they received under theguaranteed lease agreement and the income they would have received under the masterlease agreement; and

 

•              whether thedefendant breached its contract with the unit owners by allowing members of thepublic upon the golf courses, thereby adversely affecting the “private golfcourse” concept of Innisbrook.

 

Deposition of class members and others, including depositions of priorexecutives of Golf Host Resorts, Inc. have been taken and additionaldiscovery remains to be undertaken. The previously scheduled trial date ofFebruary 3, 2003 was postponed by the Court and a new trial date has notyet been set. In July 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. Plaintiffs have appealed each of theserulings to the court of appeals. The court of appeals summarily affirmed thelower court’s ruling that the case could not proceed as a class action and hasaffirmed the lower court’s dismissal with prejudice of the veil piercingcase.  No decision on the interventionappeal has been made.

 

Neither GTA nor any of our affiliates is a party to this lawsuit,however, it affects us insofar as any costs imposed on the borrower by thelawsuit might reduce the borrower’s willingness and ability to (i) makeany future participating mortgage payments to us (the borrower has not made anysuch payments to us since October 1, 2001), or (ii) enter into asettlement agreement with us regarding its participating mortgage default onterms we believe are acceptable. Moreover, we believe the lawsuit clouds thevalue of the Innisbrook Resort and thereby impairs the value of the collateralwhich secures the participating loan we hold as the lender.

 

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

 

46

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against numerous defendants, including Golf Trust of America, L.P.  Plaintiffs assert LOCI performedconstruction services on, or that benefited, the property of variousdefendants, including Golf Trust of America, L.P.  So far as the action concerns Golf Trust of America, L.P., Plaintiffsseek to foreclose a mechanic’s lien upon property formerly owned by Golf Trustof America, L.P.  The lien is for theprincipal amount of $1,276,123, plus interest at 10% per year and attorneyfees.  Plaintiffs calculate interest toMay 20, 1999, just prior to the lien filing, to be $151,180 and interestthereafter to be $354 per day.  In March2002 the Court orally granted a motion for summary judgment filed by Golf Trustof America, 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 in April 2002.  Since not all claims involved in thislawsuit were disposed of by that ruling, Plaintiffs’ time to appeal this rulingdid 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.

 

***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. Our participating leases provided that each lessee is responsiblefor claims based on personal injury and property damage at the golf courseswhich are leased and require each lessee to maintain insurance for suchpurposes. Since we are now the operator of our remaining golf courses, exceptInnisbrook, we maintain insurance for these purposes. We are not currentlysubject to any claims of this sort that we deem to be material and we no longerhave any pending participating leases.

 

**ITEM 2. CHANGES IN SECURITIES**

 

NotApplicable.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

As previouslyreported, on July 21, 2003 we defaulted on our obligation, under our votingagreement with the holder of our Series A preferred stock, to redeem the SeriesA shares within 60 days of the holder’s May 23, 2003 demand.  As a result, the aggregate Series A dividendrate increased from $462,500 per quarter to $625,000 per quarter and thepreferred stock holder has a right to appoint two directors to our board ofdirectors.  The preferred stock holderhas that same right under our the Series A Articles Supplementary (our charterdocument relating to the preferred stock) because we have not paid a preferredstock dividend since the third quarter of 2001 and such right arises whenpreferred stock dividends are in arrears for six or more quarters.  The preferred stock holder has informed usthat it does not currently intend to exercise that right.  However, it remains free to do so at anytime (pursuant to the procedures specified in our charter and the votingagreement).

 

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

 

No matterswere submitted to a vote of security holders during the three months endedMarch 31, 2004.

 

**ITEM5.  OTHER INFORMATION**

 

NotApplicable.

 

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

 

***Exhibits***

 

The exhibitslisted on the Exhibit Index, which appears after the signature page, areincluded or incorporated by reference in this Quarterly Report.

 

***Form 8-KFilings***

*** ***

During thequarter ended March 31, 2004, we did not file any current reports on Form 8-K.

 

47

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**SIGNATURES**

 

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

 
|                | **GOLF TRUST OF AMERICA, INC.,**registrant |
|---------------------|-------------------------------------------------|
|                |                                            |   |
| Date: May 11,  2004 | By:  /s/                                   | W. Bradley  Blair, II |   |
|                |                                            | W. Bradley  Blair, II |
|                |                                            | *President and Chief Executive Officer* |
|                |                                            |   |
| Date: May  11, 2004 | By:  /s/                                   | Scott D.  Peters |   |
|                |                                            | Scott D.  Peters |
|                |                                            | *Senior Vice President and Chief Financial  Officer* |

 

48

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**EXHIBIT INDEX**

 

Pursuant toItem 601(a)(2) of Regulation S-K, this exhibit index immediately precedesthe exhibits.

 

The followingexhibits are part of this Quarterly Report on Form 10-Q (and are numberedin accordance with Item 601 of Regulation S-K). Items marked with anasterisk (*) 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).                                                                                                                                                             |

 

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| **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 May 7, 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). |

 

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| **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).                                                                                                                                                                                                                                                                                                                                                     |

 

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| **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).                                                    |

 

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| **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).                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 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.                                                                                                                                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 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).                                                                                                                                                                                  |

 

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*              Filedherewith

†              Portionsof this exhibit have been omitted pursuant to a request for confidentialtreatment.

 

53

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