10-K 1 g81638e10vk.txt INTERSTATE LAND INVESTORS II LTD PARTNERSHIP SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Mark one) [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended December 31, 2002 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from _______________ to _______________ Commission File Number 33-30312 -------- INTERSTATE LAND INVESTORS II LIMITED PARTNERSHIP (Exact name of Registrant as specified in its charter) North Carolina 56-1669199 ------------------------- ------------------------------------ (State of Organization) (I.R.S. Employer Identification No.) Wachovia Securities, NC0170 301 S. College St. - 17th Floor Charlotte, NC 28288-0170 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (704) 715-7616 -------------- Securities Registered Pursuant to Section 12(b) of the Act: NONE ---- Securities Registered Pursuant to Section 12(g) of the Act: Units of Class A Limited Partnership Interest --------------------------------------------- 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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ___ No X Upon the sale of the remaining property, the estimated aggregate market value of the units of Class A Limited Partnership Interest ("Units") held by non-affiliates of the registrant would be approximately $1,872,500 based on a price of approximately $250 per Unit. On March 19, 2003, there were 7,650 Units outstanding. Documents Incorporated by Reference: See Item 15 Page 1 of 14 Sequentially Numbered Pages PART I ITEM 1 - BUSINESS Interstate Land Investors II (the "Registrant" or the "Partnership") is a North Carolina limited partnership organized as of July 27, 1989 to acquire for investment and dispose of three tracts of undeveloped land located in York County, South Carolina (the "Property"). The Property originally consisted of "Tract 1" (which was subdivided as discussed below), an approximately 91.64 acre tract fronting on Interstate 77 and Gold Hill Road; "Tract 2", an adjoining (but non contiguous) approximately 76.74 acre tract with frontage entirely on Interstate 77; and "Tract 3", an approximately 20 acre tract located on U.S. Highway 21 and contiguous to Tract 2. The General Partners of the Registrant were Performance Investments, Inc., a North Carolina corporation ("PII"), William Garith Allen ("Allen") and ISC Realty Corporation, a North Carolina corporation ("ISCR"). Allen is the President, a director and a 50% shareholder of PII. ISCR is a North Carolina corporation wholly owned by Wachovia Securities Inc. ("WSI"). Effective January 1, 1992, ISCR and Allen assumed the role of co-managing general partner and PII was converted to a Class A limited partner. In 1997, Allen executed an assignment of his partnership interests and forfeited his right to subordinated returns by transferring his interest and PII's interest to ISCR. The Registrant offered (the "Offering") a minimum of 5,406 units of Class A Limited Partnership Interests and a maximum of 9,588 units of Class A Limited Partnership Interests (the "Units") at $1,000 per Unit pursuant to a Registration Statement effective September 29, 1989, filed under the Securities Act of 1933, as amended (the "Act"). As of November 3, 1989, the Registrant had received aggregate subscriptions for 5,406 Units and accordingly, on November 3, 1989, subscriptions for 5,406 Units were accepted and the Initial Closing occurred under the Offering and 527 investors were admitted to the Partnership as Limited Partners. Of the $5,402,640 in gross proceeds received in connection with the Initial Closing (which amount equals subscription payments for 5,406 Units at $1,000 each less discounts on the purchase of certain Units as described in the Registration Statement), $668,458 had been applied to sales commissions and to organization and offering expenses. The balance of the gross proceeds, $4,734,182, was used to purchase Tracts 2 and 3 and provide working capital. Tract 2 was acquired by the Registrant pursuant to an Option Agreement that was originally obtained by Performance Service and Finance, Inc. ("PSF") from unaffiliated individuals. This Option Agreement was subsequently assigned by PSF to PII and then assigned by PII to the Registrant. Tract 2 was acquired from unrelated individuals for a purchase price of $2,855,223. In addition, the Partnership reimbursed PII $116,000 for its carrying costs associated with the Option Agreement and paid PII $181,363 in additional consideration as an assignment fee. The total amount paid by the Registrant for Tract 2 was $3,152,586, not including certain miscellaneous closing costs. The Registrant acquired Tract 3 pursuant to an Option Agreement that was originally obtained by Gold Hill Investment Associates ("Gold Hill"). The Option Agreement was subsequently assigned by Gold Hill to the Registrant. The Registrant acquired Tract 3 from an unaffiliated unrelated entity for a purchase price of $1,400,000. In addition, the Registrant 2 reimbursed Gold Hill $10,750 for its carrying costs associated with the Option Agreement and an additional $14,094 in consideration as an assignment fee. The total amount paid by the Registrant for Tract 3 was $1,424,844, not including certain miscellaneous closing costs. Gold Hill is a North Carolina partnership of which Gold Hill Limited Partnership, an affiliate of Allen, is a partner. Tract 1 was purchased by Gold Hill from an unrelated entity in December, 1986 for a purchase price of $1,800,000. Gold Hill Limited Partnership had an option, until June 30, 1990, to acquire the partnership interests of the remaining unrelated entities in Gold Hill, and thus become the sole owner of Tract 1. The Registrant had secured an option (see discussion below) to purchase Tract 1 from Gold Hill at a purchase price of $3,622,500. During July 1990, the Registrant requested and received approval from the limited partners to extend the Partnership offering from July 31, 1990 until December 31, 1990. During July and August 1990, the Registrant requested and received limited partner approval to subdivide Tract 1 into four (4) separate parcels and to allow the Registrant to acquire a portion of the property in the event proceeds from investor subscriptions were not sufficient to acquire all of Tract 1. In addition, the seller of Tract 1 had agreed to extend the option to purchase Tract 1 from September 30, 1990 until December 31, 1990 (the "Option"). Under the terms of the Option, in the event the Registrant was unable to sell the Maximum Offering Amount by December 31, 1990, but the Registrant had sold a minimum of 7,620 Units (the "Secondary Offering Amount") then the Registrant could purchase Tracts 1A and 1D (and it must purchase Tracts 1A and 1D simultaneously). Additionally, if the Registrant had achieved the Secondary Offering Amount, purchased Tracts 1A and 1D pursuant to the terms of the Option and had sold a minimum of 8,721 Units (the "Tertiary Offering Amount") prior to December 31, 1990, then the Registrant could purchase Tract 1B. Finally, if the Registrant achieved the Tertiary Offering Amount, and purchased Tracts 1A, 1B and 1D as herein above provided, and had sold a minimum of 9,588 Units prior to December 31, 1990, then the Registrant could purchase Tract 1C. The Registrant filed a post effective amendment to the original prospectus in August, 1990, outlining to the SEC these modifications to the offering and the amendment to the Partnership Agreement. On November 14, 1990, the Partnership received formal approval from the SEC on the post-effective amendment filed in August, 1990. Therefore, ISCR took additional subscriptions and was able to close on Parcels 1A and 1D on November 30, 1990. The total cost of the November 30, 1990 acquisition of Subtracts 1A and 1D was $1,908,605 which included a purchase price of $1,906,517, plus closing costs of $2,088. At that time, the Partnership determined that no further Units would be offered, sold and issued pursuant to the prospectus. The Partnership filed Post-effective Amendment No. 4 for the purpose of deregistering 1,938 unsold Units. The Registrant's principal investment objectives are to: (1) preserve and protect capital invested in the Registrant, (2) provide a relatively low-risk real estate investment through debt-free ownership of the Property, (3) provide long-term appreciation in the value of the Property, 3 and (4) provide protection for investors against inflation. The Registrant intends to accomplish its objectives through holding the Property and subsequently disposing of it at an appropriate time. The disposition of the Property by the Registrant may result in substantial fees to the General Partner and its affiliates. Reference is made to Item 13 herein for a description of certain transactions between the Registrant and the General Partner and its affiliates. No mortgage indebtedness was incurred in connection with the acquisition of the Property. The Registrant plans to hold the property for future appreciation. It is not contemplated that the Registrant will undertake construction or substantial improvements on the Property. Upon the sale of all or a portion purchased (i.e., Tracts 2, 3, 1A, and 1D) of the Property by the Registrant, the proceeds of the sale will be distributed to the investors. The General Partner currently intends to dispose of the Property purchased within ten to twelve years of the purchase. However, the investors had a one-time right to direct the Registrant to dispose of the Property upon the fifth anniversary of the Closing of the Offering (November 1994) for a price not less than $11,104,839, reduced by the net proceeds to the Registrant from the sale of other parcels within the Property by the Registrant. If the Registrant was unable to sell the Property by such date at such price, Allen was obligated to either (i) purchase the Property at such price or (ii) forfeit his entire subordinated Limited Partner interest and transfer the remaining General Partner interest to the Limited Partners. In 1997 Mr. Allen executed an assignment transferring his partnership interest to ISCR. (See Note 1 of the audited financial statements.) The Registrant in seeking to secure purchasers for its Property will be competing with many other real estate investment partnerships as well as individuals, insurance companies, banks and other entities engaged in real estate investment activities including, perhaps, certain affiliates of the General Partner. The General Partner currently serves as general partner in several public and private partnerships, which currently own various types of real property. None of the prior partnerships sponsored by the General Partner or its affiliates now contemplate the acquisition of any additional properties of the type purchased by the Registrant. However, the General Partner or its affiliates may sponsor additional public or private partnerships in the future. In addition, the General Partner and its affiliates are and will continue to be engaged in the business of real estate investment, development and management apart from their involvement in the Registrant. Located immediately adjacent to the Property is an approximately 96.74 acre tract which was owned by Interstate Land Investors I Limited Partnership ("Interstate I"), a North Carolina limited partnership having the same general partner as the Registrant. Interstate I acquired the adjacent property on September 30, 1988, for a purchase price of $4,200,000. Interstate I sold the adjacent property in May of 2001 to Greenfield Development Company, LLC and Interstate Land Investors I Limited Partnership was liquidated in 2001. 4 The General Partner will devote only so much of its time to the business of the Registrant as in their judgment and experience is reasonably required. The General Partner is engaged in other activities that also require its time and attention. As of December 31, 2002, the Registrant did not directly employ any persons in a full-time position. Certain employees of the General Partner performed services for the Registrant during the year. ITEM 2 - PROPERTY The Property is located approximately 12 miles south of the Central Business District of Charlotte, North Carolina along the I-77 corridor and approximately 8 miles north of Rock Hill, South Carolina. While the Property is located in northeastern York County, South Carolina, the Property is considered a part of the Charlotte Metropolitan Service Area (MSA). The Property originally consisted of three separate tracts, all of which are zoned for agricultural use, more particularly described as follows: Tract 1 (which was subdivided - See Item 1) is an approximately 91.64 acre tract located in the northeast quadrant of I-77 and Gold Hill Road in York County, South Carolina. 16.1 acres of Tract 1 lies in a floodplain and the remaining 76.03 acres are usable and free of rights-of-way. Tract 1 has approximately 2,200 feet of frontage along Gold Hill Road and 3,600 feet of frontage along I-77. Electricity and telephones are available to Tract 1. Municipal water and sewer has been brought to the edge of the Property and would be made available if the Property were developed. If a sale was to occur, Tract 1 zoning would revert to BD-2 and BD-3 under the York County Zoning Ordinance. The BD-2 classification is designed to provide for the development of office and institutional parks in areas free of general commercial activity. The BD-3 classification is designed to provide for retail establishments, such as department stores and variety stores. Tract 1 was subdivided into four Tracts. Tract 1A is approximately 17.0 acres; Tract 1B, approximately 24.33 acres; Tract 1C, approximately 19.08 acres; and Tract 1D, approximately 31.23 acres. Tracts 1A and 1D are owned by the Registrant. Tract 2 consists of approximately 76.74 acres. Tract 2 has 2,819 feet of frontage on I-77 and is located north of Tract 1. Tract 2 is not contiguous to Tract 1. Access to Tract 2 is through Tract 3 to U.S. Highway 21. Additionally, Tract 2 adjoins a common boundary with the 95-acre tract of land owned by Interstate I. Electricity and telephones are available to Tract 2. Water is currently available to Tract 2 by extension through Tract 3. Water and sewer will be provided by a private utility company with facilities located west of Tract 2 on the west side of I-77. In addition, Tract 2 can be serviced by the water and sewer facilities serving the Charlotte Knights baseball stadium. If a sale was to occur, Tract 2 zoning would revert to UDD, urban development district, by the York County Council. The purpose of this district is to permit maximum flexibility in response to market demands in specific areas of the County. Permitted uses range from residential to business development and industrial. Tract 3 consists of approximately 20 acres of land fronting approximately 400 feet on U.S. Highway 21 and being contiguous to Tract 2. Additionally, a portion of the Property is contiguous to the tract that was owned by Interstate I. Electricity, telephone, water and sewer are 5 all available to Tract 3. If a sale was to occur, Tract 3 zoning would revert to UDD, urban development district, by the York County, South Carolina, County Council. In June 2000, the Partnership entered into a contract with Greenfield Development Company, LLC, to sell 97 acres of the 145 acres of unimproved land for $45,000 per acre, subject to adjustments for wetlands acreage. The actual proceeds from the sale totaled $4,353,360. The purchaser deposited $50,000 earnest money with a title agency. Under the terms of the contract, the purchaser had until November 6, 2000, to complete their due diligence, however, Greenfield requested two 90-day extensions of the closing date to provide them time to obtain a wetlands permit from the U.S. Army Corps of Engineers which permit was necessary to allow the proposed development. An additional $25,000 earnest money was deposited with the title agency for the first extension and $50,000 was deposited for the second extension. The first extension expired on March 6, 2001, and the sale was consummated on May 11, 2001. The remaining approximate 48 acres of the property consisting of Tract 1A and Tract 1D is listed and being marketed for sale at $57,500 per acre by Bissell Patrick. (See Item 13 - Related Transactions.) ITEM 3 - LEGAL PROCEEDINGS The Partnership is not a party to any legal proceedings. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 2002. PART II ITEM 5 - MARKET FOR REGISTRANT'S SECURITIES AND RELATED SECURITY HOLDER MATTERS Transfer of the Units is subject to certain restrictions contained in the Limited Partnership Agreement. There is no established market for the Units and it is not anticipated that any will occur in the future. The Registrant is not aware of any significant resale of Units since the Initial Closing on November 3, 1989. As of March 19, 2003, 775 persons were record owners of 7,650 Units. The Registrant in each year allocates to the investors and the General Partner any net profit prior to a sale of the Property. Such allocations to the investors are credited against the preferred return due to them on their invested capital. Net losses for each year are also allocated to the investors and the General Partner in accordance with their respective capital accounts. The Registrant does not intend to make any distributions of available cash prior to the sale of all or a portion of the Property. Allocations to the investors are subject to the limitations of the Partnership's limited partnership agreement. 6 ITEM 6 - SELECTED FINANCIAL DATA (AUDITED) SELECTED STATEMENT OF OPERATIONS DATA The following selected financial data for the five years ended December 31, 2002, have been derived from audited financial statements. The financial statements for each of the three years ended December 31, 2002, were audited by Faulkner and Thompson, P.A., and these financial statements and independent auditors' report are contained elsewhere in this report. All of the data set forth below are qualified by this reference to, and should be read in conjunction with, the Partnership's audited financial statements (including the Notes thereto), and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this report.
Year ended Year ended Year ended Year ended Year ended December 31, December 31, December 31, December 31, December 31, 2002 2001 2000 1999 1998 ----------- ----------- ----------- ----------- ----------- Revenue from Sale of Property $ 0 $ 4,353,360 $ 0 $ 0 0 Interest and Other Income $ 1,313 $ 17,424 $ 3,056 $ 2,356 $ 2,392 Property write-down 0 0 0 84,310 0 Extraordinary Gain on Extinguishment of Liability 0 131,561 0 0 0 Expenses 33,446 36,985 57,177 51,880 52,506 ----------- ----------- ----------- ----------- ----------- Net Loss $ (32,133) $ (520,749) $ (54,121) $ (133,834) $ (50,114) ----------- ----------- ----------- ----------- ----------- Distributions to limited partners $ 439 $ 3,467,974 $ 0 $ 0 $ 0 ----------- ----------- ----------- ----------- ----------- Net Loss Allocated to Class A limited partners $ (32,129) $ (520,684) $ (54,115) $ (133,817) $ (50,108) ----------- ----------- ----------- ----------- ----------- Net Loss Per Class A limited partnership unit $ (4.20) $ (68.06) $ (7.07) $ (17.49) $ (6.55) ----------- ----------- ----------- ----------- -----------
7 SELECTED BALANCE SHEET DATA
December 31, December 31, December 31, December 31, December 31, 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- Total Assets $2,008,978 $2,041,174 $6,494,010 $6,492,936 $6,572,386 Total Liabilities 376 0 464,113 408,918 354,534 ---------- ---------- ---------- ---------- ---------- Partner's Capital $2,008,602 $2,041,174 $6,029,897 $6,084,018 $6,217,852 ---------- ---------- ---------- ---------- ----------
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Partnership sold one-third acre of the Property for $15,000 on May 10, 2001. On May 11, 2001, the Partnership sold 97 acres of the Property for $4,353,360. On June 29, 2001, a distribution of $3,467,974 ($453 per unit) was distributed to the limited partners. In 2001, there was a significant year end adjustment related to the cost basis of the properties sold. The original second quarter 2001 filing utilized an average cost basis on the properties sold. However, a year end adjustment totaling approximately $209,000 increased the cost basis of the property sold as the Partnership utilized the specific identification method on the properties sold which was more reflective of the proper cost. As of December 31, 2002, the Registrant had $97,478 in cash and cash equivalents on hand which will be retained to pay ongoing partnership expenses. Until the Registrant disposes of the remaining approximate 48 acres of the Property, its only sources of additional capital are from General Partner advances or other borrowings. The General Partner anticipates that any future additional funds necessary for the operations of the Partnership will be provided by ISCR. On May 23, 1995, the General Partner, ISCR, entered into a line of credit agreement in the amount of $150,000 with the Partnership to provide additional funds as needed. In July of 1998, the line of credit amount was increased to $175,000 and in August of 1999, the amount was increased to $250,000. In accordance with the Partnership Agreement, ISCR is entitled to accrue interest on any loans provided to the Partnership at the rate of prime plus two percent. In May 2001, a portion of the proceeds from the sale of unimproved land was used to pay in full the debt and accrued interest. (See Note 5 of the audited financial statements.) RESULTS OF OPERATIONS COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR ENDED DECEMBER 31, 2001 The Registrant's net loss decreased from $520,749 for the year ended December 31, 2001, to $32,133 for the year ended December 31, 2002. With the exception of an approximately $3,800 fee for a real estate broker's opinion of value, the loss in 2002 is the result of regular and ongoing partnership expenses, compared to the loss incurred from the sale of a portion of the property in 2001. An extraordinary gain in the amount of $131,561 on extinguishment of debt was recorded by the Partnership in 2001. (See Note 4 of the audited financial statements.) 8 Professional and legal fees increased from $26,707 in 2001 to $28,034 in 2002 reflecting extra charges incurred by auditors and tax preparers for new electronic filing requirements mandated by the IRS. Interest expense was zero in 2002 compared to $8,306 in 2001 because the note to ISCR was paid in full from the proceeds of the sale in May 2001. General and administrative expenses increased from $1,873 in 2001 to $5,392 in 2002 due to additional database management fees incurred also for the new IRS electronic filing requirements. COMPARISON OF THE YEAR ENDED DECEMBER 31, 2001 TO THE YEAR ENDED DECEMBER 31, 2000 The Registrant's net loss increased from $54,121 for the year ended December 31, 2000, to $520,749 for the year ended December 31, 2001. This loss is the result of the loss incurred from the sale of a portion of the property in 2001. An extraordinary gain on extinguishment of debt for $131,561 was recorded by the Partnership in 2001. (See Note 4 of the audited financial statements Professional and legal fees increased from $16,297 in 2000 to $26,707 in 2001 due to the review of the purchase contract and closing costs. Interest expense decreased to $8,306 in 2001 from $20,986 in 2001 because the note to ISCR was paid in full from the proceeds of the sale in May 2001. General and administrative expense decreased from $19,697 in 2000 to $1,873 due to discontinuation and forgiveness of Partnership management fees to ISCR. See Note 4 for further disclosure. SELECTED QUARTERLY FINANCIAL DATA The table below shows excerpted results from our quarterly Reports on Form 10-Q filed in the years ended December 31, 2002 and 2001. Individual quarterly amounts may not be additive due to rounding.
2002 (unaudited) 2001 (unaudited) 1st 2nd 3rd 4th Total 1st 2nd 3rd 4th Total Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Total Revenues $367 $284 $286 $376 $1,313 $35 $4,345,381 $9,703 $15,665 $4,370,784 Total Expenses 10,882 6,882 10,273 5,409 33,446 17,490 4,641,704 4,592 359,308 5,023,094 and other Extraordinary 131,561 131,561 Gain on Extinguishment of Liability Income (Loss) ($10,515) ($6,598) ($9,987) ($5,033) ($32,133) ($17,454) ($296,323) $5,112 ($212,084) ($520,749) From Operations and Sale of Property Net Income (Loss) Allocation: General (105) (1) (1) 104 ($3) (175) (30) 1 152 ($52) Partners Class A (10,410) (6,597) (9,987) (5,135) ($32,129) (17,280) (296,294) 5,111 ($212,221) ($520,684) Limited Partners Net Income ($1.36) ($0.86) ($1.31) (0.67) ($4.20) ($2.26) ($38.73) $0.67 ($27.74) ($68.06) (Loss) Per Class A Limited Partnership Unit
9 ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership does not hold any financial instruments with market risk exposure. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this Item is submitted as a separate section of this report. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements concerning either the December 31, 2002, financial statements or the December 31, 2001, financial statements. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Registrant has no directors or executive officers. PII, the former managing general partner, filed for relief from creditors under Chapter 11 of the Bankruptcy Code during 1991. Effective January 1, 1992, the general partner interest of PII was converted to that of a Class A Limited Partner retaining the same interest in the Partnership's net profit, losses and distributions as it had as a general partner subject to the same priority of the other Class A Limited Partners. In 1997, Allen executed an assignment of his partnership interests and forfeited his right to subordinated returns by transferring his interest and PII's interest to ISCR. Because the Registrant has no directors or executive officers and because, to the Registrant's knowledge no person owns more than 10% of the Units, there is no disclosure pursuant to Item 405 of Regulation S-K contained in this report. Information as to ISCR, the current Managing General Partner, is as follows: Information About Executive Officer Jeffrey K. Harpel Principal Executive, Financial and Accounting Officer of ISCR since 2002. He is 50 years old. Jeffrey K. Harpel is Sr. Vice President & Managing Director of Wachovia Securities, Inc. (WSI), an affiliate of ISCR. WSI is the brokerage division of the parent company Wachovia Corporation, a large east-coast bank. Before joining Wachovia Securities in 1988, Mr. Harpel was Controller & Managing Director at Wheat First Securities. He received his B.S. degree from Penn State. 10 The officer holds office until his death, resignation, retirement, removal, disqualification or his successor is elected and qualified. On April 1, 1999, ISCR's parent company, Interstate/Johnson Lane, Inc., merged into Wachovia Corporation and on September 1, 2001, Wachovia Corporation and First Union Corporation merged. The new organization functions under the name Wachovia Corporation. Personnel and offices continue to operate as usual. ITEM 11 - EXECUTIVE COMPENSATION No remuneration from the Partnership was paid or accrued for the account of any partner, officer or director of the General Partner during the Partnership fiscal year ended December 31, 2002. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MATTERS As of March 19, 2003, Begley-Hall, P.O. Box 1027, Mount Airy, NC 27030, an investment partnership, beneficially owned 6.87% of the limited partnership interests or 525.6 Units. As of March 19, 2003, none of the individual directors and officers of the General Partner beneficially owned any Units. ISCR has sole investment and voting power with respect to the securities indicated in the table below. The address of ISCR is 901 E. Byrd St., Richmond, VA 23019.
Amount and Nature of Beneficial Percent of Partner Type Name & Address Ownership Class ------------ -------------- ---------- ---------- Subordinated Limited ISC Realty Corporation 0 Units 100% General Partner ISC Realty Corporation 0 Units 100% Class A Limited Partner ISC Realty Corporation 160.65 Units 2.1%
The Partnership does not have any equity compensation plans. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The remaining approximate 48 acres of the Property is listed for sale with Bissell Patrick. Should a sale of the property occur from this contractual listing agreement, the past president of ISCR, J. Christopher Boone, may receive a sales commission through a separate agreement between Mr. Boone and Bissell Patrick. As the purchase price of the property is not known, the Partnership is unable to determine the amount of the sales commission, if any, that Mr. Boone may receive. 11 ITEM 14 - CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures. The General Partner's Senior Vice President (our principal executive officer and principal financial officer,) has concluded, based on his evaluation as of a date within 90 days prior to the filing date of this Report, that the Partnership's disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to the Partnership's management, including the General Partner's Senior Vice President, as appropriate to allow timely decisions regarding required disclosure. Changes in internal controls. There were no significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation. PART IV ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules. See Index to Financial Statements included in Appendix A to this Form 10-K. Schedules are omitted because they are not applicable, not required or because the requested information is included in the Financial Statements or notes thereto. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth quarter of 2002. (c) Exhibits. No exhibits are attached to this filing. 12 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERSTATE LAND INVESTORS II A NORTH CAROLINA LIMITED PARTNERSHIP BY: ISC REALTY CORPORATION AS PRINCIPAL EXECUTIVE OFFICER, PRINCIPAL FINANCIAL OFFICER, PRINCIPAL ACCOUNTING OFFICER AND GENERAL PARTNER OF THE REGISTRANT BY: /S/JEFFREY K. HARPEL JEFFREY K. HARPEL DATE: MARCH 19, 2003 PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jeffrey K. Harpel, certify that: 1. I have reviewed this annual report on Form 10-K of Interstate Land Investors II Limited Partnership; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by 13 others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/Jeffrey K. Harpel -------------------- Jeffrey K. Harpel Senior Vice President ISC Realty Corporation, General Partner, Principal Executive Officer and Principal Financial Officer of the Registrant 14 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERSTATE LAND INVESTORS II A NORTH CAROLINA LIMITED PARTNERSHIP BY: ISC REALTY CORPORATION AS PRINCIPAL EXECUTIVE OFFICER, PRINCIPAL FINANCIAL OFFICER, PRINCIPAL ACCOUNTING OFFICER AND GENERAL PARTNER OF THE REGISTRANT BY: ______________________________ JEFFREY K. HARPEL DATE: MARCH 19, 2003 PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jeffrey K. Harpel, certify that: 1. I have reviewed this annual report on Form 10-K of Interstate Land Investors II Limited Partnership; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: 15 a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: ---------------- Jeffrey K. Harpel Senior Vice President ISC Realty Corporation, General Partner, Principal Executive Officer and Principal Financial Officer of the Registrant 16 INTERSTATE LAND INVESTORS II, LIMITED PARTNERSHIP FINANCIAL STATEMENTS As of December 31, 2002 and 2001 and for the three years ended December 31, 2002, 2001 and 2000 FAULKNER AND THOMPSON, P.A. CERTIFIED PUBLIC ACCOUNTANTS INTERSTATE LAND INVESTORS II, LIMITED PARTNERSHIP FINANCIAL STATEMENTS -------------------------------------------------------------------------------- TABLE OF CONTENTS Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1 BALANCE SHEETS 2 STATEMENTS OF OPERATIONS 3 STATEMENT OF PARTNERS' CAPITAL 4 STATEMENTS OF CASH FLOWS 5 NOTES TO FINANCIAL STATEMENTS 6 -i- FAULKNER AND THOMPSON, P.A. CERTIFIED PUBLIC ACCOUNTANTS POST OFFICE BOX 2456 ROCK HILL, SOUTH CAROLINA 29732-4456 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Partners of Interstate Land Investors II, Limited Partnership Charlotte, North Carolina We have audited the balance sheets of Interstate Land Investors II, Limited Partnership (a North Carolina limited partnership) as of December 31, 2002 and 2001 and the related statements of operations, partners' capital and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the managing general partner, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Interstate Land Investors II, Limited Partnership (a North Carolina limited partnership) as of December 31, 2002 and 2001 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with U.S. generally accepted accounting principles. Charlotte, North Carolina February 6, 2003 INTERSTATE LAND INVESTORS II, LIMITED PARTNERSHIP BALANCE SHEETS DECEMBER 31, -------------------------------------------------------------------------------- ASSETS 2002 2001 ---------- ---------- Unimproved land held for investment purposes $1,911,500 $1,911,500 Cash and cash equivalents 97,478 129,674 ---------- ---------- $2,008,978 $2,041,174 ========== ========== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Accrued expenses $ 376 $ -- ---------- ---------- 376 -- ---------- ---------- PARTNERS' CAPITAL Class A limited partners' interest (authorized, 9,588 units; issued and outstanding, 7,650 units) 2,008,747 2,041,315 Subordinated limited partner's interest 70 71 General partners' capital deficiency (215) (212) ---------- ---------- 2,008,602 2,041,174 ---------- ---------- $2,008,978 $2,041,174 ========== ========== See Notes to Financial Statements. - 2 - INTERSTATE LAND INVESTORS II, LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS For the three years ended December 31, -------------------------------------------------------------------------------- 2002 2001 2000 --------- ---------- ---------- INCOME Sale of real estate $ -- $4,353,360 $ -- Interest 1,313 17,424 3,056 --------- ---------- ---------- 1,313 4,370,784 3,056 --------- ---------- ---------- OPERATING EXPENSES Cost of real estate sold -- 4,986,109 -- Professional fees 28,034 26,707 16,297 Property tax 20 99 197 Interest expense -- 8,306 20,986 General and administrative 5,392 1,873 19,697 --------- ---------- ---------- 33,446 5,023,094 57,177 --------- ---------- ---------- Net loss before extraordinary item (32,133) (652,310) (54,121) EXTRAORDINARY GAIN ON EXTINGUISHMENT OF LIABILITY - RELATED PARTY -- 131,561 -- --------- ---------- ---------- Net loss $(32,133) $(520,749) $(54,121) ========= =========== ========== NET LOSS ALLOCATED TO Class A limited partners $(32,129) $(520,684) $(54,115) Subordinated limited partner (1) (13) (1) General partners (3) (52) (5) --------- ---------- ---------- $(32,133) $(520,749) $(54,121) ========= =========== ========== Weighted average Class A limited partnership units outstanding 7,650 7,650 7,650 ========= =========== ========== Net loss per weighted average Class A limited partnership unit $(4.20) $(68.06) $(7.07) ========= =========== ========== See Notes to Financial Statements. - 3 - INTERSTATE LAND INVESTORS II, LIMITED PARTNERSHIP STATEMENT OF PARTNERS' CAPITAL For the three years ended December 31, 2002, 2001 and 2000 --------------------------------------------------------------------------------
Subordinated Class A Limited Partners --------------------------- -------------------------- Limited General Units Amount Partner Partners Total ----------- ----------- ----------- ----------- ----------- Partners' capital (deficiency) - December 31, 1999 7,650 $ 6,084,088 $ 85 $ (155) $ 6,084,018 Net loss, year ended December 31, 2000 -- (54,115) (1) (5) (54,121) ----------- ----------- ----------- ----------- ----------- Partners' capital (deficiency) - December 31, 2000 7,650 6,029,973 84 (160) 6,029,897 Net loss, year ended December 31, 2001 -- (520,684) (13) (52) (520,749) Distributions to partners -- (3,467,974) (--) (--) (3,467,974) ----------- ----------- ----------- ----------- ----------- Partners' capital (deficiency) - December 31, 2001 7,650 2,041,315 71 (212) 2,041,174 Net loss, year ended December 31, 2002 -- (32,129) (1) (3) (32,133) Distributions to partners -- (439) (--) (--) (439) ----------- ----------- ----------- ----------- ----------- Partners' capital (deficiency) - December 31, 2002 7,650 $ 2,008,747 $ 70 $ (215) $ 2,008,602 =========== =========== =========== =========== ===========
See Notes to Financial Statements. - 4 - INTERSTATE LAND INVESTORS II, LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the three years ended December 31, --------------------------------------------------------------------------------
2002 2001 2000 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (32,133) $(520,749) $(54,121) Adjustments to reconcile net loss to net cash provided by (used for) operating activities Loss on sale of unimproved land held for investment purposes - 632,749 - (Increase) decrease in interest receivable - related party - 42,361 (2,868) Increase (decrease) in other liabilities 376 (251,359) 37,195 Proceeds from sale of unimproved land (net of closing costs totaling $447,609) 3,905,751 - ------- --------- ------- Net cash provided by (used for) operating activities (31,757) 3,808,753 (19,794) ------- --------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Advance from related party - 15,000 18,000 Distributions to partners (439) (3,467,974) - Payment on line-of-credit - related party - (175,000) - Payment on advance from related party (-) (52,754) - ------- --------- ------- Net cash provided by (used for) financing activities (439) (3,680,728) 18,000 ------- --------- ------- Net increase (decrease) in cash and cash equivalents (32,196) 128,025 (1,794) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 129,674 1,649 3,443 ------- --------- ------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 97,478 $ 129,674 $ 1,649 ======== ========== =======
See Notes to Financial Statements. - 5 - INTERSTATE LAND INVESTORS II, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Interstate Land Investors II, Limited Partnership (the Partnership) is a North Carolina limited partnership formed on July 26, 1989, to acquire for investment, hold for appreciation and ultimately dispose of, without substantial improvements, undeveloped land in York County, South Carolina. The Partnership acquired 97 acres of such land in November 1989 and an additional 48 acres in November 1990. The Partnership shall continue its existence without interruption subject to the terms and conditions set forth in the partnership agreement and the provisions of the Revised Uniform Limited Partnership Act of the State of North Carolina. Until January 1, 1992, the managing general partner was Performance Investments, Inc. (PII), which is 100% owned by Mr. William Garith Allen and a family member. Mr. Allen and ISC Realty Corporation (ISCR) are also general partners in the Partnership and effective January 1, 1992, assumed the role of co- managing partners. In November 1991 PII consented to the conversion of its interest to that of a Class A limited partner, to become effective January 1, 1992. PII, however, retains the same interest in the Partnership's net profit, losses and distributions as it had as a general partner subject to the same priority of the other Class A limited partners. In December 1993, upon the approval of 67% of the Class A limited partners' interest and upon meeting certain conditions in the partnership agreement, the partners exercised their one-time right to direct the general partners to sell the property at a price no less than $11,104,839, reduced by the proceeds from any previous sales. The property was to be sold by November 1994, or at that time Mr. Allen would agree to either (i) purchase the property from the Partnership on such date at the purchase price or, (ii) elect not to purchase the property at the purchase price but instead forfeit his right to receive subordinated returns, withdraw as a general partner and transfer his general partnership interest to ISCR. In 1997 Mr. Allen executed an assignment of his partnership interests and forfeited his right to subordinated returns by the transfer of his interest and PII's interest to ISCR. The general partners are solely responsible for the day-to-day management and operation of the property. ISCR is responsible for certain administrative functions of the Partnership and beginning in November 1989, is entitled to an annual administrative fee equal to .25% of the cost of the property acquired. Payment of such administrative fee is deferred until the sale of the property and the return of the Class A limited partners' invested capital plus their preferred return, as defined. Any such deferred fee will accrue interest at the prime rate plus 1%. In 2002, management of ISCR determined that this fee would never be paid. Accordingly, the fee was written-off as uncollectible and reported as an extraordinary gain on extinguishment of debt. CASH EQUIVALENTS For the purposes of the statements of cash flows, the Partnership considers all highly liquid investments having maturities of three months or less to be cash equivalents. At December 31, 2002 and 2001, the Partnership's cash consisted of monies deposited through Wachovia Securities, Inc. (a related company to ISCR) in a money market fund. UNIMPROVED LAND HELD FOR INVESTMENT PURPOSES The costs of acquiring land, including related closing and predevelopment costs, are capitalized and will be allocated to cost of sales as sales of the property occur. In the fourth quarter of 2000, the Partnership recorded a write-down of the carrying amount of their property of approximately $84,000 to reflect the general partner's estimate of the property's estimated realizable value. - 6 - INTERSTATE LAND INVESTORS II, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED UNIMPROVED LAND HELD FOR INVESTMENT PURPOSES, CONTINUED On May 11, 2001, the Partnership sold 97 acres of unimproved land held by the Partnership for $4,338,360. The Partnership sold an additional one-third acre of unimproved land as right-of-way for $15,000 on May 10, 2001. ORGANIZATIONAL AND SYNDICATION COSTS Various expenses and fees paid in connection with organizing the Partnership (including an organizational fee paid to ISCR amounting to $159,000 in 1990 and an additional $66,000 in 1991) have been capitalized and amortized using the straight-line method over a 60-month period. These costs have been fully amortized in prior years. Other fees and expenses related to the sale of limited partnership interests in the Partnership have been classified as syndication costs and include sales commissions paid to Interstate/Johnson Lane Corporation, a related company to ISCR, of $377,644 in connection with the initial offering in 1989 and $116,305 in connection with the secondary offering in 1990. These costs were charged directly against partners' capital. INCOME TAXES Items of income or loss of the Partnership are included in the income tax returns of the partners. Accordingly, the Partnership makes no provision for federal and state income taxes. NET LOSS PER CLASS A LIMITED PARTNERSHIP UNIT Net loss per weighted average Class A limited partnership unit is calculated based on the loss allocated to such partners without giving consideration to the conversion of PII's general partner interest (see Note 7). DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMEnts The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate the value. Cash, Cash Equivalents, Receivables, Accounts Payable and Accrued Expenses - The carrying amount approximates fair value because of the short-term nature of these instruments. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. - 7 - INTERSTATE LAND INVESTORS II, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 2 - UNIMPROVED LAND HELD FOR APPRECIATION PROVISION FOR WRITE-DOWN OF UNIMPROVED LAND The general partner periodically reviews the recorded value of its long-lived assets to determine if the future cash flows to be derived from these assets will be sufficient to recover the recorded asset values. During the fourth quarter of 1999, the Partnership recorded a non-cash charge of approximately $84,000, or approximately $11 per limited partnership unit, to write-down its unimproved land to its estimated realizable value. This charge was reflected in the basis of the property sold in 2001. Management deems that the market value of the land held for investment purposes at December 31, 2002 is in excess of its cost. NOTE 3 - ALLOCATIONS AND DISTRIBUTIONS OF NET PROFITS AND LOSSES Under the terms of the partnership agreement, net profit and distributions of available cash in each year prior to a sale of the property will be allocated 99% to the Class A limited partners and 1% to the general partners. Net losses shall be allocated among all partners in accordance with their respective capital accounts. Special allocations are provided for any gains or losses arising from the sale of the property and for the related cash distributions. NOTE 4 - RELATED PARTIES AND RELATED PARTY TRANSACTIONS In connection with the initial acquisition of the property in 1989, the Partnership paid PII and Gold Hill Investment Associates (a partnership of Gold Hill Limited Partnership and an affiliate of Mr. Allen) a total of $322,207 for the assignment of options to acquire the two tracts of land which comprise the property and for reimbursement of Gold Hill Investment Associates' (Gold Hill) and PII's holding costs in the options (which totaled approximately $126,750). The total cost, along with legal and other acquisition expenses, is included in the land on the accompanying balance sheets. In connection with the consent entered into during November 1991 (see Note 1), the amount will be offset against any amounts due PII or Mr. Allen in connection with the sale of the property. This receivable was written-off as uncollectible in 2001 and is netted against the liabilities of ISCR, which were forgiven in 2001 and included in the extraordinary item as an extinguishment of debt. In November 1990, the Partnership acquired approximately 48 acres of property from Gold Hill at a purchase price of $1,906,517. The partners of Gold Hill agreed to accept, as part of the purchase price, 533 units of Class A limited partner interests and granted a credit on the purchase price of $495,690, which represents the cost of 533 units at $1,000 per unit less selling commissions. In 1989, ISCR purchased 106 units of Class A limited partner interests at the full offering price ($1,000 a unit). In 1990, ISCR contributed two-thirds of its fee received for additional organizational costs to purchase 44 Class A limited partner interests at $1,000 per unit. These units are included in Class A limited partners' interest on the balance sheets. Also, the general partners, their affiliates and their employees purchased units of Class A limited partner interests at 3.5% discount. The total discounts amounted to $385 in 1990 and $3,360 in 1989, representing 11 and 66 units, respectively. - 8 - INTERSTATE LAND INVESTORS II, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 4 - RELATED PARTIES AND RELATED PARTY TRANSACTIONS, CONTINUED The Partnership incurred expense of approximately $16,200 in 2000 for services rendered by ISCR in connection with certain administrative functions of the Partnership. Since payment of these fees is deferred as described in Note 1, they are included in accrued administrative fees in the accompanying balance sheets, and as general and administrative expenses in the accompanying statements of operations. The accompanying liability was forgiven by ISCR in 2001 and this is included in the extraordinary item as an extinguishment of debt. See Note 1 for fees paid to ISCR and its affiliates in connection with organizing the Partnership and the subsequent sale of limited partnership interests. NOTE 5 - LINE-OF-CREDIT FROM RELATED PARTY On May 23, 1995, the Partnership obtained a line-of-credit from ISCR to utilize as needed. Interest was charged on this line-of-credit at 2% above the announced prime-lending rate of Bank of America, resulting in a rate of 0% and 11.5% at December 31, 2002 and 2001, respectively. ISCR received a mortgage and assignment of rents and leases on the property as security. Interest accrued on this line-of-credit which would be paid along with the outstanding principal balance on the earlier of: o Sale or disposition of all or any portion or part of the property securing the mortgage instrument; o the date ISCR is removed as managing general partner of the Partnership; or o the date the Partnership terminates its legal existence. A portion of the proceeds from the sale of unimproved land on May 11, 2001, totaling $313,543, was used to pay the line-of-credit and accrued interest. During the years ended December 31, 2002, 2001 and 2000, interest expense of $0, $85,014 and $0, respectively, was paid to ISCR. NOTE 6 - SALE OF UNIMPROVED LAND HELD FOR INVESTMENT PURPOSES On June 29, 2000, the Partnership entered into a contract to sell 97 acres of the Partnership's 145 acres of unimproved land held for sale. A majority of the limited partners approved the sale of unimproved land on August 7, 2000. Subsequently, on May 11, 2001, the Partnership sold the 97 acres of unimproved land held for investment purposes related to this contract. The Partnership realized a loss related to this sale calculated as follows: Sales proceeds $ 4,353,360 Less: Carrying value of acreage sold (4,538,500) Less: Selling costs (447,609) ------------- Loss on sale $ (632,749) ============= In 1999, the Partnership recorded an impairment loss in order to reflect management's expected cash flow from its land held for sale. Management believes the expected cash flow from the remaining 48 acres of unimproved land held for sale will be greater than the carrying value. - 9 - INTERSTATE LAND INVESTORS II, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 7 - RECONCILIATION OF FINANCIAL STATEMENT NET LOSS TO TAXABLE LOSS A reconciliation of financial statement net loss and taxable loss is as follows:
2002 2001 2000 --------- ---------- --------- Financial statement net loss $(32,133) $(520,749) $(54,121) Less: Temporary non-taxable income from related party - - (2,868) Less: Expenses deductible for tax purposes in excess of book - (128,151) - Less: Tax loss on sale of property in excess of book loss - (84,310) - Less: Excludable gain for tax purposes on extinguishments of debt from related party - (131,561) - Plus: Temporary non-deductible expenses to related party - - 37,195 --------- ---------- --------- Taxable loss $(32,133) $(864,771) $(19,794) ========= ========== =========
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