**UNITED STATES****SECURITIES AND EXCHANGECOMMISSION**

**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: June 30,  2003** |
|           |   |   |
| **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 by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such report(s)and (2) has been subject to such filing requirements for the past90 days. Yes ý  No o.

 

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

 

On August 8, 2003, there were 7,884,943common shares outstanding of the registrant’s only class of common stock. OnAugust 8, 2003, there were 800,000 shares outstanding of the registrant’s 9.25%Series A Cumulative Convertible Preferred Stock, which is the registrant’sonly class of outstanding preferred stock.

 

The Exhibit Index begins on page 39.

 

 

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**GOLF TRUST OFAMERICA, INC.Form 10-Q Quarterly ReportFor the Three Months Ended June 30, 2003INDEX**

 
| **PART I. FINANCIAL INFORMATION** |
|-----------------------------------|
|                              | **Item 1.** | **Liquidation Basis Financial Statements** |
|                              |   | Condensed Consolidated Statements of Net  Assets as of June 30, 2003 (unaudited) and December 31, 2002 |
|                              |   | Condensed Consolidated Statements of Changes  in Net Assets (unaudited) for the Three Months Ended June 30, 2003 and 2002 |
|                              |   | Condensed Consolidated Statements of  Changes in Net Assets (unaudited) for the Six Months Ended June 30, 2003 and  2002 |
|                              |   | Condensed Consolidated Statements of Cash  Flows (unaudited) for the Six Months ended June 30, 2003 and 2002 |
|                              |   | 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 NoteRegarding Forward-Looking Statements**

 

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 annual 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 our company and speak only as of the date on which thisreport was 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, in the current economy it is particularlydifficult to predict business activity levels at the Innisbrook Resort(underlying our most significant asset) with any certainty more than a fewmonths in advance. Accordingly, our projections in this annual report aresubject to particularly high uncertainty. Our projections should not beregarded as legal promises, representations or warranties of any kindwhatsoever. Over time, our actual results, performance or achievements willlikely differ from the anticipated results, performance or achievements thatare expressed or implied by our forward-looking statements, and such differencemight be significant and harmful to our stockholders interests. Many importantfactors that could cause such a difference are described under the caption“Risks that might Delay or Reduce our Liquidating Distributions,” in Item 2 ofthis quarterly report, which you should review carefully.

 

2

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**GOLF TRUST OFAMERICA, INC.**

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

**AS OF JUNE 30, 2003(unaudited) AND DECEMBER 31, 2002(in thousands, except per share amounts)**

 
|                                                                                                  |   | **June 30,  2003** |       | **December 31,  2002** |       |
|-------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-----------------------------|------------|
|                                                                                                  |   | **(unaudited)**    |       |                        |       |
|                                                                                                  |   |               |       |                        |       |
| **ASSETS**                                                                                            |   |               | ** ** |                        | ** ** |
| Real estate and mortgage note receivable —  held for sale                                        |   | $                  | 73,301     |                        | $          | 143,963 |   |
| Cash and cash equivalents                                                                             |   | 2,299              |       | 7,990                       |       |
| Restricted cash                                                                                       |   | —             |       | 1,551                       |       |
| Receivables — net                                                                                |   | 4,308              |       | 2,754                       |       |
| Other assets                                                                                          |   | 266                |       | 498                         |       |
| Total assets                                                                                          |   | 80,174             |       | 156,756                     |       |
|                                                                                                  |   |               |       |                        |       |
| **LIABILITIES**                                                                                       |   |               | ** ** |                        | ** ** |
| Debt                                                                                                  |   | —             |       | 69,003                      |       |
| Accounts payable and other liabilities                                                                |   | 3,107              |       | 3,927                       |       |
| Dividends payable                                                                                     |   | 3,700              |       | 2,775                       |       |
| Reserve for estimated costs during the  period of liquidation                                         |   | 6,977              |       | 12,148                      |       |
| Total liabilities                                                                                     |   | 13,784             |       | 87,853                      |       |
|                                                                                                  |   |               |       |                        |       |
| 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                                                                 |   | 33,784             |       | 107,853                     |       |
|                                                                                                  |   |               |       |                        |       |
| **NET ASSETS IN LIQUIDATION**(available to  holders of common stock and OP units)                     |   | $                  | 46,390     |                        | $          | 48,903 |   |

 

See accompanying notes to condensed consolidated financial statements. 

 

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**GOLF TRUST OF AMERICA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF**

**CHANGES IN NET ASSETS(LIQUIDATION BASIS)**

**FOR THE THREE MONTHSENDED JUNE 30, 2003 AND 2002**

**(in thousands, exceptper share data) (unaudited)**

 
|                                                                        |   | **Three  Months Ended  June 30, 2003** |   | **Three  Months Ended  June 30, 2002** |   |
|-----------------------------------------------------------------------------|--------|----------------------------------------|--------|----------------------------------------|--------|
|                                                                        |   |                                   |   |                                   |   |
| Revenues                                                                    |   |                                   |   |                                   |   |
| Rent                                                                        |   | $                                      | — |                                   | $      | 1,789 |   |
| Revenue from managed golf course operations                                 |   | 2,815                                  |   | 3,613                                  |   |
| Total revenues                                                              |   | 2,815                                  |   | 5,402                                  |   |
|                                                                        |   |                                   |   |                                   |   |
| Expenses:                                                                   |   |                                   |   |                                   |   |
| General & administrative                                                |   | 653                                    |   | 926                                    |   |
| Direct expenses from managed golf course  operations                        |   | 2,514                                  |   | 3,731                                  |   |
| Total expenses                                                              |   | 3,167                                  |   | 4,657                                  |   |
|                                                                        |   |                                   |   |                                   |   |
| Operating (loss) income                                                     |   | (352                                   | )      | 745                                    |   |
|                                                                        |   |                                   |   |                                   |   |
| Other income (expense):                                                     |   |                                   |   |                                   |   |
| Interest income                                                             |   | 59                                     |   | 136                                    |   |
| Interest expense                                                            |   | (468                                   | )      | (1,358                                 | )      |
| Total other income (expense)                                                |   | (409                                   | )      | (1,222                                 | )      |
|                                                                        |   |                                   |   |                                   |   |
| Loss before adjustment for liquidation  basis                               |   | (761                                   | )      | (477                                   | )      |
| Adjustment for liquidation basis of  accounting                             |   | 88                                     |   | (401                                   | )      |
| Net loss                                                                    |   | (673                                   | )      | (878                                   | )      |
|                                                                        |   |                                   |   |                                   |   |
| Preferred dividends                                                         |   | (462                                   | )      | (463                                   | )      |
|                                                                        |   |                                   |   |                                   |   |
| Net change in net assets available to  holders of common stock and OP units |   | $                                      | (1,135 | )                                      | $      | (1,341 | ) |

 

See accompanying notes to condensed consolidated financial statements.

 

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**GOLF TRUST OFAMERICA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF**

**CHANGES IN NET ASSETS(LIQUIDATION BASIS)**

**FOR THE SIX MONTHSENDED JUNE 30, 2003 AND 2002**

**(in thousands, exceptper share data) (unaudited)**

 
|                                                                        |   | **Six Months  Ended  June 30, 2003** |   | **Six Months  Ended  June 30, 2002** |   |
|-----------------------------------------------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
|                                                                        |   |                                 |   |                                 |   |
| Revenues                                                                    |   |                                 |   |                                 |   |
| Rent                                                                        |   | $                                    | 452    |                                 | $      | 3,750 |   |
| Revenue from managed golf course operations                                 |   | 5,249                                |   | 6,384                                |   |
| Total revenues                                                              |   | 5,701                                |   | 10,134                               |   |
|                                                                        |   |                                 |   |                                 |   |
| Expenses:                                                                   |   |                                 |   |                                 |   |
| General & administrative                                                |   | 1,384                                |   | 2,054                                |   |
| Direct expenses from managed golf course  operations                        |   | 4,819                                |   | 6,294                                |   |
| Total expenses                                                              |   | 6,203                                |   | 8,348                                |   |
|                                                                        |   |                                 |   |                                 |   |
| Operating (loss) income                                                     |   | (502                                 | )      | 1,786                                |   |
|                                                                        |   |                                 |   |                                 |   |
| Other income (expense):                                                     |   |                                 |   |                                 |   |
| Interest income                                                             |   | 115                                  |   | 293                                  |   |
| Interest expense                                                            |   | (1,289                               | )      | (2,782                               | )      |
| Total other income (expense)                                                |   | (1,174                               | )      | (2,489                               | )      |
|                                                                        |   |                                 |   |                                 |   |
| Loss before adjustment for liquidation  basis                               |   | (1,676                               | )      | (703                                 | )      |
| Adjustment for liquidation basis of  accounting                             |   | 88                                   |   | (1,261                               | )      |
| Net loss                                                                    |   | (1,588                               | )      | (1,964                               | )      |
|                                                                        |   |                                 |   |                                 |   |
| Dividends and Distributions:                                                |   |                                 |   |                                 |   |
| Preferred dividends                                                         |   | (925                                 | )      | (925                                 | )      |
| Value of OP units redeemed in sale of golf  courses and other settlements   |   | —                               |   | (535                                 | )      |
| Total dividends and distributions                                           |   | (925                                 | )      | (1,460                               | )      |
|                                                                        |   |                                 |   |                                 |   |
| Net change in net assets available to  holders of common stock and OP units |   | $                                    | (2,513 | )                                    | $      | (3,424 | ) |

 

See accompanying notes to condensed consolidated financial statements.

 

5

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**GOLF TRUST OFAMERICA, INC.**

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

**FOR THE SIX MONTHSENDED JUNE 30, 2003 AND 2002**

**(in thousands,unaudited)**

 
|                                                                         |   | **Six Months  Ended  June 30, 2003** |       | **Six Months  Ended  June 30, 2002** |       |
|------------------------------------------------------------------------------|--------|--------------------------------------|------------|--------------------------------------|------------|
|                                                                         |   |                                 |       |                                 |       |
| **Cash flows from operating activities:**                                    |   |                                 | ** ** |                                 | ** ** |
| Net loss                                                                     |   | $                                    | (1,588     | )                                    | $          | (1,964 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                 |       |                                 |       |
| Adjustment to liquidation basis of  accounting                               |   | (88                                  | )          | 1,261                                |       |
| Straight-line interest, rent and other                                       |   | —                               |       | (42                                  | )          |
| Decrease (increase) in other assets                                          |   | 620                                  |       | (1,021                               | )          |
| Decrease   in restricted cash                                           |   | 1,529                                |       | 582                                  |       |
| Decrease in accounts payable and other  liabilities                          |   | (101                                 | )          | (5                                   | )          |
| Decrease in liquidation liabilities                                          |   | (4,827                               | )          | (3,500                               | )          |
| Net cash used in operating activities                                        |   | (4,455                               | )          | (4,689                               | )          |
|                                                                         |   |                                 |       |                                 |       |
| **Cash flows from investing activities:**                                    |   |                                 | ** ** |                                 | ** ** |
| Golf course improvements                                                     |   | (112                                 | )          | (1,296                               | )          |
| Net proceeds from golf course dispositions                                   |   | 67,767                               |       | 8,590                                |       |
| Decrease in notes receivable                                                 |   | 112                                  |       | 2,486                                |       |
| Net cash provided by investing activities                                    |   | 67,767                               |       | 9,780                                |       |
|                                                                         |   |                                 |       |                                 |       |
| **Cash flows used in financing activities:**                                 |   |                                 | ** ** |                                 | ** ** |
| Net repayments on debt                                                       |   | (69,003                              | )          | (11,471                              | )          |
| Net cash used in financing activities                                        |   | (69,003                              | )          | (11,471                              | )          |
|                                                                         |   |                                 |       |                                 |       |
| Net decrease in cash                                                         |   | (5,691                               | )          | (6,380                               | )          |
| Cash and cash equivalents, beginning of  period                              |   | 7,990                                |       | 14,762                               |       |
| Cash and cash equivalents, end of period                                     |   | $                                    | 2,299      |                                 | $          | 8,382 |   |
| **Supplemental Disclosure of Cash Flow Information**                         |   |                                 | ** ** |                                 | ** ** |
| Interest paid during the period                                              |   | $                                    | 1,289      |                                 | $          | 2,782 |   |
| Note receivable from sale of asset                                           |   | $                                    | 2,300      |                                 | $          | 1,750 |   |
| OP units redeemed as a non-refundable  deposit in the sale of golf courses   |   | $                                    | —     |                                 | $          | 535 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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**GOLF TRUST OFAMERICA, INC.Form 10-Q Quarterly ReportFor the Three and Six Months Ended June 30, 2003**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1. Plan 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 plan of liquidation contemplates the sale ofall of our assets and the payment of, or provision for, our liabilities andexpenses, and authorizes us to establish a reserve to fund our contingentliabilities. The plan of liquidation gives our board of directors the power tosell any and all of our assets without further approval by our stockholders.Pursuant to the plan of liquidation, as of August 8, 2003, we have sold 38of the 47 (eighteen-hole equivalent) golf courses we once held interestsin.

 

*Credit Agreement*

 

Our obligation under our Second Amended andRestated Credit Agreement with our senior bank lenders which was scheduled tomature on June 30, 2003 were repaid in full and retired as of June 19, 2003.

 

**2. Organization and Basis of Presentation**

 

Golf Trust of America, Inc., or GTA, wasincorporated in Maryland on November 8, 1996. We were originally formed tobe a real estate investment trust, or REIT, however, we no longer have our REITstatus as a result of our repossession and operation of golf courses followingthe default of their original third-party lessees. We now own and operate golfcourses. In our SEC filings, we often state golf course quantities in terms of18-hole equivalents. Therefore, one 27-hole golf course property would becounted as 1.5 golf courses. As of August 8, 2003, we have interests in fiveproperties which represent nine golf courses. Five of these nine golf coursesare owned by us and four (namely, the Innisbrook Resort golf courses) arecollateral for a 30-year participating mortgage wherein we are the lender. Thefive golf courses that we own are held by us in fee simple. The nine golfcourses are located in Florida (6), South Carolina (2), and New Mexico. Titleto our golf courses is generally held by Golf Trust of America, L.P., aDelaware limited partnership. We refer to Golf Trust of America, L.P. as our“operating partnership” or “OP” and we refer to the operating partnership andGTA (together with all of their subsidiaries) collectively as “we”, “us” or our“Company.” Golf Trust of America, Inc., through its wholly ownedsubsidiaries GTA GP, Inc. (“GTA GP”) and GTA LP, Inc. (“GTA LP”)holds a 99.5 percent interest in our operating partnership as of August 8,2003. GTA GP is the sole general partner of our operating partnership and ownsa 0.2 percent interest therein. GTA LP is a limited partner in theoperating partnership and owns a 99.3 percent interest therein. Thesepercentages give effect to all outstanding preferred OP units on anas-converted basis. Operators of the golf courses, their affiliates and one ofour officers hold the minority interests in our operating partnership.

 

**Adjustment to Liquidation Basis of Accounting**

 

As a result of our board ofdirectors’ adoption of our plan of liquidation and its approval by ourstockholders, as required we adopted the liquidation basis of accounting forall periods subsequent to May 22, 2001. Accordingly, on May 22, 2001,our assets were adjusted to their estimated fair value and our liabilities,including estimated costs associated with implementing the plan of liquidation,were adjusted to their estimated settlement amounts. The valuation of realestate held for sale as of June 30, 2003 is based on current contracts andestimates of sales values. The valuation of our other assets and liabilitiesunder the liquidation basis of accounting are based on management’s estimatesas of June 30, 2003.   An adjustment of$88,000 is included in the June 30, 2003 consolidated statement of changes innet assets to reflect a $353,000 write-down of certain golf course assets offsetby a net gain of $441,000 in the aggregate on the sales of certain golf courseassets   There were no other liquidationbasis of accounting adjustments for the three months and six months ended June30, 2003.

 

The net assets represent the assets availableto our common stockholders and the remaining OP unit holder. The actual valuesrealized for assets and settlement of liabilities may differ materially fromthe amounts estimated. The actual number of shares of common stock and OP units(excluding intra-company holdings) outstanding at August 8, 2003 is 7,920,737(which includes 35,794 OP units). Of this amount, 365,380 shares of commonstock owned by an affiliate of the borrower under the participating mortgage atthe Innisbrook Resort are pledged to us as collateral under a participating mortgagewherein the borrower is in default, and 85,000 shares of common stock arepledged to us as security for the payment and performance of the obligationsand liabilities of the pledgor under a common stock redemption agreementexecuted concurrently with the sale of Royal New Kent and Stonehouse.  This redemption agreement provides that thissecurity will be tendered to us if and when the total amount of liquidatingdistributions paid to our shareholders pursuant to the plan of liquidation isless than $10.74 per share.

 

7

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

 

Under the liquidation basis of accounting, weare required as an accounting matter to estimate and accrue the costs associatedwith implementing the plan of liquidation. These amounts can vary significantlydue to, among other things, the timing and realized proceeds from golf coursesales, the costs of retaining personnel and others to oversee the liquidation,including the costs of insurance, the timing and amounts associated withdischarging known and contingent liabilities and the costs associated withcessation of our operations. These costs are estimated and are expected to bepaid out over the liquidation period.

 

The following is a summary of the changes inthe Reserve for Estimated Costs During the Period of Liquidation:

 
|                   |   | **December  31,  2002** |       | **Payments** |   | **Adjustments** |   | **June 30,  2003** |   |
|------------------------|--------|-------------------------|------------|--------------|--------|-----------------|--------|--------------------|--------|
|                   |   |                    |       |         |   |            |   |               |   |
| Severance              |   | $                       | 5,075,000  |         | $      | (2,575,000      | )      | $                  | — |   | $ | 2,500,000 |   |
| Professional fees      |   | 3,025,000               |       | (1,738,000   | )      | —          |   | 1,287,000          |   |
| Financial advisor fees |   | 594,000                 |       | (57,000      | )      | —          |   | 537,000            |   |
| Capital expenditures   |   | 386,000                 |       | (344,000     | )      | —          |   | 42,000             |   |
| Other                  |   | 3,068,000               |       | (457,000     | )      | —          |   | 2,611,000          |   |
| Total                  |   | $                       | 12,148,000 |         | $      | (5,171,000      | )      | $                  | — |   | $ | 6,977,000 |   |

 

Included in the accrued severance amountsabove are performance milestone payments due to our executives pursuant totheir amended and restated employment agreements.  Performance milestone payments aggregating approximately$2,526,000 were paid upon our complete repayment of our obligations under oursecured credit facility. ** **Performancemilestone payments aggregating approximately $1,895,000 will be paid in duecourse, however, there are no remaining conditions to such payment.   Any severance payments otherwise payable byus under the amended and restated employment agreements will be reduced by theamount of all earlier performance milestone payments.

 

Included in the total payments under theOther category above is a $105,000 extension fee payment under one of our  directors and officers insurance policies.Our original directors and officers insurance policy expired on February 7,2003 and was replaced by our current directors and officers insurance policywhich expires on February 7, 2004.   Also, included in the total payments underthe Other category above is $128,000 in fees paid to our lenders, $100,000sales bonus paid on the sale of  EagleRidge, $63,000 in fees paid to obtain an updated survey of the Innisbrookproperty,  $30,000 in printing costs forthe 2002 Annual Report, $19,000 in the settlement of the Hillcrest Bank legalclaim, plus miscellaneous fees and expenses related to the sales effort for thedisposition of our assets.

 

**3. Summary of Significant Accounting Policies**

 

*Interim Statements*

 

The accompanying condensed consolidatedfinancial statements for the three months and six months ended June 30, 2003and 2002 have been prepared in accordance with (i) generally acceptedaccounting principles (“GAAP”), and under the liquidation basis of accountingfollowing stockholders’ approval of the plan of liquidation on May 22,2001, and (ii) the instructions to Form 10-Q and Article 10 ofRegulation S-X. These financial statements have not been audited byindependent public accountants, however, they include adjustments (consistingof normal recurring adjustments) which are, in the judgment of management,necessary for a fair presentation of the net assets, financial condition,results of operations and cash flows for such periods. However, these resultsare not necessarily indicative of results for any other interim period or forthe full year. In particular, revenues from golf course operations areseasonal.

 

Certain information and footnote disclosuresnormally included in financial statements in accordance with GAAP have beenomitted as allowed in quarterly reports by the rules of the Securities andExchange Commission, or the SEC. Management believes that the disclosuresincluded in the accompanying interim financial statements and footnotes areadequate to make the information not misleading, but also believes that suchinformation should be read in conjunction with the consolidated financialstatements and notes thereto included in our annual report on Form 10-K,as amended, for the year ended December 31, 2002.

 

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*Recent Accounting Pronouncements*

 

In January 2003, the FASB issuedinterpretation No. 46, Consolidation of Variable Interest Entities.  Interpretation No. 46 requires companieswith a variable interest in a variable interest entity to apply this guidanceas of the beginning of the first interim period beginning after June 15, 2003,for existing interests and immediately for new interests.  The application of the guidance could resultin the consolidation of a variable interest entity.  The only potential variable interest entity with which we areassociated is Innisbrook as disclosed in Note 4.  We are evaluating whether Innisbrook is a variable interestentity, whether we are the primary beneficiary and, if so, the impact of thisinterpretation on financial position and results of operations.

 

4.  **Mortgage Note Receivable**

 

In June 1997, our operating partnershipclosed and funded, as lender, an initial $69.975 million participatingmortgage to Golf Host Resorts, Inc., an entity affiliated with StarwoodCapital Group LLC. The participating loan is secured by the Innisbrook Resort,a 72-hole destination golf and conference facility located near Tampa, Florida,and by some additional collateral. The operator of the resort, Westin HotelCompany, guaranteed up to $2.5 million of debt service at the InnisbrookResort for each of the first five years of the term of the participatingmortgage; this guarantee has been substantially funded. The initial loan of$69.975 million was increased by us by an additional $9 million loanto the borrower (creating a total principal loan amount of$78.975 million), which was used by the borrower for a nine-hole expansionand other improvements to the Innisbrook Resort facilities.

 

The term of the participating mortgage loanis 30 years from inception, with an initial base interest rate of 9.6% perannum, annual increases (of at least 5% but no more than 7%) in the interestpayment for the first five years, and a participating interest featurethroughout the term based upon the growth in revenues, if any, over the baseyear.

 

Golf Host Resorts, the borrower, used$8,975,000 of the proceeds of the loan to purchase 274,039 of our OP units,159,326 shares of our common stock and was granted an option to purchase anadditional 150,000 shares of our common stock which expired (unexercised) onDecember 31, 1999. The 274,039 OP units were converted to shares of ourcommon stock at the request of Golf Host Resorts on March 3, 2000. These274,039 shares of our common stock, plus 79,663 of the shares of our commonstock that they purchased at the time we made the loan to them, plus 11,678 ofthe shares of our common stock formerly pledged by the borrower under the LostOaks participating lease (for a total of 365,380 shares) continue to be pledgedas security for the borrower’s performance under the participating mortgage.Prior to the borrower’s default under the participating mortgage discussedbelow, we recognized interest income on a straight-line basis.

 

Following September 11, 2001, theborrower informed us that due to the significant impact of the events ofSeptember 11th on the Resort’s operating performance, the borrower mightdefault on its mortgage payments to us. The borrower then failed to pay usinterest when due for the month of October 2001.  On November 29, 2001, we notified the borrower that itsfailure to cure its non-payment of the October 2001 interest paymentwithin ten days of our previous notice constituted an event of default of theborrower under our participating mortgage.

 

On March 8, 2002, we sent a notice toWestin Hotel Company alleging that Westin breached the subordination agreementby failing to remit payments directly to us on behalf of the borrower. Westinhas contested our claim that it breached the subordination agreement. Nolitigation has been filed in this regard. We are seeking a resolution of thisdispute with Westin as part of the proposed global settlement at Innisbrook discussedbelow.

 

Additionally, on March 8, 2002, wedelivered a legal notice to the borrower accelerating the entire amount of itsindebtedness to us as a result of its continuing default under theparticipating mortgage. The participating mortgage is a non-recourse loan.Accordingly, following an event of default, we cannot bring a legal actiondirectly against the borrower to compel payment. Rather, our recourse is toproceed against the guarantors and/or to foreclose upon the Innisbrook Resort(other than the condominium units which are owned by third parties) and anyother property of the borrower that has been pledged to us as collateral tosecure our loan to the borrower. Since early 2002, we have been seeking anegotiated foreclosure or settlement with the borrower as well as negotiating aglobal resolution of all issues impacting the Innisbrook Resort . We expect toenter into formal documentation of the global resolution by the end of 2003;however, we can provide no assurances as to the terms, timing or likelihood ofany such global settlement.

 

**5.   Commitments and Contingencies**

 

*Palm Desert Country Club*

 

We operated this golf course through ourwholly owned subsidiary, GTA—Palm Desert, LLC, from September 5, 2000,when the lessee agreed to deliver possession to us, until April 20, 2001,when we completed the sale of Palm Desert Country Club to Dahoon

 

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Investment Company, for total consideration of $4.075 million.Dahoon Investment Company commenced a judicial action against us and GTA PalmDesert LLC on November 20, 2001 in the Riverside County Superior Court,alleging (1) breach of a purchase and sale agreement involving the PalmDesert Country Club in Palm Desert, California, (2) negligence, (3) breachof the covenant of good faith and fair dealing, and (4) intentional andnegligent misrepresentation in connection with the sale of the golf course. Wehave contested their claims, however, we cannot predict the outcome of thelitigation at this time.   The court seta trial date of October 20, 2003, and a Mandatory Settlement Conference forSeptember 19, 2003. Discovery is currently ongoing and the parties are in themidst of an extended mediation process. At this time we are unable to assess the likely outcome of thislitigation.

 

*Stonehenge (Country Club at Wildewood andCountry Club at Woodcreek Farms)*

 

On April 22, 2002, we filed an action *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 for breach of contract accompanied byfraudulent act, fraud and unfair trade practices. We are seeking damages ofapproximately $172,000, which represents prepaid dues which were not disclosedby the defendants. A counterclaim for payment under a consulting agreement,along with claims for payment of operating/maintenance and insurance expenseswas received on June 20, 2002. Our reply was filed on July 22, 2002denying the claims and, alternatively, seeking a set-off or recoupment againsttheir alleged claim for the amount of our claim. Discovery is ongoing, and notrial date has been set. We are unable to assess the likely outcome of thislitigation.

 

*Osage National Golf Club*

* *

The lawsuit, *Osage National Golf Club, Inc. etal. v. Golf Trust of America, Inc., et al.*, United StatesDistrict Court Eastern District of Missouri was filed against us on or aboutApril 5, 2000. This lawsuit involves a sale and lease transaction betweenplaintiffs and Golf Trust of America L.P. of a golf course located in MillerCounty, Missouri. Part of the consideration for this transaction at the time ofour purchase of the golf course was the transfer of OP Units as purchaseconsideration to Osage National Golf Club. Plaintiffs allege that wemisrepresented the nature of these OP Units. Plaintiffs assert that because ofthis misrepresentation the OP Units were substantially less valuable than hadbeen represented by us and, therefore, they have suffered actual damages in theamount of not less than $3,500,000. In addition, plaintiffs’ claim that theyare entitled to unspecific punitive damages. A scheduling conference was heldwith the court in late February 2002, and the case was tentatively set fortrial on October 28, 2002. The parties agreed to submit the case onstipulated facts and have submitted such a stipulation to the court. Theparties met with the court on October 29, 2002 and an order was enteredscheduling memoranda of law and other procedures to present the case. OnDecember 30, 2002, plaintiffs filed their memorandum of law in which theylimited their request for judgment to $1,465,886.80 plus interest at 9% fromJune 20, 2000. On January 6, 2003, we filed a responsive memorandum. OnJune 18, 2003, the parties filed their joint request for entry of judgment.This matter is now in a position for ruling by the court and we wouldanticipate the ruling within a few months. At this time we are unable to assessthe likely outcome of this case.

 

*Other Litigation*

 

*Lake Ozark Industries, Inc. and Everett Holding Company, Inc.v. Golf Trust of America, et al.*  This is an action initiated in the CircuitCourt of Miller County, Missouri, by a contractor, Lake Ozark ConstructionIndustries, Inc., or LOCI, against numerous defendants including us. LOCIasserts that it performed construction services on, or which benefited theproperty of, the various defendants, including us and seeks to foreclose amechanic’s lien upon our property. Plaintiffs’ amended petition is in sixcounts. Counts I, II and III seek recovery of payment for LOCI’s work fromM & M Contractors, Inc., which plaintiffs’ claim was the primecontractor and the party who hired LOCI as a subcontractor. Counts IV, V and VIname us and other defendants. Count IV seeks to foreclose a mechanic’s lienupon the property of various defendants, including us. The lien is for theprincipal amount of $1,276,123, plus interest at 10% per year and attorneys’fees. Plaintiffs calculate interest to May 20, 1999, just prior to thelien filing, to be $151,180, and interest thereafter to be $354 per day. CountV of the amended petition, directed at various defendants, including us, seeksa determination of the priority of plaintiffs’ claimed mechanic’s lien overvarious deeds of trust and property interests, including our interest. Theoutcome of count V will be determined by the resolution on the merits of countIV. Finally, count VI seeks foreclosure of a deed of trust from one of theother defendants, Osage Land Company, apparently given to Everett to forestallplaintiffs’ filing of the mechanic’s lien. The deed of trust was recordedsubsequent to the recordation of the deed from Ozark Land Company to us for itsproperty. The court ruled in June 2001 on cross-motions for summaryjudgment filed by plaintiffs, us, and defendant Central Bank of Lake of theOzarks, a beneficiary of deed of trust on some of the property covered by themechanic’s lien and by the deed of trust from Osage Land Company to Everett.The court denied all the motions with one exception—it granted Everett summaryjudgment on count VI (foreclosure of the deed of trust to Everett from OsageLand Company) but ruled that the deed to us and the deeds of trust to CentralBank of Lake of the Ozarks are prior to the deed of trust to Everett. The courtdid not explain its rulings on the remainder of plaintiffs’ motion or on ourCentral Bank of Lake of the Ozarks motions, except that “there remainsubstantial and genuine issues of material fact.” We filed two motions forsummary judgment on counts IV and V. The grounds for the motions are thatplaintiffs’ claimed lien does not comply with requirements of the Missourimechanic’s lien statute and thus is invalid. On March 25, 2002, the courtorally granted our requested relief and ruled that plaintiffs’ claimed liendoes not comply with requirements of the Missouri mechanic’s lien statute andis invalid. The court entered its written order granting our motions for

 

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summary judgment on April 20, 2002. As we have previouslyreported, since not all claims involved in this lawsuit have been resolved,plaintiffs’ time to appeal the April 20, 2002 order granting our motions forsummary judgment had not yet begun to run. Although the plaintiffs’ attorneys informed us that they were makingefforts to resolve the remaining claims in this lawsuit, this had apparentlynot come to pass.  Accordingly, on April15, 2003, we filed a motion with the court asking that it make final thejudgment granted to Golf Trust of America, L.P.  On May 12, 2003, the Court entered a judgment that disposed ofall outstanding claims in the lawsuit. On June 10, 2003 Plaintiffs filed aNotice of Appeal of the ruling in favor of Golf Trust of America, L.P. on itsMotion for Summary Judgment. Because of the uncertainty of an appeal byplaintiffs, at this time we are unable to assess the likely outcome of thislitigation.

 

*Ordinary Course Litigation*

 

In addition to litigation between lessor andour former lessees (and their affiliates), owners and operators of golf coursesare subject to a variety of legal proceedings arising in the ordinary course ofoperating a golf course, including proceedings relating to personal injury andproperty damage. Such proceedings are generally brought against the operator ofa golf course, but may also be brought against the owner. Our participatingleases provided that each lessee was responsible for claims based on personalinjury and property damage at the golf courses which were leased and requiredeach lessee to maintain insurance for such purposes. Since we are now theoperator of our remaining golf courses, excepting Innisbrook, we maintaininsurance for these purposes. We are not currently subject to any materialclaims of this type.

 

*Refundable Initiation Fees*

 

Certain membership initiation fees at thesegolf courses are refundable based on specific conditions. The estimated presentvalue of the potential refunds over the thirty-year required membership term,as defined in the Club Membership Manual, recorded as an accrued liability onour books at June 30, 2002 is valued at $125,000. Additionally, certaininitiation fees may be refundable prior to the expiration of the thirty-yearterm under specific membership replacement conditions. There is no liabilityrecorded to consider the refundability of refunds issued under these conditionsdue to the fact that four new members have to join in the specific membershipcategory for a resigned member to receive a refund. A refund issued under thesespecific circumstances would be considered a reduction of membership revenuefor that period.  All initiation feesreceived are initially recorded as deferred revenue and amortized over theaverage life of a membership which, based on historical information, is deemedto be nine years.

 

**6. Other Assets**

 

Receivables—net consists of the following:

 
|                                     |   | **(Liquidation  Basis)** |      |
|------------------------------------------|--------|--------------------------|-----------|
|                                     |   | **June 30,  2003**       |      | **December 31,  2002** |   |
|                                     |   | **(unaudited)**          |      |   |   |
|                                     |   |                     |      |   |   |
| Rent receivable                          |   | $                        | —    |   | $ | 553,000 |   |
| Note receivable taken in sale of asset   |   | 2,313,000                |      | — |   |
| Loans to officers                        |   | 1,255,000                |      | 1,255,000 |   |
| Other miscellaneous receivables—net |   | 740,000                  |      | 946,000 |   |
| Receivables—net                     |   | $                        | 4,308,000 |   | $ | 2,754,000 |   |

 

The rent receivable represented the rent dueon the golf courses at the Eagle Ridge Inn & Resort atDecember 31, 2002 which was subsequently received.  This property was sold on January 30, 2003.

 

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

 

*Loans to Officers*

 

Historically, the compensation committee ofthe board authorized us from time to time to make loans to our officers topurchase shares of our common stock and to assist in their payment of theirpersonal income tax liability arising in connection with their non-cashcompensation and benefit arrangements. Pursuant to the terms of our officers’ amended and restated employment

 

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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 accrues 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 July 1, 2002, we discontinued accruing interest on these loansfor financial reporting purposes because the total outstanding balance exceededthe value of the collateral shares of common stock, computed based on the netassets available to common shareholders. Loans to officers are subject to an allowance for doubtful accounts of $400,000to reflect the difference between the computed value of our officers’ pledgedshares of their common stock compared to their value at the time that theshares were pledged, which was $8 per share.  These loans mature at the earliest of the following:(i) February 25, 2006; (ii) three years following termination ofthe executive/borrower’s employment; or (iii) the date of the finaldistribution under the plan of liquidation. At any time when the loan isover-secured, the executive/borrower has the right to sell the common stocksecuring the loan, provided that all proceeds of the sale are first applied tothe then outstanding balance of the loan. All distributions (including anyliquidating distributions) on the common stock securing the loan are appliedagainst the loan. The related promissory notes are non-recourse to theexecutive/borrower.

 

The other miscellaneous receivables includeapproximately $497,000 of member, trade and other miscellaneous receivables ofour managed golf courses, $234,000 in notes receivable, including accrued interest,taken in participating lease terminations, and $9,000 in insurance receivables.In estimating the fair value of receivables, management considers the term,security, interest rates, and collectability of the receivable.

 

**7.  Credit Agreement**

 

Our obligations under our Second Amended andRestated Credit Agreement with our senior bank lenders which was scheduled tomature on June 30, 2003 were repaid in full as of June 19, 2003.  Prior to repayment, the interest rate underthe credit agreement was prime plus 3% for an effective rate of 7.25% per annumat retirement.

 

**8. Preferred Stock**

 

*Series A Preferred Stock*

 

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

 

Aggregate Series A preferred stockdividends accrued, until July 20, 2003, at a rate of $462,500 perquarter.  Effective July 21, 2003 therate increased to $625,000 per quarter (see further discussion of thisincrease) below.  As of June 30, 2003,we have accrued and not paid eight quarters of Series A preferred stockdividends (including the dividend otherwise payable in respect of the quarterended June 30, 2003). Under our Series A charter document, because we nowhave at least six quarters of accrued and unpaid Series A preferred stockdividends, the holder of the Series A preferred stock, AEW TargetedSecurities Fund, L.P. (or its transferee), will have the right to elect twoadditional directors to our board of directors at our next annual meeting,whose terms as directors will continue until we fully pay all accrued butunpaid Series A dividends.

 

On February 22, 2001, we entered into avoting agreement with AEW, which continues to hold all of the shares of theSeries A preferred stock. That agreement required AEW to vote in favor ofthe plan of liquidation and required us to redeem all of the shares ofSeries A preferred stock (for $25 per share plus dividends accrued andunpaid thereon through the date of the final redemption payment) promptly afterwe determine in good faith that we have received sufficient net proceeds fromthe disposition of our assets and/or operations to redeem all of the preferredshares without violating any legal or contractual obligations.

 

Moreover, under our voting agreement withAEW, since we did not fully redeem the Series A preferred stock byMay 22, 2003 (which was the second anniversary of our shareholders’adoption of the plan of liquidation), AEW Targeted Securities Fund (or itstransferee) had the right to require us to redeem the Series A preferredstock in full within 60 days which right they exercised on May 23, 2003.Since we defaulted on that obligation, from and after July 21, 2003 the stateddividend rate of the Series A preferred

 

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stock increased from 9.25% to 12.50% per annum (equivalent to aquarterly dividend of $625,000) until the Series A preferred stock isredeemed. Although we are permitted to continue to accrue such dividendswithout paying them on a current basis, they must be paid in full prior to anydistribution to our common stockholders, which will reduce our cash availablefor liquidating distributions to common stockholders**. **We intend to continue to accrue such dividends until such timeas we have cash available to redeem the Series A preferred stock, at which timewe intend to redeem the Series A preferred stock.

 

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**GOLF TRUST OFAMERICA, INC.Form 10-Q Quarterly ReportFor the Three and Six Months Ended June 30, 2003**

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Golf Trust of America, Inc., or GTA, wasincorporated in Maryland on November 8, 1996. We were originally formed tobe a real estate investment trust, or REIT, but lost our REIT status as aresult of our repossession and operation of golf courses following the defaultof their original third-party lessees. We now own and operate golf courses. Inour SEC filings, we often state golf course quantities in terms of 18-holeequivalents. Therefore, one 27-hole golf course property would be counted as1.5 golf courses. As of August 8, 2003, we have interests in five propertieswhich represent nine golf courses. Five of these nine golf courses are owned byus and 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 99.5 percent interestin our operating partnership as of August 8, 2003. 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 a99.3 percent interest therein. These percentages give effect to alloutstanding preferred OP units on an as-converted basis. Operators of the golfcourses, their affiliates and one of our officers hold the minority interestsin our operating partnership.

 

**Significant Events since the filing of ourquarterly report on Form 10-Q on May 15, 2003**

 

Significant events occurring since May 15,2003 (the filing date of our Form 10-Q for the quarter ended March 31,2003) include the following:

 

•              on May 21, 2003, thecourt dismissed the legal action titled *Mary Ella Crossley v. W. Bradley Blair, II et al*inits entirety.  Subsequently, we reacheda non-monetary settlement with the plaintiff which provided that the plaintiffwill not appeal the court’s ruling and the Golf Trust defendants will not seekattorneys’ fees or costs from the plaintiff.**(see Part II, Item 1 Legal Proceedingsfor further details);

 

•              on June 17, 2003, weclosed the sale of the Sandpiper Golf Course for $25.0 million in cash;

 

•              on June 19, 2003, werepaid in full our obligations under our Second Amended and Restated CreditAgreement with our senior bank lenders, which was scheduled to mature on June30, 2003;

 

•              on June 19, 2003, wepaid performance milestones to our executives pursuant to their amended andrestated employment agreements aggregating $2,526,000 which became due upon theretirement of our credit agreement as noted above;

 

•              we continued tonegotiate for a potential settlement of claims resulting from the borrower’sdefault under the participating mortgage at the Innisbrook Resort whileInnisbrook fell short of budget expectations for the first half of 2003; and

 

•              in July 2003, thejudge in the litigation against our borrower at the Innisbrook Resort, GolfHost Resorts, Inc., rejected the plaintiffs’ attempts to proceed with the caseas a class action, leaving approximately 80 individual plaintiffs in thelawsuit.  The judge also ruled that theplaintiffs could not seek recovery from the individuals that hold stock in GolfHost Resorts, Inc. and its affiliates (rejecting plaintiffs’ attempt to “piercethe corporate veil”).  Golf HostResorts, Inc. has been informed that the plaintiffs have or intend to appealboth of these decisions.

 

Each of these developments is described inmore detail herein.

 

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**Our Participating Mortgage secured by theInnisbrook Resort**

 

***RecentInnisbrook Developments***

 

During the second quarter of 2003 wecontinued to negotiate for a potential settlement of claims resulting from the borrower’sdefault under the participating mortgage wherein we are the lender. We areseeking to resolve this matter by the end of 2003,  however, we can provide no assurances as to the terms, timing orlikelihood of any resolution.

 

***InnisbrookBackground***

 

We are the lender under a $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. The borrower, Golf Host Resorts, Inc., owns theInnisbrook Resort (other than the condominium units). The borrower entered intoan arrangement with many of the persons who own condominium units at theResort. Under this arrangement, when the condominiums are not being used bytheir owners, they are placed in a pool and rented as hotel rooms to guests ofthe Innisbrook Resort. There are no separate hotel rooms. Accordingly, webelieve maintaining condominium owner participation in the rental pool isimportant to the economic success of the Innisbrook Resort. The borrower alsoentered into an agreement with Troon Golf, LLC to manage the golf courses, anda separate management agreement with Westin Hotel Company to manage thecondominium unit rental-pool and the conference facilities. Troon Golf, WestinHotel Company and the borrower are all affiliates.

 

Pursuant to the terms of the participatingmortgage, the loan term of the participating mortgage is 30 years frominception, with an initial base interest rate of 9.6% per annum, annualincreases (of at least 5% but no more than 7%) in the interest payment for thefirst five years, and a participating interest feature throughout the termbased upon the growth in revenues, if any, over the base year. However,operations at the Resort have not resulted in any participating interestpayments (as distinct from base interest payments) since 1999 (see Note 4to our condensed consolidated financial statements).

 

In addition to the Innisbrook Resort itself,the collateral securing the borrower’s performance under the participatingmortgage currently includes 365,380 shares of GTA common stock owned by theborrower (and held by GTA as the secured party) and three condominium unitsowned by the borrower at the Innisbrook Resort. The borrower’s parent, GolfHosts, Inc., guaranteed all of the borrower’s loan payment obligations,however, Golf Hosts, Inc. has few significant assets other than itsinterest in the borrower. In June 1997, Westin and the borrower entered into anagreement pursuant to which Westin agreed to advance, in specifiedcircumstances, up to $2.5 million per year to the borrower for five yearsin the event that the Resort did not generate the levels of cash flow specifiedin that agreement. Westin, the borrower and GTA entered into a subordinationagreement whereby Westin agreed to make such payments directly to GTA inspecified circumstances, and GTA agreed that in the event of foreclosure,Westin would continue to manage the resort pursuant to the existing managementagreement.

 

In addition to the current rental poolagreement dated January 1, 2002, the current owner of the InnisbrookResort agreed with the condominium owners association that the owner of theInnisbrook Resort would reimburse 50% of the refurbishment costs (approximately$7.6 million plus accrued interest thereon, assuming 610 units arerefurbished) invested in the condominium units by the condominium owners. Thisamount will be amortized and reimbursed to participating condominium owners (ortransferees of their condominium unit) over the five-year period beginning in2005. The reimbursement is contingent on the units remaining in the rental poolfrom the time of their refurbishment throughout the reimbursement period (2005to 2009). If the unit does not remain in the pool during the reimbursementperiod, the owner or successor owner forfeits any unpaid installments at thetime the unit is removed from the pool. We understand that the refurbishment ofapproximately 500 units of the total rental pool units of approximately 619 hasbeen completed to date.

 

Certain of the condominium owners (asplaintiffs) initiated legal action against our borrower, Golf HostResorts, Inc., and its corporate parent, Golf Hosts, Inc. (asdefendants), regarding various aspects of the prior rental pool arrangement andasking that the case proceed as a class action on behalf of all similarlysituated condominium owners. We have been informed that by order dated April 3,2003, Golf Host Resorts, Inc. was substituted in place of Golf Hosts, Inc. asthe defendant in this lawsuit. 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 theResort.  In July 2003, the judge in thelitigation against Golf Host Resorts, Inc. rejected the plaintiffs’ attempts toproceed with the case as a class action, leaving approximately 80 individualplaintiffs in the lawsuit.  The judgealso ruled that the plaintiffs could not seek recovery from the individualsthat hold stock in Golf Host Resorts, Inc. and its affiliates (rejectingplaintiffs’ attempt to “pierce the corporate veil”).  Golf Host Resorts, Inc. has been informed that the plaintiffshave or intend to appeal both of these decisions.

 

Neither GTA nor any of our affiliates is aparty to that lawsuit, however, it affects us insofar as any costs imposed onthe borrower by the lawsuit might reduce the borrower’s willingness and abilityto (a) commence to make any participating mortgage

 

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payments to us in the future or to cure its default thereunder, 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.

 

Following September 11, 2001, theborrower informed us that due to the economic erosion in the lodging industryperformance resulting from the decline in the economy and the significantimpact of the events of September 11th on the Resort’s operatingperformance, the borrower might default on its mortgage payments to us. Shortlythereafter, the borrower’s affiliate, Lost Oaks, L.P. (the lessee of our LostOaks Golf Club), failed to pay us monthly rent when due forSeptember 2001. The borrower then failed to pay us interest when due forthe month of October 2001. On November 6, 2001, we notified LostOaks, L.P. that its failure to pay rent (as well as late charges and interest)for the month of September 2001 constituted an event of default under itsparticipating lease. On November 14, 2001 we sent a notice to the borrowerthat its interest payment was overdue. On that same day, we sent a notice ofdefault to the borrower based upon the cross-default of its affiliate, LostOaks, L.P., under its participating lease. (The participating lease at LostOaks golf course was terminated on June 30, 2002 and the golf course wassubsequently sold on January 13, 2003.) On November 29, 2001, wenotified the borrower that its failure to cure its non-payment of theOctober 2001 interest payment within ten days of our previous noticeconstituted an event of default of the borrower under our participatingmortgage.

 

On March 8, 2002, we sent a notice toWestin Hotel Company alleging that Westin breached the subordination agreementby failing to remit payments directly to us, on behalf of the borrower. Westinhas contested our claim that it breached the subordination agreement. Nolitigation has been filed in this regard. We are seeking a resolution of thisdispute with Westin as part of the proposed global settlement at Innisbrookdiscussed below.

 

In addition, on March 8, 2002, wedelivered a notice to the borrower accelerating the entire amount of itsindebtedness to us as a result of its continuing default under theparticipating mortgage. The participating mortgage loan is a non-recourse loan.Accordingly, following an event of default thereunder, we cannot bring a legalaction directly against the borrower to compel payment. Rather, our recourse isto proceed against the guarantors and/or to foreclose upon the InnisbrookResort (other than the condominium units which are owned by third parties) andany other property of the borrower that has been pledged as collateral to us tosecure our loan to the borrower. Since early 2002, we have been seeking anegotiated foreclosure or settlement with the borrower as described in moredetail below.

 

***InnisbrookStrategy***

 

In general, we face a potential trade-offbetween (a) seeking to sell the participating mortgage on the InnisbrookResort at the present time, as a distressed loan, which would likely result ina significant loss on our investment, but would likely hasten the completion ofour liquidation, and (b) seeking to resolve the problems with our borrowerand others associated with the Resort through a negotiated settlement orforeclosure of the Innisbrook Resort loan, after which we, in conjunction withthe Resort operators (Westin and Troon), would seek to realize a potentiallybetter recovery, based on historical results. The latter alternative mightallow us to recoup more of our investment, but would take considerably moretime and expense.

 

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 projected the range of total value wecould reasonably expect to receive if we were to hold the asset for a period ofapproximately 30-months (ending on or about December 31, 2005) and duringthat time we and the Resort’s operators (namely Westin and Troon) were tosuccessfully realize a modest recovery based on past historical results. In a letterdated March 15, 2002, subject to various limiting assumptions, HoulihanLokey’s analysis projected that we would receive between $45 and$50 million under the forced liquidation scenario, and between $60 and$70 million under the orderly liquidation scenario.

 

Houlihan Lokey updated its analysis of theInnisbrook Resort in March 2003. In a report we received on March 18,2003, subject to various limiting assumptions, Houlihan Lokey’s analysisprojected that we would receive between $40 and $47 million under the forcedliquidation scenario, and between $58 and $70 million under the orderlyliquidation scenario.

 

Houlihan Lokey’s projections regarding theInnisbrook Resort are forward-looking statements, subject to this report’sintroductory cautionary note and the risk factors listed herein. The actualvalue we may obtain from our participating mortgage interest might be muchlower. Houlihan Lokey’s estimates are based on several assumptions about futureevents, including assumptions that we will successfully obtain fee simple titleto the Innisbrook Resort and then successfully realize a  recovery in the financial performance of theResort (which is dependent on the success of the Resort operators and arecovery in the travel and leisure sectors of the U.S.

 

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economy). Any or all of these assumptions might prove to be incorrect.Moreover, Houlihan Lokey’s projections are not based on any appraisals of theInnisbrook asset or any independent litigation risk assessments. Accordingly,we have not, and you should not, place undue reliance upon these projections.

 

Following review of Houlihan Lokey’sMarch 2003 report and consideration of other relevant facts, circumstancesand analyses, management and the board of directors continue to believe thatseeking a recovery in the Resort’s financial performance and a resolution ofissues with the borrower (as opposed to actively marketing for sale ourinterest in Innisbrook at a distressed price), is in our stockholders’ bestinterest vis-à-vis other alternatives. To that end, we have been negotiatingwith our borrower, as well as with Westin and Troon Golf, in an effort to seeka global resolution of all contractual defaults at the Innisbrook Resort and totake control of the Innisbrook Resort (and all other assets of the operatingentity) by the end of 2003, but which may take longer. As part of any suchglobal settlement, we expect (but cannot assure) the following:

 

•              to obtain fee simpletitle to the Innisbrook Resort real property and personal property (includingall financial 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 andTroon Golf, respectively, which we expect will contain a broad range of newrevenue enhancement possibilities, accountability and reporting provisions;

 

•              to enter, throughone of our subsidiary LLCs, into a new agreement regarding ownership anddevelopment of a residential project at an adjacent parcel of land, commonlycalled Parcel F;

 

•              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 will be subject to a contract with Westin) and,as 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 to improvethe Resort’s relationship with the Innisbrook condominium association; and

 

•              to support asettlement of the lawsuit brought by certain condominium owners against theResort owner, which settlement we believe would be in the best interest of theResort.

 

As previously discussed, we are seeking tofinalize open issues and legal agreements on all of the above by the end of2003, however, we can provide no assurances as to the terms, timing orlikelihood of any possible global settlement. If we decide to pursue judicialforeclosure of the Resort, we expect that it would be expensive andtime-consuming and there is a risk to us that the borrower might pursue andobtain bankruptcy and/or other judicial protection. We also face the risk thatour negotiations with Westin might not be successful. If our settlementnegotiations with Westin do not succeed, but we nonetheless become the owner ofthe Innisbrook Resort, we may become involved in potentially costly litigationwith Westin regarding the effect of the subordination agreement. Any suchlitigation would likely focus on the extent, if any, to which we, as successorowner of the Innisbrook Resort, must assume the borrower’s outstandingliabilities to Westin under the original management agreement, among other issues.Nothing herein shall imply a view that we have any such obligation or that wedon’t have defenses to any allegations that we have such an obligation. Even ifwe successfully obtain ownership of the Innisbrook Resort, we, along with theResort’s operators, Westin and Troon Golf, expect to face the difficult task ofseeking to realize a recovery in the Resort’s performance, which is currentlyhindered 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 theInnisbrook Resort’s management that all cash generated by the business isretained in the operating entity and is being utilized to cover InnisbrookResort financial obligations.

 

Our estimate of the fair value of ourparticipating mortgage interest as lender in the Innisbrook Resort, as recordedon our books at June 30, 2003, is $60 million, which is near the low endof the valuation range for the Innisbrook asset under the “orderly liquidation”scenario, as estimated by Houlihan Lokey in both their March 2002 andMarch 2003 analyses. We have identified our valuation of the participatingmortgage as a critical accounting estimate, as discussed below, under thecaption “Application of Critical Accounting Policies.” We do not rule out thepossibility that we might decide to sell our interest in the Innisbrook Resortprior to the

 

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end of the anticipated holding period (i.e., December 31, 2005) in response to any reasonable offer, evenif the amount is for less than $60 million if, after consideration of thefacts and circumstances at that time, our board determines that the sale wouldbe in the best interest of our stockholders. However, we cannot presentlypredict what events, signals, factors or outcomes might cause our board toabandon the orderly liquidation strategy in favor of an immediate sale. We facethe risk that our efforts to preserve the value of the Innisbrook Resort mightbe unsuccessful and, therefore, that we might ultimately sell our interest inthe Innisbrook Resort for less than our current estimates of its fair value.Accordingly, at some future date, our assessment of the asset’s fair value maychange, based on facts and circumstances applicable at that time, and the assetmay be written-down.

 

We face a number of risks respecting theResort, our attempted resolution of the issues described above and the timingthereof.  These risks are describedfurther below under the heading “Risks that might Delay or Reduce ourLiquidating Distributions.”

 

***InnisbrookResort Financial Performance***

 

If we acquire ownership of the InnisbrookResort, together with the business and assets of the Resort’s owner, Golf HostsResorts (and its various related parties associated with operations at theInnisbrook Resort), we expect to include these newly-acquired assets of theseentities within our consolidated financial reporting group. The consolidatedfinancial results of these entities are discussed below.

 

Even though we have not yet acquiredownership of the Innisbrook Resort, we have based our calculation of the participatingmortgage’s liquidation value on an estimate of the future going-concern valueof the Resort’s operations, on the assumption that we will assume operations,hold and operate the property until operating revenues realize a modestrecovery based on historical results and then sell the Resort as a goingconcern. We have identified our valuation of the participating mortgage as acritical accounting estimate.  Thistopic is discussed below. See “Application of Critical Accounting Policies.”

 

As previously discussed, we are seeking toassume operations at the Innisbrook Resort by the end of 2003. The InnisbrookResort continues to suffer from weak performance in the travel sector of theeconomy.   As a result Innisbrookbookings for the first half of 2003 have been below anticipated levels for 2003and we currently do not expect to see any marked improvement until early2004.   Based on the current financialperformance of Innisbrook and its outstanding unpaid financial obligations fromprior periods (years), we can offer no assurances that we will not need to fundshort-term operating cash shortfalls at some level following the conclusion ofsettlement negotiations.

 

Based upon the financial resultssubmitted to us by Golf Hosts Resorts, Inc., the net operating income of theproperty for the six months ended June 30, 2003 was $793,000, which is adecrease in income from the same period in the prior year of approximately$2,502,000, or 75.9%. During the six months ended June 30, 2003, gross revenuesdeclined $4,272,000, or 16.3%, from the same period in the prior year. Roomnights for the period were down by 18.5% and room night spending levels were upby $12.81 per room night or 2.7%. The combined reduction in room nights andincrease in average spending resulted in the net reduction of gross revenuesnoted above. Total operating expenses before depreciation and amortization weredown $1,531,000, or 7.2%, for the six months ended June 30, 2003 compared tothe same period for the prior year. In addition, depreciation and amortizationwere down in the aggregate amount of $239,000. This performancewas significantly below budget expectations for the first half of 2003.

 

For the trailing twelve months ended June 30,2003, net operating income, before write-down of impaired intangible assets, isup approximately $1,443,000, or 35.9%, when compared to the trailing twelvemonths ended June 30, 2002. Total revenues are down approximately $4,483,000,or 11.1%. REVPAR, which is a standard operating measurement tool within thehotel industry, is in our judgment not a useful analytical tool at thisproperty due to the rental pool arrangement. Revenue per room night, whichrecognizes the actual gross revenue as it relates to occupied rooms, was up$23.84, or approximately 4.4 % while rooms occupied were down by 11,113 roomnights or 14.9%. The decrease in revenues was offset by reductions in operatingexpenses totaling approximately $2,602,000, or 6.9%. Other expenses, whichinclude participating interest, straight-line interest, losses on assets leasedand held for sale, income tax benefits and non-cash charges for depreciationand amortization are down approximately $ 2,889,000. This reduction in otheritems is primarily the result of a the write-down during the twelve monthsended June 30, 2002 of intangibles due to intangible impairment in the amountof $3,000,000, reductions in the recognition of depreciation and amortizationin the amount of approximately $324,000, an increase in interest expense of$104,000, reductions in the losses on assets held for sale in the amount of$184,000 and reductions in income tax benefits of $515,000 during the trailingtwelve months ended June 30, 2002. These fluctuations culminated in a reductionof $1,008,000 or 7.8%, in the loss for the trailing twelve months ended June30, 2003, when compared to the same period in the prior year.   Because these results are unaudited and areprovided by our borrower and not prepared by us, we can provide no assurancesas to the completeness or accuracy of these financial results.

 

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**Planof Liquidation**

 

***Recent Dispositions***

 

As previously noted, since the filing of ourquarterly  report on Form 10-Q on May15, 2003, we closed the sale of the Sandpiper Golf Course. The disposition was structured as a sale of our interest inSandpiper-Golf Trust, LLC, the entity which owns the golf course.  We received the purchase price of $25.0million in cash on June 17, 2003.

 

***Background regardingthe Plan of 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 events andconsiderations leading our board to adopt the plan of liquidation are summarizedin our proxy statement dated April 6, 2001, and in our most recent annualreport on Form 10-K. The plan of liquidation contemplates the sale of allof our assets and the payment of (or provision for) our liabilities andexpenses, and authorizes us to establish a reserve to fund our contingentliabilities. The plan of liquidation gives our board of directors the power tosell any and all of our assets without further approval by our stockholders.However, the plan of liquidation constrains our ability to enter into saleagreements that provide for gross proceeds below the low end of the range ofgross proceeds that our management initially estimated would be received fromthe sale of such assets absent a fairness opinion, an appraisal or otherevidence satisfactory to our board of directors that the proposed sale is inthe best interest of our Company and our stockholders.

 

At the time we prepared our proxy statementsoliciting stockholder approval for the plan of liquidation, we expected thatour liquidation would be completed within 12 to 24 months from the date ofstockholder approval on May 22, 2001 and would result in liquidatingdistributions to common stockholders within a specified range. While we havemade significant progress toward that goal, our ability to complete the plan ofliquidation within this time-frame and within the range of liquidatingdistributions per share set forth in our proxy statement is now far lesslikely, particularly insofar as the disposition of our lender’s interest in theInnisbrook Resort is concerned. We use the term “Original 2001 Range” to referto our 2001 projection of the range within which total liquidatingdistributions to common stockholder would likely occur. (As the contextrequires, the term “Original 2001 Range” also refers to the component estimateprices or price ranges for particular golf courses, all of which contributed tothe overall projected range of liquidating distributions.).  At the time management prepared the Original2001 Range, one of our financial advisors, Houlihan Lokey, estimated thatliquidating distributions to common stockholders would be lower. We refer tothis projection as “Houlihan Lokey’s 2001 Range,” which term also refers to itscomponent per-course estimated sale price ranges, as the context requires. Withrespect to our dispositions, as of August 8, 2003,  we have sold 29 of our 34 properties (stated in 18-holeequivalents, we have sold 38.0 of our 47.0 golf courses) for gross salesproceeds of $301.4 million. In the calculation of this amount, we valued allequity redemption components of sale prices as agreed upon by the parties atthe time of sale. In the aggregate, our gross sales proceeds of$301.4 million are within the combined per-course ranges for the sold golfcourses, as estimated during the preparation of Houlihan Lokey’s 2001 Range.However, our gross sales proceeds are $15.6 million, or 4.9%, below thelow end of their combined Original 2001 Range. Of the twelve assets sold belowthe low end of the Original 2001 Range, all but two were sold afterSeptember 11, 2001 (three in late 2001, three in 2002 and four in 2003).The events of September 11th as well as the continuing decline in theeconomy after that date negatively impacted our ability to close sales transactionswithin the originally contemplated range of prices. Although no fairnessopinions or appraisals were obtained, based on the board’s observations of theenvironment in which we and the nation were operating in at the time of eachsale and other evidence regarding each sale below the low end of the range, ourboard determined that each of these twelve transactions at prices below theOriginal 2001 Range was fair to, and in the best interest of, the Company andour stockholders.

 

In the spring of 2002, based in part onHoulihan Lokey’s report dated March 15, 2002, we disclosed a revised, lower,projection of our per share liquidating distributions to common stockholders.We refer to this projection as the “Updated 2002 Range.” For the periodJanuary 1, 2002 through March 18, 2003, we disclosed comparisons ofasset sale prices primarily against the Updated 2002 Range. Of the five assets(or 9.5 golf courses) that we sold since January 1, 2002 but before March18, 2003, one asset (or 1.5 golf courses), was sold at a price below the lowend of its respective Updated 2002 Range; this property was sold for 4.3%, or$150,000, less than the low end of its Updated 2002 Range. For the remainder of2003, we intend to disclose price comparisons (if applicable) for the propertiesremaining in our portfolio primarily against the Updated 2003 Range discussedbelow.  The two assets that have beensold since March 18, 2003 were sold within the Updated 2003 Range (as definedbelow).

 

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 estimates, in our Form 10-K dated March 31, 2003 we projectedthat total liquidating distributions to our common stockholders over theremainder of our orderly liquidation will be within the range of $4.75 to $7.21per share. We refer to this projection as the “Updated 2003 Range”.  This projection is a forward-lookingstatement, subject to this report’s introductory cautionary note and the riskfactors listed below. This projection was based on

 

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several assumptions about future events, including (among many others)the following:

 

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

 

•              an assumption thatwe, in conjunction with the Resort’s operators, Westin and Troon Golf, will beable to realize a modest recovery, based on historical financial results, inthe financial performance of the Innisbrook Resort by year-end 2005 (whichimplicitly assumes that relevant economic recovery will begin sufficiently inadvance of that date to support regular business and group leisure activity atthe Innisbrook Resort by late 2005); and

 

•              an assumption thatwe will not be subject to any material liability under any of the lawsuits wewere then defending (the two most important of which have subsequently beendismissed or settled)**.**

 

Any of these assumptions mightprove to be incorrect, which might cause our actual liquidating distributionsto be lower than our projections. Moreover, our projections are based onseveral estimates, including (among many others)

 

•              estimated saleprices and sale dates not only for the Innisbrook Resort, but also for ourother remaining golf courses, many of which are not subject to any purchase andsale agreements or letters of intent;

 

•              estimated cashinflows or working capital shortfalls from the other golf courses that we ownand manage up to the estimated date of sale;

 

•              estimated repaymentdates for our outstanding indebtedness and redemption dates for our outstandingpreferred stock (after which interest and preferred dividends, respectively,will cease to accrue); and

 

•              estimated legal andaccounting fees, management compensation expenses and other operating expensesover the course of our liquidation.

 

**Assets Held for Sale**

 

The following chart identifies each of ourunsold properties:

 

**Properties Held forSale as of August 8,  2003**

 
| **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                     |   |

 

*Letters of Intent and Purchase Agreements*

 

As of August 8, 2003, we haveentered into the following binding and non-binding arrangements from thedisposition of our remaining assets. From time to time, we may consider multi-assetletters of intent, however, at the present time, no such non-bindingcommitments have been executed.

 

•*              Tierra Del Sol Sale Agreement.* On July 10, 2003, we entered into a definitiveagreement for the disposition of the Tierra Del Sol Country Club, for a priceof $2.0 million to be paid $1.5 in cash at closing and $0.5 million in theform of a secured promissory note.  Thebuyer will also be assuming the $125,000 liquor license note payable related tothis golf course.  Pursuant to our jointmarketing agreement with the executor of the Estate of Terence J. Mulvihill andGolf Classic Resorts, LLC (see further discussion under Part II, Item 1, “LegalProceedings”), we will pay the aforementioned parties 17.5% of the gross salesprice received.

 

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•*              Country Club of Wildewood and Country Club atWoodcreek Farms (collectively known as “Stonehenge”)  Letter of Intent.*On July 28, 2003, we entered into a non-binding letter of intent for thedisposition of  Stonehenge for a totalpurchase price that is within the Updated 2003 Range.  No purchase agreement has been executed.

 

We do not intend to issue any updatesregarding these arrangements unless and until a closing occurs. Our currentletter of intent is non-binding and, therefore, at this time, we can provide noassurances that any purchase agreement will be executed. Even after we enter intoa purchase agreement, the buyer’s obligation to close is often subject toconditions, some of which might be within the buyer’s control. Accordingly, theabove proposed sales could fail to close, in which case we would attempt tolocate alternate buyers and enter new purchase agreements or seek torenegotiate the sale with the original buyers. Any such alternate orrenegotiated transactions might be on less favorable terms.

 

**Overview of Liquidation Basis of Accounting**

 

We adopted the liquidation basis ofaccounting for all periods subsequent to May 22, 2001, the date on whichour stockholders approved our plan of liquidation. 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 minorityinterest in our operating partnership was reclassified to net assets becausethe holders of common limited partnership units, which we call OP units, do nothave preferential distribution rights over the common stockholders.

 

The valuation of our real estate held for sale as of June 30, 2003 isbased on current contracts and estimates of sales values. The valuation of ourother assets and liabilities under the liquidation basis of accounting is basedon management’s estimates as of June 30, 2003. An adjustment of $88,000 isincluded in the June 30, 2003 consolidated statement of changes in net assetsto reflect a $353,000 write-down of certain golf course assets offset by a netgain of $441,000 in the aggregate on the sales of certain golf courseassets   There were no other liquidationbasis of accounting adjustments for the three months and six months ended June30, 2003.

 

The net assets represent the assets availableto our common stockholders and the remaining OP unit holders. The actual valuesrealized for assets and settlement of liabilities may differ materially fromthe amounts estimated. The actual number of shares of common stock and OP units(excluding intra-company holdings) outstanding at August 8, 2003 is 7,920,737(which includes 35,794 OP units). Of this amount, 365,380 shares of commonstock owned by an affiliate of the borrower under the participating mortgage atthe Innisbrook Resort are pledged as collateral to us under a participatingmortgage wherein our counter-parties are in default.

 

**Applicationof Critical Accounting Policies**

 

*Liquidation Basis of Accounting*

 

As a result of our board of directors’adoption of a plan of liquidation and its approval by our stockholders, weadopted the liquidation basis of accounting as required. Our discussion andanalysis of our financial condition and results of operations is based on ourfinancial statements which have been prepared in accordance with generallyaccepted accounting principles in the United States of America. The preparationof these financial statements requires us to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Webase our estimates on historical experience and other various assumptions thatwe believe to be reasonable under the circumstances. Actual results may differfrom these estimates. The valuation of real estate held for sale as of June 30,2003 is based on current contracts and estimates of sales values based onindications of interest from the marketplace, certain assumptions by managementspecifically applicable to each property, and on the property valueranges.  Our most significant estimateis the fair value of our interest in the Innisbrook Resort and its expected netfree cash flow prior to its disposition.

 

*Estimated Liquidation Value of ourParticipating Mortgage Note Receivable on the Innisbrook Resort.*

 

We hold a participating mortgage, as thefirst lender, secured by the Innisbrook Resort. The borrower is in defaultunder the mortgage. Our estimate of the fair value of our interest, as lender,in the participating mortgage, as recorded on our books at June 30, 2003, is$60 million. This value is toward the low end of the valuation rangeestimated by Houlihan Lokey in its March 2003 valuation report (the lowend of Houlihan Lokey’s orderly liquidation range for this asset was$58.0 million and the high end of this range was $70.4 million). 

 

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Our valuation assumes, among other things, that we will acquire directownership of the Resort by the end of 2003 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 itsMarch 2003 report estimated to be between $40.5 and $47.3 million(compared to an estimate of between $45 and $50 million in theMarch 2002 report). If we were to value the Innisbrook Resort at the lowend of the immediate liquidation range (i.e., $40.5 million) rather thanour current estimate of $60 million, our Net Assets in Liquidation(available to holders of common stock and OP units) would decrease from$46,390,000 to $26,890,000, which is equivalent to a decrease of $2.46 peroutstanding share and OP unit.

 

*Reserve for Estimated Costs During the Periodof Liquidation*

 

Under the liquidation basis of accounting we are required to estimateand accrue the costs associated with implementing the plan of liquidation.These amounts can vary significantly due to, among other factors, the timingand actual receipt of proceeds from golf course sales, the costs of retainingpersonnel and others to oversee the liquidation, including the costs ofinsurance, the timing and amounts associated with discharging known andcontingent liabilities and the costs associated with cessation of our operations.These costs are estimated and are expected to be paid over the liquidationperiod.

 

*Revenue Recognition*

 

Subsequent to January 30, 2003, when we soldthe Eagle Ridge Inn & Resort, we do not have any remaining performingparticipating leases.  Prior to thattime, under the performing participating leases, we recognized rental revenueon an accrual basis over the term of the lease.  Prior to our borrower’s default under the participating mortgage,we recognized interest income ratably over the term of the loan.

 

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 thesegolf courses are refundable based on specific conditions. The estimated presentvalue of the potential refunds at Wildewood and Woodcreek Farms over theoriginal 30-year required membership term, as defined in the Club MembershipManual, recorded as an accrued liability on our books at June 30, 2003 isvalued at $125,000. Additionally, certain initiation fees may be refundableprior to the expiration of the 30-year term under specific membershipreplacement conditions. There is no liability recorded to reflect ourcontingent refund obligation due to the fact that four new members have to joinin the specific membership category for a resigned member to receive a refund.A refund issued under these specific circumstances would be considered areduction of membership revenue for that period.  All initiation fees received are initially recorded as deferredrevenue and amortized over the average life of a membership which, based onhistorical information, is deemed to be nine years.

 

**Results of Operations**

 

*Results of operations for the three monthsended June 30, 2003 and 2002*

 

For the three months ended June 30, 2003 and2002, we recognized $2,815,000 and $5,402,000, respectively, in revenue fromthe participating leases and from the operations of the golf courses that wemanage. The decrease in revenues of $2,587,000, or 48%, is due to lost rentalrevenue of approximately $1,789,000 from 1.5 of the 5.0 golf courses that weresold in 2002 and the 3.5 of the 4.5 golf courses that were sold in January 2003together with the lost operating revenue from golf courses that we managed andsubsequently sold.  Revenue from theoperations of the 7.5 golf courses that we managed totaled $2,815,000 duringthe three months ended June 30, 2003. For the same period in 2002, we managed11.0 golf courses from which we recorded $3,613,000 in revenue from managedgolf course operations.  Of these 11.0golf courses, 6.0 were also managed during this period in 2003, 3.5 were soldprior to the second quarter of 2003 and 1.5 were sold on April 17, 2003.

 

Expenses totaled $3,167,000 and $4,657,000for the three months ended June 30, 2003 and 2002, respectively.  The period over period decrease was$1,490,000, or 32%, of which $1,217,000 represents the difference between thedirect operating expenses of $2,514,000, in the aggregate, from the 6.0 golfcourses that we managed during the three months ended June 30, 2003 compared to$3,731,000 in direct operating expenses of the 11.0 golf courses that wemanaged during the three months ended June 30, 2002. The net operating income(loss) for the managed courses for the three months ended June 30, 2003 and2002 was $301,000 and ($118,000), respectively.   Subsequent to the period ended May 22, 2001 (the date ofour shareholders’ approval of our plan of liquidation), we adopted theliquidation basis of accounting in accordance with the requirement that we doso which requires that we accrue all anticipated expenses associated with ourexecution of the plan of liquidation. Therefore, the majority of our expenses

 

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incurred in the three months ended June 30, 2003 and 2002,respectively, were specifically related to items that we provided for in ourliquidation accrual. The general and administrative expenses incurred duringthe three months ended June 30, 2003 and not specifically related to the planof liquidation and accrued for in our liquidation accrual were approximately $653,000.Of this amount, approximately $353,000, or 54%, was salaries and benefits.Pursuant to our plan of liquidation we will be implementing further staffreductions throughout the next 60 days. This compares to general andadministrative expenses of $926,000 incurred during the same period in2002.  Of this amount for the threemonths ended June 30, 2002, approximately $346,000, or 37%, was salaries andbenefits.

 

For the three months ended June 30, 2003,interest expense was $468,000 compared to $1,358,000 for the three months endedJune 30, 2002. The decrease of $890,000 is due to the decrease of$64,252,000  in the average balance ofour outstanding debt for the second quarter of 2003 versus the average balanceof outstanding debt for the second quarter of 2002.  This effect of the decrease in the average balance was offset byan increase of approximately 1.5% in the average interest rate period overperiod.

 

We accrued a quarterly preferred dividend of$462,500 in the three months ended June 30, 2003.

 

Due to the lost rental revenue from theparticipating leases and the lost operating revenue from golf courses that wemanaged and subsequently sold, we recorded a net change in net assets availableto holders of common stock and OP unit holders of ($1,135,000) compared to($1,341,000) recorded for the three months ended June 30, 2002.

 

*Results of operations for the six monthsended June 30, 2003 and 2002*

 

For the six months ended June 30, 2003 and2002, we recognized $5,701,000 and $10,134,000, respectively, in revenue fromthe participating leases and from the operations of the golf courses that wemanage. The decrease in revenues of $4,433,000, or 44%, is due to lost rentalrevenue of approximately $3,298,000 from 1.5 of the 5.0 golf courses that weresold in 2002 and the 3.5 of the 4.5 golf courses that were sold in January 2003and the lost operating revenue from golf courses that we managed andsubsequently sold. Revenue from the operations of the 8.5 golf courses that wemanaged (3.5 of which were sold during this period)  totaled $5,249,000 during the six months ended June 30,2003.  For the same period in 2002, wemanaged 11.0 golf courses (7.5 of which were also managed for at least aportion of this period in 2003 and 3.5 of which were sold in July 2002) andrecorded $6,384,000 in revenue from managed golf course operations.

 

Expenses totaled $6,203,000 and $8,348,000for the six months ended June 30, 2003 and 2002, respectively.  The period over period decrease was$2,145,000, or 26%, of which $1,475,000 represents the difference between thedirect operating expenses of $4,819,000, in the aggregate, from the 8.5 golfcourses that we managed (for varying periods of time) during the six monthsended June 30, 2003 compared to $6,294,000 in direct operating expenses of the11.0 golf courses that we managed during the six months ended June 30, 2002.The net operating income for the managed courses for the six months ended June30, 2003 and 2002 was $430,000 and $90,000, respectively.   Subsequent to the period ended May 22,2001 (the date of our shareholders’ approval of our plan of liquidation), weadopted the liquidation basis of accounting in accordance with the requirementthat we do so which requires that we accrue all anticipated expenses associatedwith our execution of the plan of liquidation. Therefore, the majority of our expenses incurred in the six months endedJune 30, 2003 and 2002, respectively, were specifically related to items thatwe provided for in our liquidation accrual. The general and administrativeexpenses incurred during the six months ended June 30, 2003 and notspecifically related to the plan of liquidation and accrued for in ourliquidation accrual were approximately $1,384,000. Of this amount,approximately $732,000, or 53%, was salaries and benefits. Pursuant to our planof liquidation we will be implementing further staff reductions throughout thenext 60 days. This compares to general and administrative expenses of$2,054,000 incurred during the same period in 2002.  Of this amount for the six months ended June 30, 2002,approximately $720,000, or 35%, was salaries and benefits.

 

For the six months ended June 30, 2003,interest expense was $1,289,000 compared to $2,782,000 for the six months endedJune 30, 2002. The decrease of $1,493,000 is due to the decrease of $58,026,000 in the average balanceof our outstanding debt for first six months of 2003 compared to the sameperiod in 2002.  This effect of thedecrease in the average balance was offset by an increase of approximately 1.5%in the average interest rate period over period.

 

We accrued quarterly preferred dividendstotaling  $925,000 in the aggregate forthe six months ended June 30, 2003 and June 30, 2002.

 

Primarily due to the lost rental revenue fromthe participating leases and the lost operating revenue from golf courses thatwe managed and subsequently sold, we recorded a net change in net assetsavailable to holders of common stock and OP unit holders of ($2,513,000)compared to ($3,424,000) recorded for the six months ended June 30, 2002.

 

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**Tax Consideration**

 

As expected, income from our direct golfcourse operations during fiscal year 2002 comprised over 5% of our grossincome, which caused us to lose our status as a REIT. Accordingly, we lost ourREIT status for the 2002 tax year. Although we will now be subject to federalincome tax as a regular corporation, we do not currently project any income taxliability for the remainder of our liquidation as a result of our net lossesfor 2002 and our net operating loss carryforwards, which we currently expect tobe sufficient to offset any taxable income for the remainder of ourliquidation.

 

**Credit Facility**

 

Our credit facility from a syndicate oflenders led by Bank of America, N.A., which was scheduled to mature on June 30,2003 was paid in full on June 19, 2003 concurrent with the sale of theSandpiper Golf Course which occurred on June 17, 2003.

 

**Liquidity and Capital Resources**

 

Our ability to meet our obligations in thenear term is contingent upon our ability to sell our remaining five golfcourses (except Innisbrook), to realize consistent positive operating cashflow  from the golf courses that wemanage, to realize consistent positive operating cash flows from Innisbrook(once we take control), or secure short-term financing.

 

Aggregate Series A preferred stockdividends accrued, until July 21, 2003, at a rate of $462,500 per quarter.  Subsequent to July 21, 2003 the rate willincrease to $625,000 per quarter (see further discussion of this increasebelow).  As of June 30, 2003, we haveaccrued and not paid eight quarters of Series A preferred stock dividends(including the dividend otherwise payable in respect of the quarter ended June30, 2003). Under our Series A charter document, because we now have atleast six quarters of accrued and unpaid Series A preferred stockdividends, the holder of the Series A preferred stock, AEW TargetedSecurities Fund, L.P. (or its transferee), will have the right to elect two additionaldirectors to our board of directors at our next annual meeting, whose terms asdirectors will continue until we fully pay all accrued but unpaid Series Adividends.

 

Moreover, under our voting agreement withAEW, since we did not fully redeem the Series A preferred stock byMay 22, 2003 (which was the second anniversary of our shareholders’adoption of the plan of liquidation), AEW Targeted Securities Fund (or itstransferee) had the right to require us to redeem the Series A preferredstock in full within 60 days which right they exercised.  Since we defaulted on that obligation, thestated dividend rate of the Series A preferred stock increased from 9.25%to 12.50% 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 tocontinue to accrue such dividends and the preferred shares shall remainoutstanding 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.

 

*Cash flows for the six months ended June 30,2003 and 2002*

 

Cash flow used in operating activities forthe six months ended June 30, 2003 was $4,455,000 compared to cash flows usedby operating activities for the six months ended June 30, 2002 of $4,689,000.This reflects the net loss for both periods plus non-cash charges to income forthe adjustment to the liquidation basis of accounting. In addition, the cashfluctuations related to operating activities included payments paid from andinterest received on restricted cash, liquidation liability payments andadjustments, and working capital changes. Cash flow from operations decreasedin both periods ended June 30, 2003 and 2002 respectively. The decrease in cashflows from operating activities for the six months ended June 30, 2003 wasprimarily due to the lost revenue, either from rents or direct revenue fromoperations, from the 5.0 golf courses sold in 2002, and 4.5 golf course sold inJanuary of 2003, namely Eagle Ridge. Also affecting cash flow from operations were changes in other assetsand liquidation liabilities. The liquidation liabilities were accrued as of theapproval of our plan of liquidation on May 22, 2001 and subsequentlyadjusted based on payments and updated estimates of future liabilities. Thedecrease in the liquidation liabilities from December 31, 2002 isprimarily due to milestone payments paid to our executive officers aggregatingapproximately $2,526,000 upon the repayment of our credit facility and dueto  professional fees incurred inconnection with our plan of liquidation.

 

We invested approximately $112,000 in golfcourse capital expenditures at the golf courses that we managed during the sixmonths ended June 30, 2003 compared to $1,296,000 in the six months ended June30, 2002, which was primarily at Eagle Ridge. In addition, our investingactivities for the first six months of 2003 provided $67,767,000 in cash flowfrom the sale of 7.0 golf courses compared to $8,590,000 in cash flow from the saleof 1.5 golf courses during the same period in 2002. Additionally, we received$112,000 in payments on two notes receivable originally taken in connectionwith the termination of participating leases. During the

 

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six months ended June 30, 2002, we received the pay-off of the notereceivable by the borrower on the land parcel near the Sandpiper Golf Coursethat matured on June 2, 2002.

 

During the six months ended June 30, 2003, weused $69,003,000 to pay down our outstanding debt under our credit agreement,which was paid in full and retired with our last payment on June 19, 2003.  During the same period in 2002, we used$11,471,000 to pay down our outstanding debt under our credit agreement..

 

**Off Balance Sheet Arrangements**

 

*Generally*

 

As of June 30, 2003, we have nounconsolidated 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 obligations of unconsolidated entities (except asdescribed below) nor do we have any commitment or intent to provide additionalfunding to any such entities (except potentially in connection with theInnisbrook Resort, as discussed previously). Accordingly, we believe we are notmaterially exposed to any market, credit, liquidity or financing risk thatcould arise if we had engaged in such relationships.

 

We have guaranteed an equipment operatinglease (with a maximum exposure of $145,000). This is an operating lease with monthly payments of $3,033 per monthwhich expires in 2007.

 

**Contractual Obligations, ContingentLiabilities and Commitments**

 

*Contractual Obligation Table*

 

The following table summarizes ourcontractual obligations at June 30, 2003, and the effect such obligations areexpected to have on the liquidity and cash flows of our company (or oursuccessors in interest under the applicable contracts, if the contracts are notterminated) 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                                                                            |   | $                           | 2,460  |   | $ | 2,030 |   | $ | 430 |   | $ | — |   | $ | — |   |
| Liquor license note payable (applies to a  certain managed golf course)                                                              |   | 132                         |   | 7 |   | — |   | 125 |   | — |   |
|                                                                                                                                 |   |                        |   |   |   |   |   |   |   |   |   |
| Operating lease agreements at the managed  golf courses                                                                              |   | 805                         |   | 281 |   | 381 |   | 143 |   | — |   |
| Advertising, service, equipment maintenance  and other contracts and software license and support agreements at the  managed courses |   | 23                          |   | 18 |   | 5 |   | — |   | — |   |
| Lease agreements for corporate office                                                                                                |   | 74                          |   | 74 |   | — |   | — |   | — |   |
| Total                                                                                                                                |   | $                           | 3,494  |   | $ | 2,410 |   | $ | 816 |   | $ | 268 |   | $ | — |   |

 

Each type of contractual obligation listed inthe table is discussed in more detail below.

 

*Employment Agreements.*  Under the existing amended and restatedemployment agreements, performance milestone payments aggregating approximately$2,526,000 were paid to our executives upon our repayment of our obligationsunder our secured credit facility led by Bank of America, N.A.   The executives are also entitled to additionalperformance milestone payments aggregating approximately $1,895,000, plusaccrued interest, due to the  repaymentof outstanding balance under our credit facility. Such payments will be made indue course; no outstanding conditions to payment exist. Any severance paymentsotherwise payable under the amended and restated employment agreements will bereduced by the amount of the above performance milestone payments that we havemade. We are currently negotiating an amendment to our CFO’s employment agreementpursuant to which his time commitment and salary would be modified.  In addition, we have severance obligationsto other employees aggregating $565,000

 

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which have been provided for in the liquidation accruals.

 

Pursuant to the terms of our executiveofficers’ amended and restated employment agreements dated as ofFebruary 25, 2001, we made non-recourse loans of $1,595,000 to ourexecutive officers ($1,150,000 to Mr. Blair and $445,000 to Mr. Peters)on February 25, 2001 for the payment of personal income taxes arising fromthe acceleration of their restricted stock grants and the forgiveness of theiroutstanding debt to us that occurred on such date. These new loans wereevidenced by promissory notes from the executives and secured by their totalholdings of 199,415 (143,790 of Mr. Blair’s and 55,625 ofMr. Peters’) shares of our common stock valued at $8 per share at the timeof the issuance of these loans. Interest accrues on these loans at 5.06% perannum (the applicable federal rate on the date of the loan) and is due atmaturity. Effective July 1, 2002, we discontinued accruing interest onthese loans because the total outstanding balance of each loan exceeded thevalue of the collateral, common stock, computed based on the current net assetsavailable to common stockholders. The outstanding balance of these loans atJune 30, 2002, principal and interest, was $1,655,000. In 2002, werecorded an allowance for doubtful accounts against this receivable in theaggregate amount of $400,000, which approximated the difference in the pledgedvalue of $8 per share and the computed value based on the net assets inliquidation at December 31, 2002. No additional reserve was deemed necessary in the six months ended June30, 2003.

 

These loans mature at the earliest of thefollowing times: (i) February 25, 2006; (ii) three yearsfollowing termination of the borrower’s employment with us; or (iii) thedate of the final distribution under the plan of liquidation. At any time whenthe loan is over-secured, the borrower has the right to sell such common stocksecuring the loan, provided that all proceeds of the sale are first applied tothe then outstanding 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-OxleyAct of 2002 has generally prohibited us from making further loans, or modifyingthe terms of pre-existing loans, to our 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 have noted theobligation of the required interest payments through April 1, 2004, theexpiration date of the prepayment restriction. This note will be assumed by the buyer of Tierra Del Sol which iscurrently expected to be sold within the next 30 days.

 

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

 

*Advertising, service, equipment maintenance and other contracts andsoftware license and support 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 certain caseswith renewal options annually.

 

*Lease agreements for GTA corporate office.*  This represents the office space lease andthe office equipment leases 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, AEWTargeted Securities Fund, L.P., or AEW. The Series A preferred stock isconvertible, in whole or in part, at the option of the holder at any time intoour common stock at an implicit conversion price of $26.25 per share of commonstock, subject to adjustment in certain circumstances. We contributed the netproceeds to our operating partnership in exchange for 800,000 Series Apreferred OP units with analogous terms.

 

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Aggregate Series A preferred stockdividends accrued, until July 20, 2003, at a rate of $462,500 perquarter.  Effective July 21, 2003 therate will increase to $625,000 per quarter (see further discussion of thisincrease below).  As of June 30, 2003,we have accrued and not paid eight quarters of Series A preferred stockdividends (including the dividend otherwise payable in respect of the quarterended June 30, 2003). Under our Series A charter document, because we nowhave at least six quarters of accrued and unpaid Series A preferred stockdividends, the holder of the Series A preferred stock, AEW TargetedSecurities Fund, L.P. (or its transferee), will have the right to elect twoadditional directors to our board of directors at our next annual meeting,whose terms as directors will continue until we fully pay all accrued butunpaid Series A dividends.

 

On February 22, 2001, we entered into avoting agreement with AEW, which continues to hold all of the shares of theSeries A preferred stock. That agreement required AEW to vote in favor ofthe plan of liquidation and required us to redeem all of the shares ofSeries A preferred stock (for $25 per share plus dividends accrued andunpaid thereon through the date of the final redemption payment) promptly afterwe determine in good faith that we have received sufficient net proceeds fromthe disposition of our assets and/or operations to redeem all of the preferredshares without violating any legal or contractual obligations.

 

Moreover, under our voting agreement withAEW, since we did not fully redeem the Series A preferred stock byMay 22, 2003 (which was the second anniversary of our shareholders’adoption of the plan of liquidation), AEW Targeted Securities Fund (or itstransferee) had the right to require us to redeem the Series A preferredstock in full within 60 days which right they exercised.  Since we defaulted on that obligation, fromand after July 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**. **Weintend to continue to accrue such dividends until such time as we have cashavailable to redeem the Series A preferred stock, at which time we intend toredeem the Series A preferred stock.

 

**Inflation**

 

We believe that inflation does not pose amaterial risk to us. Our main source of cash flow, golf course dispositions, isnot particularly vulnerable to inflation because we can adjust our askingprices if supply/demand factors support an interest in the particular golfcourse. Our main financial obligation, redemption of the Series A preferredstock, accrues at a fixed rate. Although some of our obligations (such as ourexecutives’ salaries) automatically adjust for inflation, some of our rightsare similarly indexed.  For example, ourparticipating mortgage interest as lender at the Innisbrook Resort provides forautomatic annual interest increases (however, our borrower thereunder is currentlyin payment default and not meeting any of its obligations as they accrue) andour golf course fees at the properties we operate are relatively flexible andcan be increased, subject to constraints imposed by competition and, in somecases, patrons’ yearly membership privileges.

 

**Seasonality**

 

The golf industry is seasonal in naturebecause of weather conditions, with fewer available tee times in the rainyseason and the winter months. Conversely, revenues fall at the InnisbrookResort during the summer months as a result of the hot Florida weather beingless appealing for group golf outings and vacation destination golfers alongwith the fact that business conventions and meetings are typically held Octoberthrough April, when business persons are relatively less likely to be on familyvacations. Innisbrook Resort revenues are generally greatest during the firstquarter, with a strong fourth quarter as well due to a PGA event that is to beheld there each October from 2003 through 2006. The effects of seasonality canbe partially offset at daily-fee golf courses by varying greens fees based onchanges in demand. Under our prior (now defunct) participating lease structure,we expected to be insulated from the effects of seasonality in that the participatingleases required our lessees to pay us base rent ratably throughout the year.Now that we manage  our golf coursesdirectly (except Innisbrook), we are experiencing some seasonal variability inour operating results, which seasonality is expected to increase in the eventthat we assume operations at the Innisbrook Resort.

 

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

 

In our most recent annual report on Form10-K, we reported an updated projected range of liquidating distributions to commonstockholders and an updated projection as to when liquidating distributions tocommon stockholders might commence.  Werefer to these projections as our Updated 2003 Range.  Our expectations about the amount of liquidating distributions wewill make and when we will make them are based on many factors, including inputfrom our financial advisors and several estimates and assumptions.  We face the risk that actual events mightprove to be less favorable than our estimates and assumptions.  Several important factors that could causesuch a difference are described below. Although we have attempted to account for the following risks during thepreparation of the Updated 2003 Range, we might have underestimated theireffects, and perhaps substantially so. As a result, the actual amount of liquidating distributions we pay toour common stockholders might be substantially below our Updated

 

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2003 Range of projected liquidating distributions.  In addition, any liquidating distributionsmight be paid substantially later than projected. Factors that could causeactual payments to be later or lower than we expect include the mattersdiscussed below.

 

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

 

Extraordinary corporate actions, such as ourplan of liquidation, often lead to securities class action lawsuits andderivative litigation being filed against companies such as ours.  We became involved in this type oflitigation in connection with our plan of liquidation (and the transactionsassociated with it) in a legal action we refer to as the *Crossley* litigation.  (See “Part II, Item 1—LegalProceedings,” in this quarterly report.) During the second quarter, the *Crossely* claim was dismissed withprejudice on our motion for summary judgment, which means that the law suit wasdismissed and the plaintiff will not be allowed to refile the claim, althoughthe plaintiff could appeal the dismissal. We subsequently entered into a non-monetary settlement with theplaintiff whereby the plaintiff agreed not to appeal the dismissal and weagreed not to seek reimbursement of our legal costs from the plaintiff.  Even though the *Crossley* litigation has beendismissed, we face the risk that other claims might be brought against us.  Any such litigation would likely beexpensive and, even if we ultimately prevail, the process would divertmanagement’s attention from implementing the plan of liquidation and otherwiseoperating our business. If we do not prevail in any such litigation, we mightbe liable for damages. We cannot predict the amount of such damages, if any,but they might be significant and would reduce our cash available fordistribution.

 

***Golf HostResorts, Inc., the borrower under our $79 million participatingmortgage on the Innisbrook Resort, has failed to make required payments to ussince November 1, 2001 and our collateral is the subject of litigationamong others. Consequently the current resale value of the participatingmortgage is impaired. If we are unable to resolve the borrower’s continuingdefault by negotiation, we intend to foreclose upon the collateral, which couldbe time-consuming and expensive and our ultimate recovery might be reduced,delayed or prevented by court order and/or diminished by the pendinglitigation.***

 

We are the lender under a $79 millionparticipating loan secured by a mortgage on the Innisbrook Resort, near Tampa,Florida.  The Innisbrook Resort consistsof rental condominiums and conference facilities, currently managed by WestinHotel Company, and four upscale golf courses, currently managed by TroonGolf.  Westin and Troon are affiliatedwith Starwood Hotels & Resorts.  Theborrower, Golf Host Resorts, Inc., owns the Resort, other than theseparately-owned condominium units.  Ourfirst priority mortgage extends to all real property at the Innisbrook Resort,other than the separately owned condominium units.  A majority of the condominium unit owners participate in a rentalpool whereby their condominium units are made available as hotel rooms toguests of the resort.  Some of thecondominium owners have initiated a legal action against the borrower regardingits management of the rental pool.  Ourmost recent annual report on Form 10-K includes a more detailed description ofthis litigation and the other arrangements at the Innisbrook Resort.

 

Currently, the borrower is in monetarydefault due to its failure, commencing on November 1, 2001, to make baseinterest payments to us. We may in the future determine that additionalnon-monetary defaults exist. We have delivered a legal notice to the borroweraccelerating the entire amount of the participating mortgage as a result of theborrower’s default. We have also sent a legal notice to Westin Hotel Companyasserting that Westin failed to comply with the terms of a subordinationagreement between us and Westin, which Westin has contested, and we areattempting to negotiate a resolution. 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 anon-recourse loan, which means that following an event of default by theborrower we cannot bring a legal action directly against the borrower to compelpayment, but instead our recourse is to proceed against the guarantors and/orto foreclose upon the Innisbrook Resort (other than the individually ownedcondominium units) and any other property of the borrower that has been pledgedby the borrower to secure our loan. If we decide to pursue judicial foreclosureagainst the borrower, it would be expensive and time-consuming and there is arisk that the borrower might obtain judicial protection. Even if we obtainownership of the Innisbrook Resort, we would face the difficult task ofrevitalizing 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 currentresale value of our participating mortgage is impaired, our recovery withrespect to this asset might be significantly delayed, and the aggregate amountwe ultimately receive, either (a) as repayment from the borrower, or

 

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(b) upon a sale of our lender’s interest in the participatingmortgage, or (c) upon a sale of the Innisbrook Resort followingforeclosure, might be substantially less than the amount we are currently owed.

 

We are seeking to conclude a negotiatedresolution with the borrower by the end of 2003 whereby the borrower’s interestin the Innisbrook Resort would be transferred to us or one of ouraffiliates.  However, we can provide noassurance of a resolution or the timing thereof.

 

***If the borrowerunder our participating mortgage declares bankruptcy, our efforts to forecloseupon the mortgage collateral (the Innisbrook Resort) could be substantiallydelayed and our recoveries reduced, which could delay and reduce ourliquidating distributions.***

 

Under the federal bankruptcy code, the filingof a bankruptcy petition by or against the borrower under our participatingmortgage would stay (i.e., temporarily suspend) our efforts to collect past duepayments owed to us. In the case of our participating mortgage, a bankruptcyfiling would also temporarily prevent our ability to commence or continue ajudicial foreclosure action. Additionally, the bankruptcy trustee (or theborrower as debtor-in-possession) would have special powers to avoid,subordinate or disallow debts. In some circumstances, it is possible that ourclaims may be subordinated to financing obtained by the borrower subsequent toits bankruptcy.

 

Further, in the case of our 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 borrower time to cure apayment default on the loan;

 

•              reduce monthly payments due underthe loan;

 

•              change the rate of interest due onthe loan;

 

•              otherwise alter the loan’srepayment schedule;

 

•              change other terms of the loan;

 

•              prevent us from enforcing ourborrower’s assignment of rents under the participating mortgage

 

The legal proceedings necessary to resolvethese issues would likely be time-consuming and expensive and mightsignificantly delay our receipt of revenue from the affected asset.

 

***If we are unable toretain at least one of our key executives and sufficient staff members tocomplete the plan of liquidation in a reasonably expeditious manner, ourliquidating distributions might be delayed or reduced.***

 

Our ability to complete the golf course salescurrently under contract, or subject to letters of intent, and to locate buyersfor our other interests in golf courses and negotiate and complete those salesdepend to a large extent upon the experience and abilities of W. Bradley Blair,II, who serves as our Chief Executive Officer and President, and Scott D.Peters, who serves as our Senior Vice President and Chief Financial Officer,and their experience and familiarity with our assets, our counter-parties andthe market for golf course sales. We believe it is important that we retain atleast one of these key executives in order potentially to achieve a relativelyfavorable settlement of our borrower’s default under the participatingmortgage. We believe our liquidation has progressed to the point that theresignation of one (but not both) of our executives would not likely causesignificant adverse consequences. However, a loss of the services of both ofthese individuals could materially harm our ability to complete the plan of liquidationin a reasonably expeditious manner and our prospects of selling our assetswithin the Updated 2003 Range. We face the risk that both of our key executivesmight resign. In particular, our payment in full of our outstanding obligationsunder our credit facility, which occurred in the second quarter, was the lastremaining milestone under our executives’ amended employment agreements, andtheir performance bonuses are now due and payable by us.  Accordingly, our executives might concludethat they no longer have meaningful financial incentives to remain with ourcompany.

 

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If both executives resign, we would considerhiring a replacement or replacements, which will likely delay any pendingsales, and diminish the process of maximizing value in view of thereplacement’s or replacements’ unfamiliarity with the assets and ourcounter-parties, and the material facts relevant thereto.

 

Our ability to complete the plan ofliquidation in a timely manner also depends on our ability to retain our keynon-executive employees. Our employees may seek other employment rather thanremain with us throughout the process of liquidation, even though theygenerally would lose their eligibility for severance payments by resigning. Ifwe are unable to retain enough qualified staff to complete our plan ofliquidation in a reasonably expeditious manner, liquidating distributions mightbe delayed or reduced.

 

***If the buyer underour current sale agreement defaults, or if the sale does not otherwise close,our liquidating distributions might be delayed or reduced.***

 

As of August 8, 2003, we have one 18-holegolf course under a sale contract for $2.0 million.  The sales agreement is subject to closing conditions. If thetransaction fails to close because of buyer default, failure of a closingcondition or other reason, we will have to identify and negotiate with newpotential buyers for the asset, which we might be unable to do promptly or forthe same purchase price. We will also incur additional costs identifying abuyer and negotiating a new sale agreement for this asset that is not includedin our projections. In that event, our liquidating payments to our stockholdersmight be delayed or reduced, perhaps in substantial ways.

 

***If we are unable tofind buyers for our other golf courses at our expected sales prices, ourliquidating distributions might be delayed or reduced.***

 

In addition to the four golf courses at theInnisbrook Resort, we have three other properties (or 4.0 eighteen-holeequivalent golf courses) which are not currently subject to sale agreements orletters of intent. In calculating our projected liquidating distribution, weassumed that we will be able to find buyers for the Innisbrook Resort and theseother golf courses at amounts based on our estimates of their fair marketvalues. However, we have not obtained any independent appraisals or anyindependent litigation risk assessments and we may have overestimated the salesprices that we will ultimately be able to obtain in the sale of these golfcourses. The analysis performed by Houlihan Lokey as of March 18, 2003 (onwhich our Updated 2003 Range was based in part) is neither an appraisal nor anopinion. Assumptions underlying our Updated 2003 Range might prove to beincorrect and, therefore, our projections might overstate the ultimate netproceeds we will receive. For example, in order to find buyers in a reasonablyexpeditious manner, we might be required to lower our asking price below ourestimate of a golf course’s fair value. If we are not able to find buyers forthese golf courses in a reasonably expeditious manner or if we haveoverestimated the sales prices we will ultimately receive, our liquidatingpayments to our common stockholders will be delayed or reduced, perhaps insubstantial ways.

 

***If we are unable torealize the value of a promissory note taken as part of any purchase price, ourliquidating distributions might be reduced.***

 

In some golf course sales, we may agree toreceive promissory notes from the buyer as a portion of the purchase price.Promissory notes can be illiquid. If we are not able to sell the promissorynote without a great discount, or in the case of a short-term note, if we holdit to maturity and the purchaser ultimately defaults, our liquidatingdistributions might be reduced.

 

***Decreases in golfcourse values caused by prolonged economic recession and/or additionalterrorist activity might reduce the amount for which we can sell our assets.***

 

The value of our interests in golf coursesmight be reduced, and substantially so, by a number of factors that are beyondour control, including the 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; and

 

•           changesin real estate tax rates and other operating expenses.

 

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Any reduction in the value of our golfcourses would make it more difficult for us to sell our assets for the amountsand within the time-frames that we have estimated. Reductions in the amountsthat we receive when we sell our assets could substantially decrease or delayour payment of liquidating distributions to stockholders, perhaps insubstantial ways.

 

***If our liquidationcosts or unpaid liabilities are greater than we expect, our liquidatingdistributions might be delayed or reduced, potentially in a substantial manner.***

 

Before making the final liquidatingdistribution to common stockholders, we will need to pay all of ourtransactions costs pertaining to the liquidation and all valid claims of ourcreditors. 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 then market prices. Wehave estimated such transactions costs in calculating the amount of ourprojected liquidating distributions. To the extent that we have underestimatedcosts and expenses in calculating our projections, our actual aggregateliquidating distributions will be lower than we have projected, and perhaps insubstantial amounts.

 

***Our loss of REITstatus will expose us to potential income tax liability in the future, whichcould lower the amount of our liquidating distributions.***

 

In order to maintain our historical qualificationas a REIT, at least 95% of our annual gross income was required to be derivedfrom real property rents, mortgage interest and a few other categories ofincome specified in the tax code, which importantly do not include income fromgolf course operations. Although we did not affirmatively intend to revoke ourREIT status, business conditions required us to begin operating golf courses in2000 and the percentage of our gross income supplied by such operationsincreased in 2001 and surpassed the 5% ceiling in 2002. Consequently, we didnot meet the 95% gross income test in 2002. Failure to meet this test caused usto fail to qualify as a REIT for the year 2002, which will prevent us fromre-qualifying for at least four years. Accordingly, we are currently subject tofederal income tax as a regular corporation.

 

However, ouroperations resulted in a net operating loss for income tax purposes during2002. Therefore, no income tax will be due on our operating income/loss orproceeds from the sale of properties that occurred during 2002. As ofDecember 31, 2002, we believe we have sufficient net operating losscarryovers to offset any gains we might recognize through our liquidation. Ifwe 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. The resulting tax liabilitieswould reduce the amount of cash available for liquidating distributions.

 

***On May 22, 2003, theholder of our Series A preferred stock became entitled to demand that we redeemthe preferred stock which rights they exercised on May 23, 2003.  If we continue to be unable to comply withthat demand, the dividend on the preferred stock will continue to accrue at theincreased rate of 12.5% that became effective July 21, 2003, which would reducethe amount of our liquidating distributions.***

 

We enteredinto a voting agreement with the holder of our preferred stock, AEW TargetedSecurities Fund, L.P., pursuant to which the holder agreed to vote in favor ofthe plan of liquidation. The voting agreement provided that if we failed toredeem the Series A preferred stock by May 22, 2003, the holder of thepreferred stock would be entitled to require us to redeem it.  We received such a demand from the preferredstock holder on May 23, 2003, but we do not have enough cash available toredeem the preferred stock. Accordingly, as set forth in the voting agreement, the dividend accruingon the preferred stock has increased from 9.25% to 12.50%. Since theliquidation preference on the preferred stock is currently $20.0 million,the quarterly dividend accruing on the preferred stock has increased from$462,500 to $625,000. The increase in the dividend payable to the holders ofthe preferred stock will reduce the funds available for distribution to ourcommon stockholders; however, this reduction in available funds for liquidatingdistributions has already been taken into account in the Updated 2003Range.  Under the terms of the votingagreement and our charter, the preferred stock holder also has the right toappoint two additional directors to our board of directors.  The current holder of the preferred stockhas informed us that it does not currently intend to exercise that right.  However, we face the risk that it mightdecide to exercise such right in the 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 preferredstockholder.

 

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

 

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At some point during our liquidation, asexpressly permitted by our plan of liquidation, we may elect to contribute ourremaining assets and liabilities to a liquidating trust. Our stockholders wouldreceive interests in the liquidating trust and our corporate existence wouldterminate. The SEC has historically allowed liquidating trusts to stop filingquarterly reports on Form 10-Q and to file unaudited annual financialstatements on Form 10-K. Accordingly, if the SEC were to grant similarrelief to our successor liquidating trust we might realize substantial legaland auditing cost savings over the remainder of our liquidation, as well asgeneral and administrative cost savings such as personnel costs, certaininsurance costs, and printing and reporting costs of a publicly traded company,among others. However, the plan of liquidation prohibits us from contributingour assets to a liquidating trust unless and until our preferred stock has beenredeemed in full.

 

For tax purposes, the creation of theliquidating trust should be treated as a distribution of our remaining assetsto our stockholders, followed by a contribution of the same assets to theliquidating trust by our stockholders. As a result, we will recognize gain orloss inherent in any such assets, with any gains offset by available netoperating loss carry-overs (discussed below). In addition, a stockholder wouldrecognize gain to the extent his share of the cash and the fair market value ofany assets received by the liquidating trust was greater than the stockholder’sbasis in his stock, notwithstanding that the stockholder would notcontemporaneously receive a distribution of cash or any other assets with whichto satisfy the resulting tax liability.

 

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

 

If we do not distribute our assets to aliquidating trust and, instead, continue to operate as a regular corporationuntil all of our assets are sold, we would recognize gains or losses upon thesale of assets for federal income tax purposes. Since we are no longer a REIT,we could be subject to income tax on any recognized gains. However, as ofDecember 31, 2002, we believe we have sufficient net operating losscarryovers to offset any recognized gains. If we were to recognize taxable gainsin a year before consideration of net operating loss carryovers, we could besubject to alternative minimum tax. Generally, for tax years ending afterDecember 31, 2002, the use of net operating loss carryovers to reducealternative minimum taxable income is limited to 90% of alternative minimumtaxable income. Therefore, tax at a rate of 20% could be imposed on ouralternative minimum taxable income that cannot be reduced by net operating losscarryovers. If a liquidating trust is formed, our net operating loss carryoverswill not be available to reduce any gains recognized within the trust. However,the trust will have a tax basis equal to the fair market value of its assets atthe date the liquidating trust is formed. Any gain recognized by the trust wouldthus be the result of either appreciation in the value of the assets during thetime that they are owned by the trust, or an initial underestimation of thefair market value of the assets at the time the trust is formed.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We have not entered into any transactionsusing derivative commodity instruments. We are no longer subject to market riskassociated with changes in interest rates since we retired the outstandingobligations under our credit facility. Reference is made to Note 7 to the Condensed Consolidated FinancialStatements of Item 1 for additional debt information.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

We maintain disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in our Exchange Act reports is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms, andthat such information is accumulated and communicated to our management, includingour Chief Executive Officer and our Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosure. Our management assessesthe costs and benefits of such controls and procedures based upon theprevailing facts and circumstances, including management's reasonable judgmentof such facts.  As we neither control ormanage the Innisbrook Resort at this time, our disclosure controls andprocedures with respect to such persons and entities are necessarily morelimited than those we maintain with respect to our own corporate operations.

 

As of June 30, 2003, we carried out anevaluation, under the supervision and with the participation of our management,including our Chief Executive Officer and our Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures pursuant to Exchange Act Rule 13a-14. Because our Company onlyhas eight employees, excluding

 

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golf course employees, two of the ten of which are the CEO and the CFO,all matters of a disclosable nature are typically addressed and handled bythese two individuals. Based upon the foregoing, our Chief Executive Officerand our Chief Financial Officer concluded that as of June 30, 2003, ourdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to our Company (including our consolidatedsubsidiaries) required to be included in our Exchange Act reports. There havebeen no significant changes in our internal controls or in other factors whichcould significantly affect internal controls subsequent to the date we carriedout our evaluation.

 

**PARTII.  OTHER INFORMATION**

 

**ITEM1:  Legal Proceedings.**

 

We are currently involved in the followingmaterial legal proceedings:

 

*Pete Dye Golf Club*

 

On March 18, 2003, we filed a judicialaction in the Circuit Court for the Ninth Judicial District, the State of SouthCarolina, against Burning Embers Corporation, Golf and Fairway, L.L.C., GolfCourse Leasing, LLC, James D. LaRosa, James J. LaRosa andLeigh Ann LaRosa, as joint and several co-borrowers, for collection of all sumsdue and owing to us, approximately $220,000 plus accrued interest atMarch 24, 2003, under the promissory note that matured onDecember 19, 2002. One payment of $10,000 has been received since thematurity date and has been applied to the outstanding principal and interest.The promissory note was executed by the buyer in favor of us in connection withthe sale of the Pete Dye Golf Club on December 19, 2001 to an affiliate ofthe borrowers.  The defendants wereserved on May 19, 2003, they answered the complaint, so we then filed a Motionfor Summary Judgment on June 30, 2003, and are awaiting for a court date forthe Motion to be heard.

 

*Mystic Creek Golf Course*

 

*Golf Trust of America v. Township of Milford and Oakland County.*  On April 17, 2003, in connection with thesale of the Mystic Creek Golf Club to Mystic Creek Acquisition, L.L.C., aMichigan limited liability company, we paid $400,000 to the Charter Township ofMilford, Michigan in order to settle our obligations related to real and/orpersonal property taxes and lessee user taxes which had accrued from the timewe purchased the property through December 31, 2001.  These taxes had accrued because we asserted that such property(in which we held a long-term ground lease interest as ground lessee) was notsubject to ad valorem property tax because it is owned by a municipality (theCity of Dearborn) and is operated as a concession for public purpose.  GTA, the purchaser , the Charter Township ofMilford, Michigan, and Oakland County, Michigan entered into the Release andSettlement Agreement dated as of April 17, 2003, to memorialize the payment byGTA to settle the tax issues and the parties release of each other.  Additionally, GTA assigned all of its claimsof exemption from payment of taxes to the purchaser in the transaction and thepurchaser and the relevant taxing authorities agreed to enter into a stipulationto dismiss all relevant lawsuits with prejudice and without costs related tothe 1998, 1999, 2000 and 2001 tax claims. This settlement reduced our tax obligation from $509,403 to $400,000. Wehad previously paid all 2002 taxes. This tax matter is now resolved and the final orders of dismissal of theTax Tribunal have been entered, accordingly this matter is closed.

 

*Osage National Golf Club*

* *

The lawsuit, *Osage National Golf Club, Inc. etal. v. Golf Trust of America, Inc., et al.*, United States DistrictCourt Eastern District of Missouri was filed against us on or aboutApril 5, 2000. This lawsuit involves a sale and lease transaction betweenplaintiffs and Golf Trust of America L.P. of a golf course located in MillerCounty, Missouri. Part of the consideration for this transaction at the time ofour purchase of the golf course was the transfer of OP Units as purchaseconsideration to Osage National Golf Club. Plaintiffs allege that wemisrepresented the nature of these OP Units. Plaintiffs assert that because ofthis misrepresentation the OP Units were substantially less valuable than hadbeen represented by us and, therefore, they have suffered actual damages in theamount of not less than $3,500,000. In addition, plaintiffs’ claim that theyare entitled to unspecific punitive damages. A scheduling conference was heldwith the court in late February 2002, and the case was tentatively set fortrial on October 28, 2002. The parties agreed to submit the case onstipulated facts and have submitted such a stipulation to the court. Theparties met with the court on October 29, 2002 and an order was enteredscheduling memoranda of law and other procedures to present the case. OnDecember 30, 2002, plaintiffs filed their memorandum of law in which theylimited their request for judgment to $1,465,886.80 plus interest at 9% fromJune 20, 2000. On January 6, 2003, we filed a responsive memorandum. OnJune 18, 2003, the parties filed their joint request for entry of judgment.  This matter is now in a position for rulingby the court and we would anticipate the ruling within a few months.. At thistime we are unable to assess the likely outcome of this litigation.

 

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*Tierra Del Sol Country Club*

 

On July 18, 2003, GTA and the Estate ofMulvihill, as sellers, and David L. Nelson, Trustee for entity to be formed, aspurchaser, entered into a purchase and sale agreement for the sale of theTierra Del Sol Golf & Country Club. The closing is scheduled to occur withinthe next 30 days. We have been operating this golf course through our whollyowned subsidiary, GTA Tierra Del Sol, LLC, since February 7, 2000. All ofthe legal proceedings relating to the Tierra Del Sol golf course have beencontractually resolved by the parties involved, pending the expiration of theapplicable agreement.

 

On September 20, 2000, TerenceMulvihill, a principal in the lessee and in the entity which previously ownedthe golf course, attempted to terminate our water rights lease Agreement at thegolf course for (a) the existence of an unauthorized assignment, whichMr. Mulvihill claimed was the result of allowing GTA Tierra Del Sol, LLCto operate the golf course; (b) utilizing the water on the golf course ina manner which was contrary to the purposes authorized under the water rightslease agreement; (c) using the water in amounts in excess of what waspermitted 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 anagreement for marketing and joint sale of property with Mary Louise MulvihillSkalkos, the executor of the Estate of Terence J. Mulvihill and Golf ClassicResorts, LLC in which the parties agreed jointly to market the assets at theTierra Del Sol Golf & Country Club in Belen, New Mexico. The term ofthis agreement is six months and we shall have the option to extend the term ofthe agreement for three additional six month periods. As a result of theparties entering into this agreement, we agreed with the Estate and Golf ClassicResorts, LLC that all parties would forbear from taking further action on theexisting lawsuit during the term of the agreement.

 

*Palm Desert Country Club*

 

We operated this golf course through ourwholly owned subsidiary, GTA—Palm Desert, LLC, from September 5, 2000,when the lessee agreed to deliver possession to us, until April 20, 2001,when we completed the sale of Palm Desert Country Club to Dahoon InvestmentCompany, for total consideration of $4.075 million. Dahoon InvestmentCompany commenced a judicial action against us and GTA Palm Desert LLC onNovember 20, 2001 in the Riverside County Superior Court, alleging(1) breach of a purchase and sale agreement involving the Palm DesertCountry Club in Palm Desert, California, (2) negligence, (3) breach of thecovenant of good faith and fair dealing, and (4) intentional and negligentmisrepresentation in connection with the sale of the golf course. We havecontested their claims, however, we cannot predict the outcome of thelitigation at this time.   The court seta trial date of October 20, 2003, and a Mandatory Settlement Conference forSeptember 19, 2003. Discovery is currently ongoing and the parties are in themidst of an extended mediation process. At this time we are unable  toassess the likely outcome of this litigation.

 

*Stonehenge (Country Club at Wildewood andCountry Club at Woodcreek Farms)*

 

On April 22, 2002, we filed an action *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 for breach of contract accompanied byfraudulent act, fraud and unfair trade practices. We are seeking damages ofapproximately $172,000, which represents prepaid dues which were not disclosedby the defendants. A counterclaim for payment under a consulting agreement,along with claims for payment of operating/maintenance and insurance expenseswas received on June 20, 2002. Our reply was filed on July 22, 2002denying the claims and, alternatively, seeking a set-off or recoupment againsttheir alleged claim for the amount of our claim. Discovery is ongoing, and notrial date has been set.  At this timewe are unable to assess the likely outcome of this litigation.

 

*Plan of Liquidation Action*

 

On January 28, 2002, we received a copyof a complaint titled *Mary Ella Crossley v. W. Bradley Blair, II et al.*This legal action was filed in the Circuit Court for Baltimore City, Maryland,against us and our directors and officers, Mr. Young and Banc of AmericaSecurities LLC. The complaint purported to be a derivative action brought byMary Ella Crossley, who claims to be one of our stockholders. The plaintiffalleged:

 

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•              that payments tocertain of our officers under their employment agreements and an agreement tosell golf courses to Legends resulted from a breach of the defendants’fiduciary duties to stockholders;

 

•              that our officersdefrauded the company in the renegotiation of their employment agreements; and

 

•              that the actions ofthe defendants in approving the payments under the employment agreements andthe Legends transaction constituted a breach of our charter resulting in theunjust enrichment of certain individual defendants.

 

The complaint’s prayer sectiondid not specify the damages plaintiff is seeking. All of the defendants movedto dismiss the complaint. In response to the motion filed by Banc of AmericaSecurities LLC, the plaintiff agreed to voluntarily dismiss Banc of AmericaSecurities LLC without prejudice from the case. The plaintiff opposed themotion to dismiss filed by us and the directors, and on May 20, 2002, thecourt denied that motion. On June 19, 2002, we and the directors respondedto the complaint by filing a general denial of liability.  Before discovery closed, plaintiff moved foran order to extend the discovery deadline by two weeks, which the defendantsopposed.  The court denied themotion.  Prior to the close ofdiscovery, plaintiff moved to compel production of certain documents.  A hearing on that motion was held on April9, 2003 and, on April 21, 2003, the court denied the plaintiff’s motion tocompel.  Also, on April 9, 2003, wefiled a motion for summary judgment based on plaintiff’s lack of standing tobring this derivative action and on the merits.  On May 21, 2003, following a hearing, the court granted ourmotion for summary judgment and dismissed the case in its entirety. Thereafter,Crossley, entered into a non-monetary settlement with all defendants underwhich Crossley agreed not to appeal the court’s ruling dismissing the case andwe agreed not to seek reimbursement of attorneys’ fees and costs fromCrossley.  The parties also releasedclaims against each other and Crossley agreed to return documents producedduring litigation. We are currently in negotiations with the insurance carrierregarding the reimbursement of our attorneys’ fees and costs incurred in thelitigation.  At this time, we are unableto assess the likely outcome of that negotiation.

 

*Innisbrook Resort Condominium OwnerLitigation*

 

The Innisbrook Resort serves as collateralfor a $79 million non-recourse loan we made to the Resort’s owner, GolfHost Resorts, Inc., in 1997. The owner/borrower has entered into anarrangement with many of the persons who own condominium units at the Resort.Under this arrangement, when the condominiums are not being used by theirowners, they are placed in a pool and rented as hotel rooms to guests of theInnisbrook Resort. Certain of the condominium owners (as plaintiffs) initiateda legal action against the borrower, Golf Host Resorts, Inc., and itscorporate parent, Golf Hosts, Inc. (as defendants), regarding variousaspects of this arrangement. 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 project;

 

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

 

•              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 themaster lease agreement; and

 

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

 

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Deposition of class members and others,including depositions of prior executives of Golf Host Resorts, Inc. have beentaken and additional discovery remains. The previously scheduled trial date of February 3, 2003 has beenpostponed by the Court; a new trial date has not yet been set.  In July 2003, the judge in the litigationagainst Golf Host Resorts, Inc. rejected the plaintiffs’ attempts to proceedwith the case as a class action, leaving approximately 80 individual plaintiffsin the lawsuit.  The judge also ruledthat the plaintiffs could not seek recovery from the individuals that holdstock in Golf Host Resorts, Inc. and its affiliates (rejecting plaintiffs’attempt to “pierce the corporate veil”). Golf Host Resorts, Inc. has been informed that the plaintiffs have orintend to appeal both of these decisions.

 

Neither GTA nor any of our affiliates is aparty to this lawsuit, however, it affects us insofar as any costs imposed onthe borrower by the lawsuit might reduce the borrower’s willingness and abilityto (i) make any future participating mortgage payments to us (the borrowerhas not made any such payments to us since October 1, 2001), or(ii) enter into a settlement agreement with us regarding its participatingmortgage default on terms we believe are acceptable. Moreover, we believe thelawsuit clouds the value of the Innisbrook Resort and thereby impairs the valueof the collateral which secures our participating loan.

 

**Other Litigation**

 

*Hillcrest Bank v. Golf Trust of America LP, United States DistrictCourt Western District of Missouri.*  This action was filed on or aboutDecember 26, 2001. This lawsuit involves a claim by Hillcrest Bank that ithas a perfected security interest in the OP Units of Osage National Golf Clubacquired by Osage National Golf Club in connection with the sale and leasetransaction of the golf course located in Miller County, Missouri. HillcrestBank alleges that it acquired this security interest in April 1999. Weredeemed the OP Units at issue in June 1999 as part of a settlement ofvarious claims owing to the company. The Bank did not receive any proceeds ofour redemption of the OP Units and asserts that because of this redemption ithas suffered actual damages in the amount of not less than $1,500,000. In May2003 a settlement, including a $19,000 payment to Hillcrest Bank, was reachedand the case was dismissed in early June 2003, thus concluding this matter.

 

*Lake Ozark Industries, Inc. and Everett Holding Company, Inc.v. Golf Trust of America, et al.*  This is an action initiated in the CircuitCourt of Miller County, Missouri, by a contractor, Lake Ozark ConstructionIndustries, Inc., or LOCI, against numerous defendants including us. LOCIasserts that it performed construction services on, or which benefited theproperty of, the various defendants, including us and seeks to foreclose amechanic’s lien upon our property. Plaintiffs’ amended petition is in sixcounts. Counts I, II and III seek recovery of payment for LOCI’s work fromM & M Contractors, Inc., which plaintiffs’ claim was the primecontractor and the party who hired LOCI as a subcontractor. Counts IV, V and VIname us and other defendants. Count IV seeks to foreclose a mechanic’s lienupon the property of various defendants, including us. The lien is for theprincipal amount of $1,276,123, plus interest at 10% per year and attorneys’fees. Plaintiffs calculate interest to May 20, 1999, just prior to thelien filing, to be $151,180, and interest thereafter to be $354 per day. CountV of the amended petition, directed at various defendants, including us, seeksa determination of the priority of plaintiffs’ claimed mechanic’s lien overvarious deeds of trust and property interests, including our interest. Theoutcome of count V will be determined by the resolution on the merits of countIV. Finally, count VI seeks foreclosure of a deed of trust from one of theother defendants, Osage Land Company, apparently given to Everett to forestallplaintiffs’ filing of the mechanic’s lien. The deed of trust was recordedsubsequent to the recordation of the deed from Ozark Land Company to us for itsproperty. The court ruled in June 2001 on cross-motions for summaryjudgment filed by plaintiffs, us, and defendant Central Bank of Lake of theOzarks, a beneficiary of deed of trust on some of the property covered by themechanic’s lien and by the deed of trust from Osage Land Company to Everett.The court denied all the motions with one exception—it granted Everett summaryjudgment on count VI (foreclosure of the deed of trust to Everett from OsageLand Company) but ruled that the deed to us and the deeds of trust to CentralBank of Lake of the Ozarks are prior to the deed of trust to Everett. The courtdid not explain its rulings on the remainder of plaintiffs’ motion or on ourCentral Bank of Lake of the Ozarks motions, except that “there remainsubstantial and genuine issues of material fact.” We filed two motions forsummary judgment on counts IV and V. The grounds for the motions are thatplaintiffs’ claimed lien does not comply with requirements of the Missourimechanic’s lien statute and thus is invalid. On March 25, 2002, the courtorally granted our requested relief and ruled that plaintiffs’ claimed liendoes not comply with requirements of the Missouri mechanic’s lien statute andis invalid. The court entered its written order granting our motions forsummary judgment on April 20, 2002. As we have previously reported, sincenot all claims involved in this lawsuit have been resolved, plaintiffs’ time toappeal the April 20, 2002 order granting our motions for summary judgment hadnot yet begun to run.  Although theplaintiffs’ attorneys informed us that they were making efforts to resolve theremaining claims in this lawsuit, this had apparently not come to pass.  Accordingly, on April 15, 2003, we filed amotion with the court asking that it make final the judgment granted to GolfTrust of America, L.P.  On May 12, 2003,the Court entered a judgment that disposed of all outstanding claims in thelawsuit. On June 10, 2003 Plaintiffs filed a Notice of Appeal of the ruling infavor of Golf Trust of America, L.P. on its Motion for Summary Judgment.Because of the uncertainty of an appeal by plaintiffs, at this time we areunable to assess the likely outcome of this litigation.

 

*Golf Trust of America, L.P. v. Osage Land Company, LLC., et al.,Circuit Court Of Miller County, Missouri. *We brought this action on July 11, 2002 todetermine our rights to a road easement leading to a golf course we then ownedin Miller County

 

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Missouri.  On that date, weobtained a temporary restraining order enjoining the defendants frominterfering with their claimed rights in the road easement.  In connection with granting that order thecourt required that a $5,000 cash bond be posted by us.  The temporary restraining order expired byits terms on July 21, 2002.  Wesubsequently sold the golf course and the purchasers assumed the risk as towhether there were any rights to the road easement.  On April 4, 2003, we filed a Motion to Dismiss Without Prejudicethe above action. We also requested the return of the $5,000 cash bond.  Some of the defendants objected to adismissal without prejudice and in addition sought an award of $14,769 inattorney fees and costs.  On April 26,2003, the judge orally granted our motion and stated that she would enter anorder allowing dismissal of the action without prejudice and the return of the$5,000 cash bond.  Defendants appealedthis order.  Subsequently, the partiesreached a settlement pursuant to which we paid the defendants $3,000.  The parties have executed mutual releasesand the appeal has been dismissed.  Thismatter is now concluded.

 

**Routine Litigation**

 

In addition to litigation between a lessorand our former lessees (and their affiliates), owners and operators of golfcourses are subject to a variety of legal proceedings arising in the ordinarycourse of operating a golf course, including proceedings relating to personalinjury and property damage. Such proceedings are generally brought against theoperator of a golf course, but may also be brought against the owner. Ourparticipating leases provided that each lessee is responsible for claims basedon personal injury and property damage at the golf courses which are leased andrequire each lessee to maintain insurance for such purposes. Since we are nowthe operator of our remaining golf courses, except Innisbrook, we maintaininsurance for these purposes. We are not currently subject to any claims ofthis sort that we deem to be material.

 

**ITEM 2. CHANGES IN SECURITIES**

 

Not Applicable.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

On July 21, 2003 we defaulted on ourobligation, under our voting agreement with the holder of our Series Apreferred stock, to redeem the Series A shares within 60 days of the holder’sMay  23 , 2003 demand.  As a result, the aggregate Series A dividendrate increased from $462,500 per quarter to $625,000 per quarter.

 

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

 

No matters were submitted to a vote ofsecurity holders during the three months ended June 30, 2003.

 

**ITEM5.  OTHER INFORMATION**

 

Not Applicable.

 

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

 

*Exhibits*

 

The exhibits listed on the Exhibit Index,which appears after the signature page, are included or incorporated byreference in this Quarterly Report.

 

*Form 8-K Filings*

 

On July 1, 2003, we filed the followingreport on Form 8-K, dated June 17, 2003, describing under Item 2 that we soldour wholly-owned subsidiary, Sandpiper-Golf Trust, LLC, to Sandpiper BBProperty, LLC for a purchase price of $25.0 million, plus routine operationprorations which was paid in cash at the closing.  Further describing under Item 5 that from the net proceeds ofthis sale, on June 19, 2003, we repaid in full our credit facility whichsatisfied the conditions necessary for the payment of the milestones under theemployment agreements of each of W. Bradley Blair, II and Scott D. Peters, bothof whom are executive officers and directors of our company.  Also, on June 19, 2003, we paid the first oftwo milestone payments payable to each of Messrs. Blair and Peters in theamounts of $1,815,523 and $972,453, respectively including interest (which,under the employment agreements, accrues on the milestone amounts from the dateof stockholder approval of the Plan of Liquidation until the date of payment).  We intend to pay the final milestone paymentsto each of Messrs. Blair and Peters, in the amounts of $1,233,907 and $660,921,respectively, plus accrued interest, in due course.

 

37

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|                   |   | **GOLF TRUST OF AMERICA, INC.,**registrant      |
|------------------------|--------|------------------------------------------------------|
| Date: August  13, 2003 |   | By:  /s/   W. Bradley Blair, II            |   |
|                   |   |                                                 |
|                   |   | W. Bradley Blair, II                                 |
|                   |   | *President and Chief Executive Officer*              |
|                   |   |                                                 |
|                   |   | /s/  Scott D. Peters                            |   |
| Date: August  13, 2003 |   | Scott D. Peters                                      |
|                   |   | *Senior Vice President and Chief Financial  Officer* |

 

38

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**EXHIBIT INDEX**

 

Pursuant to Item 601(a)(2) ofRegulation S-K, this exhibit index immediately precedes the exhibits.

 

The following exhibits are part of thisQuarterly Report on Form 10-Q (and are numbered in accordance with Item601 of Regulation S-K). Items marked with an asterisk (*) are filedherewith.

 
| **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 March 15, 2002 and as currently in effect (previously filed as  Exhibit 3.3.4 to our Company’s Annual Report on form 10-K, filed April 1,  2002, 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).                                                                                                                                                             |
| 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).                                                                     |

 

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| 4.4† |   | Voting  Agreement, between Golf Trust of America, Inc. and the holder of all of its  outstanding shares of Series A Preferred Stock, AEW Targeted Securities Fund,  L.P., dated February 22, 2001 (previously filed as Exhibit 4.2 to our  Company’s Current Report on Form 8-K, filed March 12, 2001, and incorporated  herein by reference).                                                                                                                                                                                                                                                                            |
|-----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.5       |   | Voting Agreement,  by and among Golf Trust of America, Inc., Golf Trust of America, L.P., GTA  GP, Inc. and the holders of operating partnership units named therein, dated  as of February 14, 2001 (previously filed as Exhibit 4.3 to our Company’s  Current Report on Form 8-K, filed March 12, 2001, and incorporated herein by  reference).                                                                                                                                                                                                                                                                         |
| 10.1.1    |   | First  Amended and Restated Agreement of Limited Partnership (the “Partnership  Agreement”) of Golf Trust of America, L.P., dated February 12, 1997  (previously filed as Exhibit 10.1 to our Company’s Annual Report on Form  10-K, filed March 31, 1997, and incorporated herein by reference).                                                                                                                                                                                                                                                                                                               |
| 10.1.2    |   | First  Amendment to the Partnership Agreement of Golf Trust of America, L.P., dated  as of February 1, 1998 (previously filed as Exhibit 10.1.2 to our Company’s  Annual Report on Form 10-K, filed March 31, 1998, and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                                               |
| 10.1.3    |   | Second  Amendment and Consent to the Partnership Agreement of Golf Trust of America,  L.P., as amended, dated as of February 14, 2001 (previously filed as Exhibit  10.3 to our Company’s Current Report on Form 8-K, filed March 12, 2001, and  incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                       |
| 10.1.4*   |   | Exhibit A to  the Partnership Agreement (Schedule of Partnership Interests) of Golf Trust  of America, L.P., as revised through August 8, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 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).                                                                                                                                                                                                 |
| 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                                                                                                                                                                                                                                                                                                                                                                                                        |

 

40

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|    |   | 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).                                                                                         |
| 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).                                                                  |
| 10.17.1 |   | 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).                                                                        |
| 10.18   |   | 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                                   |

 

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|    |   | 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).                                                                                                                                                   |
| 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).                                                                                                                                                |
| 21.1*   |   | List of  Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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).                                                                                                                                                                                 |

 

----

*              Filed herewith

 

†              Portions of thisexhibit have been omitted pursuant to a request for confidential treatment.

 

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