UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File #0-19220
Inland Land Appreciation Fund II, L.P.
(Exact name of registrant as specified in its charter)
Delaware #36-3664407
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
2901 Butterfield Road, Oak Brook, Illinois 60523
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 630-218-8000
N/A
(Former name, former address and former fiscal
year, if changed since last report)
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
-1-
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Balance Sheets
September 30, 1998 and December 31, 1997
(unaudited)
Assets
------
1998 1997
Current assets: ---- ----
Cash and cash equivalents (Note 1).............. $ 3,192,981 961,428
Short-term investments (Note 1)................. - 431,682
Accounts and accrued interest receivable........ 136,050 25,065
Other current assets............................ 8,527 2,380
------------ ------------
Total current assets.............................. 3,337,558 1,420,555
------------ ------------
Mortgage loans receivable (Note 5)................ 2,750,000 -
Investment properties (including acquisition
fees paid to Affiliates of $1,927,812 and
$2,003,096 at September 30, 1998 and December
31, 1997, respectively) (Notes 1 and 3):
Land and improvements........................... 39,550,739 41,765,589
Buildings....................................... 93,082 93,082
------------ ------------
39,643,821 41,858,671
Less accumulated depreciation................... 17,711 15,384
Total investment properties, net of accumulated ------------ ------------
depreciation.................................... 39,626,110 41,843,287
------------ ------------
Total assets...................................... $45,713,668 43,263,842
============ ============
See accompanying notes to financial statements.
-2-
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Balance Sheets
(continued)
September 30, 1998 and December 31, 1997
(unaudited)
Liabilities and Partners' Capital
---------------------------------
1998 1997
---- ----
Current liabilities:
Accounts payable................................ $ 13,992 21,221
Accrued real estate taxes....................... 77,644 100,993
Due to Affiliates (Note 2)...................... 40,506 12,450
Unearned income................................. 10,030 109,669
------------ ------------
Total current liabilities......................... 142,172 244,333
------------ ------------
Deferred gain on sale (Note 5).................... 1,701,090 -
Partners' capital (Notes 1 and 2):
General Partner:
Capital contribution........................... 500 500
Cumulative net income.......................... 450,766 449,454
Cumulative cash distributions.................. (93,034) (93,034)
------------ ------------
358,232 356,920
Limited Partners: ------------ ------------
Units of $1,000. Authorized 60,000 Units,
50,119.52 and 50,164.52 Units outstanding
as of September 30, 1998 and December 31,
1997, respectively (net of offering costs of
$7,532,439, of which $2,535,445 was paid
to Affiliates)................................ 42,597,492 42,637,010
Cumulative net income.......................... 7,751,435 6,862,332
Cumulative cash distributions.................. (6,836,753) (6,836,753)
------------ ------------
43,512,174 42,662,589
------------ ------------
Total Partners' capital........................... 43,870,406 43,019,509
------------ ------------
Total liabilities and Partners' capital........... $45,713,668 43,263,842
============ ============
See accompanying notes to financial statements.
-3-
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Statements of Operations
For the three and nine months ended September 30, 1998 and 1997
(unaudited)
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
Income: ---- ---- ---- ----
Sale of investment properties
(Notes 1 and 3)................ $2,241,271 367,870 3,544,010 1,414,487
Rental income (Note 4)........... 92,933 90,731 277,413 274,441
Interest income.................. 71,460 25,076 124,326 175,583
Other income..................... - 20 160,057 20
---------- ---------- ---------- ----------
2,405,664 483,697 4,105,806 1,864,531
---------- ---------- ---------- ----------
Expenses:
Cost of investment properties
sold........................... 1,859,588 241,073 2,784,808 834,974
Professional services to
Affiliates..................... 12,336 10,200 28,521 28,794
Professional services to
non-affiliates................. 207 340 32,166 52,559
General and administrative
expenses to Affiliates......... 1,200 5,120 10,948 21,347
General and administrative
expenses to non-affiliates..... 4,805 4,004 23,891 25,093
Marketing expenses to Affiliates. 12,484 33,147 21,369 100,483
Marketing expenses to
non-affiliates................. 37,548 51,970 98,687 104,541
Land operating expenses to
Affiliates..................... 22,286 22,778 67,636 68,532
Land operating expenses to
non-affiliates................. 60,128 46,501 145,038 117,516
Depreciation..................... 775 776 2,327 2,327
---------- ---------- ---------- ----------
2,011,357 415,909 3,215,391 1,356,166
---------- ---------- ---------- ----------
Net income......................... $ 394,307 67,788 890,415 508,365
========== ========== ========== ==========
See accompanying notes to financial statements.
-4-
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Statements of Operations
(continued)
For the three and nine months ended September 30, 1998 and 1997
(unaudited)
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
Net income (loss) allocated to: ---- ---- ---- ----
General Partner.................. $ 126 (590) 1,312 (711)
Limited Partners................. 394,181 68,378 889,103 509,076
---------- ---------- ---------- ----------
Net income......................... $ 394,307 67,788 890,415 508,365
========== ========== ========== ==========
Net income (loss) allocated to the
one General Partner Unit......... $ 126 (590) 1,312 (711)
========== ========== ========== ==========
Net income per Unit, basic and
diluted, allocated to Limited
Partners per weighted average
Limited Partnership Units (50,133.00
and 50,164.52 for the three months
ended September 30, 1998 and 1997,
respectively, and 50,152.78 and
50,175.55 for the nine months
ended September 30, 1998 and 1997,
respectively).................... $ 7.86 1.37 17.73 10.15
========== ========== ========== ==========
See accompanying notes to financial statements.
-5-
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Statements of Cash Flows
For the nine months ended September 30, 1998 and 1997
(unaudited)
1998 1997
Cash flows from operating activities: ---- ----
Net income...................................... $ 890,415 508,365
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation.................................. 2,327 2,327
Gain on sale of investment properties......... (759,202) (579,513)
Changes in assets and liabilities:
Accounts and accrued interest receivable.... (110,985) (120,235)
Other current assets........................ (6,147) (1,288)
Accounts payable............................ (7,229) (44,612)
Accrued real estate taxes................... (23,349) (28,097)
Due to Affiliates........................... 28,056 67,393
Unearned income............................. (99,639) 16,082
------------ ------------
Net cash used in operating activities............. (85,753) (179,578)
------------ ------------
Cash flows from investing activities:
Additions to investment properties.............. (569,958) (1,673,834)
Sale (purchase) of short-term investments, net.. 431,682 1,475,465
Proceeds from sale of investment properties..... 2,495,100 1,414,487
------------ ------------
Net cash provided by investing activities......... 2,356,824 1,216,118
------------ ------------
Cash flows from financing activities:
Cash distributions.............................. - (4,000,000)
Repurchase of Limited Partnership Units......... (39,518) (18,361)
------------ ------------
Net cash used in financing activities............. (39,518) (4,018,151)
Net increase (decrease) in cash and ------------ ------------
cash equivalents................................ 2,231,553 (2,981,611)
Cash and cash equivalents at beginning of
period.......................................... 961,428 3,904,046
------------ ------------
Cash and cash equivalents at end of period........ $ 3,192,981 922,435
============ ============
Supplemental schedule of non-cash investing activities:
Mortgage loans receivable....................... $(2,750,000) -
Reduction of investment properties.............. 2,784,808 -
Deferred gain on sale........................... 1,701,090 -
Gain on sale of land............................ 759,202 -
------------ ------------
Proceeds from sale of investment properties....... $ 2,495,100 -
============ ============
See accompanying notes to financial statements.
-6-
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
September 30, 1998
(unaudited)
Readers of this Quarterly Report should refer to the Partnership's audited
financial statements for the fiscal year ended December 31, 1997, which are
included in the Partnership's 1997 Annual Report, as certain footnote
disclosures which would substantially duplicate those contained in such audited
financial statements have been omitted from this Report.
(1) Organization and Basis of Accounting
The Registrant, Inland Land Appreciation Fund II, L.P. (the "Partnership"), is
a limited partnership formed on June 28, 1989, pursuant to the Delaware Revised
Uniform Limited Partnership Act, to invest in undeveloped land on an all-cash
basis and realize appreciation of such land upon resale. On October 25, 1989,
the Partnership commenced an Offering of 30,000 (subject to increase to 60,000)
Limited Partnership Units pursuant to a Registration under the Securities Act
of 1933. The Amended and Restated Agreement of Limited Partnership (the
"Partnership Agreement") provides for Inland Real Estate Investment Corporation
to be the General Partner. On October 24, 1991, the Partnership terminated its
Offering of Units, with total sales of 50,476.17 Units, at $1,000 per Unit,
resulting in $50,476,170 in gross offering proceeds, not including the General
Partner's capital contribution of $500. All of the holders of these Units have
been admitted to the Partnership. As of September 30, 1998, the Partnership has
repurchased a total of 356.65 Units for $346,239 from various Limited Partners
through the Unit Repurchase Program. Under this program, Limited Partners may,
under certain circumstances, have their Units repurchased for an amount equal
to their Invested Capital.
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 periods.
Actual results could differ from those estimates.
Offering costs have been offset against the Limited Partners' capital accounts.
The Partnership considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents and are carried at
cost, which approximates market.
Investments purchased with a maturity of three months or more are considered to
be short-term investments and are carried at cost, which approximates market.
-7-
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
September 30, 1998
(unaudited)
Statement of Financial Accounting Standards No. 121 ("SFAS 121") requires the
Partnership to record an impairment loss on its property to be held for
investment whenever its carrying value cannot be fully recovered through
estimated undiscounted future cash flows from their operations and sale. The
amount of the impairment loss to be recognized would be the difference between
the property's carrying value and the property's estimated fair value. As of
September 30, 1998, the Partnership has not recognized any such impairment.
For vacant land parcels and parcels with insignificant buildings and
improvements, the Partnership uses the area method of allocation, which
approximates the relative sales method of allocation, whereby a per acre price
is used as the standard allocation method for land purchases and sales. The
total cost of the parcel is divided by the total number of acres to arrive at a
per acre price. For parcels with significant buildings and improvements (Parcel
24, described in Note 3), the Partnership records the buildings and
improvements at a cost based upon the appraised value at the date of
acquisition. Building and improvements are depreciated using the straight-line
method of depreciation over a useful life of thirty years. Repair and
maintenance expenses are charged to operations as incurred. Significant
improvements are capitalized and depreciated over their estimated useful lives.
Statement of Financial Accounting Standards No. 128 "Earnings per Share" was
adopted by the Partnership for the year ended December 31, 1997 and has been
applied to all prior earnings periods presented in the financial statements.
The Partnership has no dilutive securities.
The Partnership is required to pay a withholding tax to the Internal Revenue
Service with respect to a Partner's allocable share of the Partnership's
taxable net income, if the Partner is a foreign person. The Partnership will
first pay the withholding tax from the distributions to any foreign partner,
and to the extent that the tax exceeds the amount of distributions withheld, or
if there have been no distributions to withhold, the excess will be accounted
for as a distribution to the foreign partner. Withholding tax payments are made
every April, June, September and December.
No provision for Federal income taxes has been made as the liability for such
taxes is that of the Partners rather than the Partnership.
In the opinion of management, the financial statements contain all the
adjustments necessary, which are of a normal recurring nature, to present
fairly the financial position and results of operations for the period
presented herein. Results of interim periods are not necessarily indicative of
results to be expected for the year.
-8-
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
September 30, 1998
(unaudited)
(2) Transactions with Affiliates
The General Partner and its Affiliates are entitled to reimbursement for
salaries and expenses of employees of the General Partner and its Affiliates
relating to the administration of the Partnership. Such costs are included in
professional services and general and administrative expenses to Affiliates, of
which $12,724 and $3,977 was unpaid as of September 30, 1998 and December 31,
1997, respectively.
The General Partner is entitled to receive Asset Management Fees equal to one-
quarter of 1% of the original cost to the Partnership of undeveloped land
annually, limited to a cumulative total over the life of the Partnership of 2%
of the land's original cost to the Partnership. Such fees of $67,636 and
$68,532 have been incurred and paid for the nine months ended September 30,
1998 and 1997, respectively, and are included in land operating expenses to
Affiliates.
An Affiliate of the General Partner performed sales marketing and advertising
services for the Partnership and was reimbursed (as set forth under terms of
the Partnership Agreement) for direct costs. Such costs of $21,369 and
$100,483 have been incurred and are included in marketing expenses to
Affiliates for the nine months ended September 30, 1998 and 1997, respectively,
of which $12,027 and $8,473 was unpaid as of September 30, 1998 and December
31, 1997, respectively.
An Affiliate of the General Partner performed property upgrades, rezoning,
annexation and other activities to prepare the Partnership's land investments
for sale and was reimbursed (as set forth under terms of the Partnership
Agreement) for salaries and direct costs. The Affiliate did not recognize a
profit on any project. Such costs are included in investment properties, of
which $15,755 was unpaid as of September 30, 1998.
-9-
<TABLE> INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
(3) Investment Properties
<CAPTION>
Total
Gross Initial Costs Costs Remaining Current
Acres Purchase/ -------------------------------------- Capitalized Costs of Costs of Year Gain
Location: Purchased Sales Original Acquisition Total Subsequent to Property Parcels at on Sale
Parcel County (Sold) Date Costs Costs Costs Acquisition Sold 9/30/98 Recognized
- ------ --------- ---------- ---------- ------------ ------------ ------------ -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 McHenry 372.759 04/25/90 $ 2,114,295 114,070 2,228,365 509,332 - 2,737,697 -
2 Kendall 41.118 07/06/90 549,639 43,889 593,528 8,164 - 601,692 -
3 Kendall 120.817 11/06/90 1,606,794 101,863 1,708,657 9,815 - 1,718,472 -
4 Kendall 299.025 06/28/91 1,442,059 77,804 1,519,863 2,493 - 1,522,356 -
5 Kane 189.0468 02/28/91 1,954,629 94,569 2,049,198 181,644 - 2,230,842 -
6 Lake 57.3345 04/16/91 904,337 71,199 975,536 18,362 4,457 989,441 -
(.258) 10/01/94
7 McHenry 56.7094 04/22/91 680,513 44,444 724,957 2,746,669 1,478,831 1,992,795 311,694
(12.6506) Var 1997
(11.7781) Var 1998
8 Kane 325.394 06/14/91 3,496,700 262,275 3,758,975 26,265 10,000 3,775,240 -
(.870) 04/03/96
9 Will 9.867 08/13/91 217,074 988 218,062 6,007 - 224,069 -
10 Will 150.66 08/20/91 1,866,716 89,333 1,956,049 4,816 - 1,960,865 -
11 Will 138.447 08/20/91 289,914 20,376 310,290 2,700 312,990 - -
(138.447) 05/03/93
12 Will 44.732 08/20/91 444,386 21,988 466,374 4,472 - 470,846 -
13 Will 6.342 09/23/91 139,524 172 139,696 - 139,696 - -
(6.342) 05/03/93
14 Kendall 44.403 09/03/91 888,060 68,210 956,270 18,089 - 974,359 -
15 Kendall 100.364 09/04/91 1,050,000 52,694 1,102,694 117,829 1,220,523 - -
(5.000) 09/01/93
(11.000) 12/01/94
(84.364) 08/14/98
16 McHenry 168.905 09/13/91 1,402,058 69,731 1,471,789 82,111 - 1,553,900 -
17 Kendall 3.462 10/30/91 435,000 22,326 457,326 3,669 - 460,995 -
18 McHenry 139.1697 11/07/91 1,160,301 58,190 1,218,491 272,973 - 1,491,464 -
------------ ------------ ------------ -------------- ------------ ------------ ------------
Subtotal $20,641,999 1,214,121 21,856,120 4,015,410 3,166,497 22,705,033 311,694
-10-
-10-
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
(4) Investment Properties (continued)
Total
Gross Initial Costs Costs Remaining Current
Acres Purchase/ -------------------------------------- Capitalized Costs of Costs of Year Gain
Location: Purchased Sales Original Acquisition Total Subsequent to Property Parcels at on Sale
Parcel County (Sold) Date Costs Costs Costs Acquisition Sold 9/30/98 Recognized
- ------ --------- ---------- ---------- ------------ ------------ ------------ -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Subtotal $20,641,999 1,214,121 21,856,120 4,015,410 3,166,497 22,705,033 311,694
19 Kane 436.236 12/13/91 4,362,360 321,250 4,683,610 159,060 - 4,842,670 -
20 Kane &
Kendall 400.129 01/31/92 1,692,623 101,318 1,793,941 147,487 - 1,941,428 -
21 Kendall 15.013 05/26/92 250,000 23,844 273,844 7,743 - 281,587 -
22 Kendall 391.959 10/30/92 3,870,000 283,186 4,153,186 101,373 164,804 4,089,755 -
(10.000) 01/06/94
(5.538) 01/05/96
23 (c) Kendall 133.2074 10/30/92 3,231,942 251,373 3,483,315 4,415,849 5,364,218 2,534,946 447,508
(11.525) 07/16/93
(44.070) Var 1995
(8.250) Var 1996
(2.610) Var 1997
(7.3984) Var 1998
23A(a) Kendall .2676 10/30/92 170,072 12,641 182,713 - 182,713 - -
(.2676) 03/16/93
24 Kendall 3.908 01/21/93 645,000 56,316 701,316 2,204 - 703,520 -
24A(b) Kendall .406 01/21/93 155,000 13,533 168,533 - - 168,533 -
25 Kendall 656.687 01/28/93 1,625,000 82,536 1,707,536 22,673 1,730,209 - -
(656.687) 10/31/95
26 Kane 89.511 03/10/93 1,181,555 89,312 1,270,867 65,273 - 1,336,140 -
27 Kendall 83.525 03/11/93 984,474 54,846 1,039,320 889 - 1,040,209 -
------------ ------------ ------------ -------------- ------------ ------------ -----------
$38,810,025 2,504,276 41,314,301 8,937,961 10,608,441 39,643,821 759,202
============ ============ ============ ============== ============ ============ ===========
</TABLE>
-11-
-11-
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
September 30, 1998
(unaudited)
(3) Investment Properties (continued)
(a) Included in the purchase of Parcel 23 was a newly constructed 2,500 square
foot house. The house was sold in March 1993.
(b) Included in the purchase of Parcel 24 was a 2,400 square foot office
building.
(c) Parcel 23, annexed and zoned to Oswego, Illinois as part of the Mill Race
Creek subdivision, consists of two parts: a 28-acre multi-family portion
and a 105-acre single-family portion. The Partnership sold the 28-acre
multi-family portion on June 7, 1995 and as of September 30, 1998, 158 of
the 243 single-family lots.
(d) Reconciliation of real estate owned:
1998 1997
---- ----
Balance at January 1,........................... $41,858,671 40,607,293
Additions during period......................... 569,958 2,348,964
------------ ------------
42,428,629 42,956,257
Sales during period............................. 2,784,808 1,097,586
------------ ------------
Balance at end of period........................ $39,643,821 41,858,671
============ ============
(e) Reconciliation of accumulated depreciation:
1998 1997
---- ----
Balance at January 1,........................... $ 15,384 12,282
Depreciation expense............................ 2,327 3,102
Sales during period............................. - -
------------ ------------
Balance at end of period........................ $ 17,711 15,384
============ ============
(4) Farm Rental Income
The Partnership has determined that all leases relating to the farm parcels are
operating leases. Accordingly, rental income is reported when earned.
As of September 30, 1998, the Partnership had farm leases of generally one year
in duration, for approximately 3,045 acres of the approximately 3,465 acres
owned.
-12-
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
September 30, 1998
(unaudited)
(5) Mortgage Loans Receivable
As a result of the sale of the remaining approximately 84 acres of Parcel 15
for a sales price of $2,750,000 on August 14, 1998, the Partnership received a
mortgage loan receivable of $2,750,000 and recorded a deferred gain on sale of
$1,701,090. The deferred gain will be recognized over the life of the related
mortgage loan receivable as principal payments are received. The mortgage loan
receivable accrues interest at 9% per annum and has a maturity date of July 31,
2001, at which time all accrued interest, as well as principal, is due. As of
September 30, 1998, accrued interest totaled $32,548.
-13-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this quarterly report on
Form 10-Q constitute of "forward-looking statements" within the meaning of the
Federal Private Securities Litigation Reform Act of 1995. These forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the Partnership's actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by these forward-looking statements. These
factors include, among other things, federal, state or local regulations;
adverse changes in general economic or local conditions; inability of borrower
to meet financial obligations; uninsured losses; and potential conflicts of
interest between the Partnership and its Affiliates, including the General
Partner.
Liquidity and Capital Resources
On October 25, 1989, the Partnership commenced an Offering of 30,000 (subject
to increase to 60,000) Limited Partnership Units pursuant to a Registration
Statement on Form S-11 under the Securities Act of 1933. On October 24, 1991,
the Partnership terminated its Offering of Units, with total sales of 50,476.17
Units, at $1,000 per Unit, resulting in $50,476,170 in gross offering proceeds,
not including the General Partner's capital contribution of $500. All of the
holders of these Units have been admitted to the Partnership. The Limited
Partners of the Partnership will share in their portion of benefits of
ownership of the Partnership's real property investments according to the
number of Units held.
The Partnership used $41,314,301 of gross offering proceeds to purchase, on an
all-cash basis, twenty-seven parcels of undeveloped land and two buildings.
These investments include the payment of the purchase price, acquisition fees
and acquisition costs of such properties. Three of the parcels were purchased
during 1990, sixteen during 1991, four during 1992 and four during 1993. As of
September 30, 1998, the Partnership has had multiple sales transactions through
which it has disposed of approximately 1,015 acres of the approximately 4,480
acres originally owned. As of September 30, 1998, cumulative distributions
have totaled $6,836,753 to the Limited Partners and $93,034 to the General
Partner. Of the $6,836,753 distributed to the Limited Partners, $6,115,753 was
net sales proceeds (which represents a return of Invested Capital, as defined
in the Partnership Agreement) and $721,000 was from operations. As of
September 30, 1998, the Partnership has used $8,937,961 of working capital
reserve for rezoning and other activities. Such amounts have been capitalized
and are included in investment properties.
The Partnership's capital needs and resources will vary depending upon a number
of factors, including the extent to which the Partnership conducts rezoning and
other activities relating to utility access, the installation of roads,
subdivision and/or annexation of land to a municipality, changes in real estate
taxes affecting the Partnership's land, and the amount of revenue received from
leasing. As of September 30, 1998, the Partnership owns, in whole or in part,
twenty-three of its twenty-seven original parcels and one office building, the
majority of which are leased to local tenants and are generating sufficient
cash flow from leases to cover property taxes and insurance.
-14-
At September 30, 1998, the Partnership had cash, cash equivalents and
investments in marketable securities of $3,192,981, of which approximately
$264,700 is reserved for the repurchase of Units through the Unit Repurchase
Program. The remaining $2,928,281 is available to be used for the Partnership
expenses and liabilities, cash distributions to partners and other activities
with respect to some or all of its land parcels. The Partnership has increased
its parcel sales effort in anticipation of rising land values.
The Partnership plans to enhance the value of its land through pre-development
activities such as rezoning, annexation and land planning. The Partnership has
already been successful in, or is in the process of, pre-development activity
on a majority of the Partnership's land investments. Parcel 1, annexed to the
Village of Huntley and zoned for residential and commercial development, has
improvements in planning stage and sites are being marketed to potential
buyers. Parcel 7, the Olde Mill Ponds on Boone Creek subdivision, has all of
the total 130 single-family lots under contract with a homebuilder, of which
fifty-six have already closed (see Note 3 of the Notes to Financial Statements
for further discussion of Parcel 7). Parcel 18, zoned for multi- and single-
family use, is being marketed to potential homebuilders. As of September 30,
1998, the Partnership has sold 158 of the 243 single-family lots at the Ponds
of Mill Race Creek (Parcel 23) in addition to the multi-family portion, the
Winding Waters of Mill Race Creek. The Partnership has fifty-three of the
remaining 85 single-family lots under contract with homebuilders (see Note 3 of
the Notes to Financial Statements for further discussion on Parcel 23).
Results of Operations
As of September 30, 1998, the Partnership owned twenty-three parcels of land
consisting of approximately 3,465 acres and one office building. Of the
approximately 3,465 acres owned, 3,045 acres are tillable, leased to local
farmers and generate sufficient cash flow to cover property taxes, insurance
and other miscellaneous expenses. Income from the sale of investment
properties and cost of investment properties sold recorded for the nine months
ended September 30, 1998 is the result of the sale of additional lots at the
Olde Mill Ponds on Boone Creek subdivision (Parcel 7), the sale of additional
lots at the Ponds of Mill Race Creek subdivision (Parcel 23) and the sale of
the remaining approximately 84 acres of Parcel 15. Rental income increased for
the three and nine months ended September 30, 1998, as compared to the three
and nine months ended September 30, 1997, due to the annual increase in lease
amounts from tenants.
Interest income decreased for the nine months ended September 30, 1998, as
compared to the nine months ended September 30, 1997, due to the Partnership
distributing net sales proceeds of approximately $4,000,000 in July 1997 and
using its working capital reserve to fund pre-development activity on the
Partnership's investment properties. Interest income increased for the three
months ended September 30, 1998, as compared to the three months ended
September 30, 1997, due primarily as a result of the interest income earned on
the mortgage loan receivable the Partnership received from the sale of the
remaining acreage of Parcel 15. See Note 5 of the Notes to Financial
Statements for further discussion of the terms of the mortgage loan receivable
received from this sale.
The other income recorded for the nine months ended September 30, 1998 relates
to one of the homebuilders on Parcel 23 buying out of its lot sales contract.
The General Partner plans to replace this homebuilder with another one.
-15-
Professional services to non-affiliates decreased for the three and nine months
ended September 30, 1998, as compared to the three and nine months ended
September 30, 1997, due primarily to a decrease in legal services.
General and administrative expenses to Affiliates decreased for the three and
nine months ended September 30, 1998, as compared to the three and nine months
ended September 30, 1997, due to decreases in postage, data processing and
investor service expenses. General and administrative expenses to non-
affiliates decreased for the nine months ended September 30, 1998, as compared
to the nine months ended September 30, 1997, due to decreases in printing and
state tax expenses.
Marketing expenses to Affiliates decreased for the three and nine months ended
September 30, 1998, as compared to the three and nine months ended September
30, 1997, due to the identification of such costs which are specific to a
particular parcel, and accordingly, have been capitalized and are included in
investments in land. Marketing expenses to non-affiliates increased for the
three and nine months ended September 30, 1998, as compared to the three and
nine months ended September 30, 1997, due to an increase in advertising and
travel expenses relating to marketing the land portfolio to prospective
purchasers.
Land operating expenses to non-affiliates increased for the three and nine
months ended September 30, 1998, as compared to the three and nine months ended
September 30, 1997, due to an increase in real estate taxes and maintenance
expenses of the Partnership's land investments.
Year 2000 Issues
GENERAL
Many computer operating systems and software applications were designed such
that the year 1999 is the maximum date that can be processed accurately. In
conducting business, the Partnership relies on computers and operating systems
provided by equipment manufacturers, and also on application software developed
internally and, to a limited extent, by outside software vendors. The
Partnership has assessed its vulnerability to the so-called "Year-2000 Issue"
with respect to its equipment and computer systems.
STATE OF READINESS
The Partnership has identified the following two areas for "Year-2000"
compliance efforts:
Business Computer Systems: The majority of the Partnership's information
technology systems were developed internally and include accounting, lease
management, investment portfolio tracking, and tax return preparation. The
Partnership has rights to the source code for these applications and employs
programmers who are knowledgeable regarding these systems. The process of
testing these internal systems to determine year 2000 compliance is nearly
complete. The Partnership does not anticipate any material costs relating to
its business computer systems regarding year 2000 compliance since the
-16-
Partnership's critical hardware and software systems use four digits to
represent the applicable year. The Partnership does use various computers, so-
called "PC's", that may run software that may not use four digits to represent
the applicable year. The Partnership is in the process of testing the PC
hardware and software to determine year 2000 compliance, but it must be noted
that such PC's are incidental to the Partnership's critical systems. The
Partnership is considering independent testing of its critical systems.
Tenants and Suppliers: The Partnership is in the process of surveying tenants,
suppliers and other parties with whom the Partnership does a significant amount
of business to identify the Partnership's potential exposure in the event such
parties are not year 2000 compliant in a timely manner. Since this area
involves some parties over which the Partnership has no control, such as public
utility companies, it is difficult, at best, to judge the status of the outside
companies' year 2000 compliance. The Partnership is working closely with all
suppliers of goods and services in an effort to minimize the impact of the
failure of any supplier to become year 2000 compliant by December 31, 1999. The
Partnership's investigations and assessments of possible year 2000 issues are
in a preliminary stage, and currently the Partnership is not aware of any
material impact on its business, operations or financial condition due to year
2000 non-compliance by any of the Partnership's tenants or suppliers.
YEAR 2000 COSTS
The Partnership's General Partner and its Affiliates estimate that costs to
achieve year 2000 compliance will not exceed $50,000. However, only
approximately 1% of these costs will be directly allocated to and paid by the
Partnership. The balance of the year 2000 compliance costs, approximately 99%,
will be paid by the General Partner and its Affiliates. Total year 2000
compliance costs incurred through September 30, 1998 are estimated at
approximately $5,000.
YEAR 2000 RISKS
The most reasonable likely worst case scenario for the Partnership with respect
to the year 2000 non-compliance of its business computer systems would be the
inability to access information which could result in the failure to issue
financial reports. The most reasonable likely worst case scenario for the
Partnership with respect to the year 2000 non-compliance of its tenants is
failure to receive rental income which could result in the Partnership being
unable to meet cash requirements for monthly expenses.
CONTINGENCY PLAN
The Partnership is in the process of formulating a contingency plan which will
be developed by July of 1999.
PART II - Other Information
Items 1 through 6(b) are omitted because of the absence of conditions under
which they are required.
Item 7. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None
-17-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INLAND LAND APPRECIATION FUND II, L.P.
By: Inland Real Estate Investment Corporation
General Partner
/S/ ROBERT D. PARKS
By: Robert D. Parks
Chairman
Date: November 12, 1998
/S/ PATRICIA A. CHALLENGER
By: Patricia A. Challenger
Senior Vice President
Date: November 12, 1998
/S/ KELLY TUCEK
By: Kelly Tucek
Principal Financial Officer and
Principal Accounting Officer
Date: November 12, 1998
-18-
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