SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) May 23, 1994
INTERSTATE GENERAL COMPANY L.P.
- - ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-9393 52-1488756
- - ---------------------------- ------------- -------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of organization) File Number) Identification No.)
222 Smallwood Village Center, St. Charles, MD 20602
- - ----------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 645-6833
--------------------
2
Item 5. OTHER EVENTS.
The registrant hereby reports that NationsBank has agreed to
restructure two of the Registrant's outstanding loans in the
aggregate principal amount of $7.4 million granting one year
extensions with options to renew for two six month periods for each
loan. The principal terms of the loan restructure are set forth in
the accompanying Notes 2 and 8 to financial statements. This
completes the restructure of all loans contemplated by the plan
discussed in the Registrant's last two reports on Form 10-K. As a
result, the Registrant's auditors, Arthur Andersen & Co., have
reissued their report with respect to Notes 2 and 8 to the financial
statements, dated May 23, 1994 on Interstate General Company L.P.'s
Consolidated Financial Statements for the Years Ended December 31,
1993, 1992 and 1991. The Registrant hereby updates the following
items or financial statements in its report on Form 10-K for the year
ended December 31, 1993 as set forth in the pages attached hereto:
Part II, Item 6. Update to Selected Financial and Operating Data.
Part II, Item 7. Update to Management's Discussion and Analysis of
Financial Condition and Results of Operation -
Financing, Liquidity and Related Matters.
Part II, Item 8. Financial Statements and Supplementary Data -
Interstate General Company L.P. Consolidated
Financial Statements for the Years Ended December
31, 1993, 1992 and 1991 with updated Report of
Independent Public Accountants, Note 2 and Note
8.
Item 7. FINANCIAL STATEMENTS, PROFORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements
The following financial statements of Interstate General Company L.P.
are contained herein:
Report of Independent Public Accountants
Consolidated Statements of Income for the years ended December
31, 1993, 1992 and 1991
Consolidated Balance Sheets as of December 31, 1993 and 1992
Consolidated Statements of Changes in Partners' Capital for the
years ended December 31, 1993, 1992 and 1991
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1992 and 1991
Notes to Consolidated Financial Statements for the years ended
December 31, 1993, 1992 and 1991
(b) None
(c) Exhibits
News release, dated Thursday, June 2, 1994.
3
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 hereunto duly authorized.
Interstate General Company L.P.
-----------------------------------
(Registrant)
By: Interstate General Management
Corporation
Managing General Partner
By: /s/ James J. Wilson
------------------------------
James J. Wilson
Chairman, President and Chief
Executive Officer
June 2, 1994
- - -------------------
DATE
4
UPDATED PART II, ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The following tables set forth combined financial data and operating data
for IGC. The following selected income statement and balance sheet data have
been extracted from the audited financial statements of IGC for each of the
years in the five-year period ended December 31, 1993. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
This information should be read in conjunction with, and is qualified in its
entirety by, the consolidated financial statements and related footnotes.
IGC SELECTED FINANCIAL AND OPERATING DATA
Years Ended December 31,
----------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(In thousands)
Income Statement Data
Revenues
Home sales $22,108 $30,761 $33,043 $40,701 $38,852
Land sales 13,809 3,359 3,151 8,659 15,676
Investment properties 3,701 2,672 2,070 2,606 2,096
HDA rental income -- -- 5,622 8,648 470
Equity in HDA
(including ECOC) 2,358 591 (741) (339) 74
Management fees 4,453 3,856 3,410 3,362 3,185
Other income 451 743 1,253 1,670 1,325
Apartment rental income 2,113 -- -- -- --
------- ------- ------- ------- -------
Total revenues 48,993 41,982 47,808 65,307 61,678
Provision for restructuring -- 15,795 -- -- --
Other expenses 42,634 40,663 47,199 59,103 48,900
Income taxes (835) 471 133 465 90
Net income (loss) 7,194 (1) (14,947) 476 5,739 12,688
5
Years Ended December 31,
----------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data
Assets related to
community development $ 78,876 $ 82,686 $ 95,549 $ 89,210 $ 77,963
Assets related to home
building projects 7,566 8,637 15,674 24,698 23,805
Assets related to
investment properties 42,707 23,516 19,132 59,821 60,445
Total assets 140,314 125,523 144,779 191,190 171,703
Short-term debt
Banks
Recourse 39,026 35,174 41,929 63,131 33,013
Non-recourse 321 1,142 930 1,589 848
Long-term debt
Banks
Recourse 16,113 34,889 35,662 19,867 29,553
Non-recourse 25,501 10,415 10,646 54,449 56,555
Total liabilities 108,068 100,481 104,790 151,677 132,763
Partners' equity 32,245 25,042 39,989 39,513 38,940
(1) Included in this amount is a $1.5 million benefit for the cumulative
effect of a change in accounting principle to reflect the addition of SFAS
No. 109 "Accounting for Income Taxes".
Years Ended December 31,
----------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(In thousands)
Operating Data
Community Development
Residential lots sold 295 80 81 148 223
Residential lots used
by Company 91 120 140 155 265
Commercial and industrial
acres sold 12 1 6 32 118
Undeveloped acres sold 27 46 -- -- --
Homebuilding, all locations
Contracts for sale, net of
cancellations 231 256 348 450 292
Number of homes sold 216 288 284 396 302
Backlog at end of period 151 136 168 104 50
Rental apartment units
managed at end of period 8,029 7,907 7,933 7,933 7,933
Units under construction 56 -- -- -- --
6
UPDATED PART II, ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION - FINANCING, LIQUIDITY AND RELATED MATTERS
The Company has historically met its liquidity requirements principally
from cash flow generated from home and lot sales, property management fees, and
from bank financing providing funds for development and working capital. In
response to the decline in the real estate markets and the decline in the
availability of financing, the Company undertook a financial restructuring in
1992.
The Company continues to make progress in completing the objectives it set
forth in its restructuring. New or amended loan agreements have now been
executed for all loans which required restructuring except for two loans
currently in default aggregating $7.4 million with MNC Financial Corporation
("MNC") which is now owned by NationsBank. In May 1994, the Company received a
commitment letter from the bank granting an extension to May 31, 1995, and an
option for two six-month extensions on each loan if mandatory principal
payments have been made by the time of the extensions. The closing of the
restructured loans is expected to occur by June 30, 1994 which will clear the
event of default. The commitment terms provide for minimum principal payments
totaling $3.5 million from December 1, 1994 to November 30, 1995, if all
extensions are granted, and cross-collateralization with another NationsBank
loan. Management expects to meet these required payments through the sale or
refinancing of land held as collateral by NationsBank. The commitment also
requires additional collateral represented by a second lien on certain
commercial land and the Company's interest in partnerships which own rental
apartments.
Under the terms of IGC's loans, most of the cash flow generated by U.S.
home and lot sales and distributions from partnerships, including distributions
from partnership refinancings, will be used to further reduce bank loans and
meet debt service requirements. Working capital for overhead and other cash
needs in 1994 is expected to be met through property management fees, and net
proceeds from the LDA land sale discussed below. In the opinion of IGC
management, these sources will be adequate to meet IGC's liquidity
requirements. As discussed in Note 8, the Company could be called in technical
default on additional debt as a result of certain financial and other
restrictive covenants. Current negotiations are being held with Signet to
extend the maturity date beyond August 13, 1994. IGC's management believes
this extension will be granted.
In March 1991, the Company's 80% owned subsidiary, Land Development
Associates, S.E. ("LDA"), sold a 61 acre parcel of land in the planned Parque
Escorial development to a major retailer who intends to develop a shopping
center ("LDA Land Sale"). The Company expects to close the $12 million sale by
June 30, 1994 and receive approximately $1.9 million from the sales proceeds
after setting aside amounts for infrastructure development and making land
release payment and distributions to LDA's 20% minority partner.
Additional potential sources of cash include amounts that could be
generated from four partnerships in Puerto Rico which applied in March 1993 for
economic incentives under the 1990 Low-Income Housing Preservation and Resident
Homeownership Act ("LIHPRHA"). Under LIHPRHA the partnerships have the option
of obtaining additional HUD insured financing and additional subsidy funds, and
distributing net refinancing proceeds to partners, or selling the projects to
non-profit organizations which would continue the projects in HUD's low income
7
housing program. Management believes that the economic benefit to the Company
and the partners will be greater from a sale of the projects, in which case the
Company will endeavor to retain the right to manage the properties. It is
anticipated that any closing pursuant to LIHPRHA will be accomplished in 1995
and the Company would expect to receive approximately $10.0 million net of
taxes. These distributions are assigned to the FDIC for debt of $9.6 million
and, as discussed above, NationsBank will be given a secondary assignment of
the distributions.
UPDATED PART II, ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Interstate General Company L.P.:
We have audited the accompanying consolidated balance sheets of Interstate
General Company L.P. (a Delaware limited partnership) and subsidiaries as of
December 31, 1993 and 1992, and the related consolidated statements of income,
changes in partners' capital and cash flows for each of the three years in the
period ended December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 management, 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 General Company
L.P. as of December 31, 1993 and 1992, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1993, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, effective January 1,
1993, the Company changed its method of accounting for income taxes.
Washington, D.C.
March 29, 1994
(except with respect to the matters discussed in Notes 2 and 8, as to which the
date is May 23, 1994)
9
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1992 1991
------------ ------------ -----------
REVENUES
Homebuilding-homes sales $ 22,107,740 $ 30,760,944 $33,043,268
Community development-lot sales 13,809,400 3,358,792 3,151,286
Revenues from investment properties
Investment in partnerships 3,700,543 2,672,100 2,069,972
Apartment rental income 2,112,762 -- --
Equity in earnings (loss) of
Housing Development
Associates S.E. ("HDA") 2,358,423 591,079 (741,000)
HDA rental income -- -- 5,621,657
Management fees, substantially all
from related entities 4,452,547 3,855,835 3,410,505
Interest and other income 451,582 742,715 1,252,711
----------- ------------- -----------
Total revenues 48,992,997 41,981,465 47,808,399
----------- ------------- -----------
EXPENSES
Cost of home sales 20,007,665 26,501,177 27,715,433
Cost of lot sales 9,588,321 3,300,581 2,153,667
General and administrative 8,092,866 7,860,528 8,294,545
Rental apartment expense 2,175,985 -- --
Depreciation and amortization 706,034 896,826 2,777,489
Interest expense 2,063,341 2,103,262 6,258,341
Restructuring provision -- 15,795,459 --
----------- ------------- -----------
Total expenses 42,634,212 56,457,833 47,199,475
----------- ------------- -----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 6,358,785 (14,476,368) 608,924
PROVISION FOR INCOME TAXES 665,000 470,976 133,409
----------- ------------- -----------
NET INCOME (LOSS) BEFORE
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 5,693,785 (14,947,344) 475,515
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 1,500,000 -- --
----------- ------------- -----------
NET INCOME (LOSS) $ 7,193,785 $ (14,947,344) $ 475,515
=========== ============= ===========
PER UNIT AMOUNTS--
NET INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE $ .56 $ (1.47) $ .05
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE .15 -- --
----------- ------------- -----------
NET INCOME (LOSS) PER UNIT $ .71 $ (1.47) $ .05
=========== ============= ===========
10
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) (continued)
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1992 1991
------------ ------------ -----------
NET INCOME (LOSS)
General Partners $ 71,938 $ (149,473) $ 4,755
Limited Partners 7,121,847 (14,797,871) 470,760
----------- ------------- -----------
$ 7,193,785 $ (14,947,344) $ 475,515
=========== ============= ===========
WEIGHTED AVERAGE UNITS
OUTSTANDING 10,080,111 10,079,310 10,079,310
=========== ============= ===========
The accompanying notes are an integral part
of these consolidated balance sheets.
11
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
A S S E T S
DECEMBER 31,
---------------------------
1993 1992
------------ ------------
CASH AND SHORT-TERM INVESTMENTS
including restricted cash of $2,587,375
and $466,421 at December 31, 1993
and 1992, respectively $ 4,595,771 $ 2,729,519
------------ ------------
ASSETS RELATED TO COMMUNITY DEVELOPMENT
Land and development costs
St. Charles, Maryland 26,682,931 27,612,887
Puerto Rico 31,389,419 28,819,090
Other United States locations 18,660,267 20,602,927
Notes receivable on lot sales, net of
reserves of $229,922 and $373,969
as of December 31, 1993 and 1992,
respectively 1,785,019 5,221,000
Other 358,437 429,794
------------ ------------
78,876,073 82,685,698
------------ ------------
ASSETS RELATED TO HOMEBUILDING PROJECTS
Homebuilding construction and land 6,644,874 7,585,065
Mortgages receivable 395,808 417,789
Receivables on home sales 405,235 378,978
Other 120,114 255,646
------------ ------------
7,566,031 8,637,478
------------ ------------
ASSETS RELATED TO INVESTMENT PROPERTIES
Investment in HDA -- 7,975,713
Investment in residential rental
partnerships 14,953,004 13,011,237
Investment properties, net of accumulated
depreciation and amortization
of $4,105,975 24,550,927 --
Other receivables, net of reserves of
$2,800,479 and $2,460,108 as of
December 31, 1993 and 1992, respectively 2,609,616 2,528,754
Other 592,992 --
------------ ------------
42,706,539 23,515,704
------------ ------------
12
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
A S S E T S (continued)
DECEMBER 31,
---------------------------
1993 1992
------------ ------------
OTHER ASSETS
Property, plant and equipment, less
accumulated depreciation of $1,836,561
and $1,513,810 as of December 31, 1993
and 1992, respectively 1,703,638 2,712,162
Costs in excess of net assets acquired,
less accumulated amortization of
$584,272 and $432,546, as of
December 31, 1993 and 1992,
respectively 2,450,257 2,601,983
Deferred costs regarding waste technology
and other 2,415,431 2,640,035
------------ ------------
6,569,326 7,954,180
------------ ------------
$140,313,740 $125,522,579
============ ============
The accompanying notes are an integral part
of these consolidated balance sheets.
13
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND PARTNERS' CAPITAL
DECEMBER 31,
---------------------------
1993 1992
------------ ------------
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and other accrued
liabilities $ 3,660,698 $ 5,776,458
Mortgages and notes payable 427,563 307,709
Accrued income tax liability 1,379,341 2,214,341
------------ ------------
5,467,602 8,298,508
------------ ------------
LIABILITIES RELATED TO COMMUNITY DEVELOPMENT
Recourse debt 50,137,318 55,596,234
Non-recourse debt 2,762,370 10,865,906
Loan payable to HDA 12,683,347 3,432,804
Accounts payable and accrued liabilities 2,552,159 3,382,476
Deferred income 199,319 593,952
------------ ------------
68,334,513 73,871,372
------------ ------------
LIABILITIES RELATED TO HOMEBUILDING
Recourse debt 3,319,926 7,538,015
Accounts payable and accrued liabilities 4,231,290 2,503,255
------------ ------------
7,551,216 10,041,270
------------ ------------
LIABILITIES RELATED TO INVESTMENT PROPERTIES
Recourse debt 1,856,799 7,312,593
Non-recourse debt 22,456,730 --
Accounts payable, accrued liabilities
and deferred income 2,401,563 957,304
------------ ------------
26,715,092 8,269,897
------------ ------------
Total Liabilities 108,068,423 100,481,047
------------ ------------
PARTNERS' CAPITAL
General partners' capital 155,565 83,627
Limited partners' capital-10,081,810 Units
issued and outstanding as of December 31,
1993 and 10,079,310 as of December 31, 1992 32,089,752 24,957,905
------------ ------------
Total partners' capital 32,245,317 25,041,532
------------ ------------
$140,313,740 $125,522,579
============ ============
The accompanying notes are an integral part
of these consolidated balance sheets.
14
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 and 1991
General Limited
Partners' Partners'
Capital Capital Total
-------- ----------- -----------
BALANCES, December 31, 1990 $ 228,345 $39,285,016 $39,513,361
Net Income 4,755 470,760 475,515
----------- ----------- -----------
BALANCES, December 31, 1991 233,100 39,755,776 39,988,876
Net Loss (149,473) (14,797,871) (14,947,344)
----------- ----------- -----------
BALANCES, December 31, 1992 83,627 24,957,905 25,041,532
Net Income 71,938 7,121,847 7,193,785
Employee unit options exercised -- 10,000 10,000
----------- ----------- -----------
BALANCES, December 31, 1993 $ 155,565 $32,089,752 $32,245,317
=========== =========== ===========
The accompanying notes are an integral part
of these consolidated statements.
15
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1992 1991
------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 7,193,785 $(14,947,344) $ 475,515
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization
Corporate 706,034 896,826 1,139,477
HDA -- -- 1,638,012
Investment properties 432,013 -- --
Provision for income taxes 665,000 470,976 133,409
Equity in earnings of
partnerships (1,668,206) (1,727,305) (1,104,774)
Increase in sponsor and
developer fees from
partnerships (902,627) (311,537) (211,028)
Cumulative effect of
accounting change (1,500,000) -- --
Provision for restructuring -- 15,795,459 --
Decrease (increase) in
Accounts payable and
accrued liabilities (820,714) (1,122,209) 1,659,691
Deferred income (394,633) (475,438) 930,299
Decrease (increase) in
Receivables 3,457,962 3,509,081 2,077,563
Homebuilding assets 1,022,461 5,963,706 5,110,111
Community development assets 339,364 (2,121,303) (5,160,491)
Restricted cash (2,120,954) (202,320) 997,917
----------- ------------ -----------
Net cash provided by
operating activities 6,409,485 5,728,592 7,685,701
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in assets related
to investment properties 7,218,974 865,247 (1,801,529)
Dispositions of other assets 740,105 346,652 169,101
Purchase of apartment properties (370,000) (170,000) (170,000)
----------- ------------ -----------
Net cash provided by (used in)
investing activities 7,589,079 1,041,899 (1,802,428)
----------- ------------ -----------
16
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1992 1991
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans from HDA 8,853,221 1,395,664 1,604,583
Cash proceeds from debt financing 14,002,805 8,619,365 11,266,783
Payment of debt (37,119,292) (16,166,267) (18,643,040)
Employee Unit options exercised 10,000 -- --
----------- ------------ -----------
Net cash used in
financing activities (14,253,266) (6,151,238) (5,771,674)
----------- ------------ -----------
NET (DECREASE) INCREASE IN CASH
AND SHORT-TERM INVESTMENTS (254,702) 619,253 111,599
DECONSOLIDATION OF HOUSING
DEVELOPMENT ASSOCIATES S.E. -- -- (506,948)
CASH AND SHORT-TERM INVESTMENTS,
BEGINNING OF YEAR 2,263,098 1,643,845 2,039,194
----------- ------------ -----------
CASH AND SHORT-TERM INVESTMENTS,
END OF YEAR $ 2,008,396 $ 2,263,098 $ 1,643,845
=========== ============ ===========
SUPPLEMENTAL DISCLOSURES
Interest paid (net of amount
capitalized) $ 4,126,977 $ 1,820,469 $ 6,247,945
Income taxes paid $ -- $ -- $ 126,435
Non-cash transactions
Acquisition of interest in
apartment partnerships, assets $22,641,000 $ -- $ --
Acquisition of interest in
apartment partnerships,
liabilities $22,532,000 $ -- $ --
Deed in lieu of payment of
purchase money mortgage $ -- $ 567,734 $ --
Lot sale transfers to
trade creditors $ -- $ 518,456 $ 782,000
House sale transfers to
trade creditors $ -- $ -- $ 480,780
The accompanying notes are an integral part
of these consolidated statements.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(1) BASIS OF PRESENTATION AND PRINCIPLES OF ACCOUNTING
On September 26, 1986, Interstate General Company L.P. ("IGC" or "the
Company"), a Delaware limited partnership, was formed, and on December 31,
1986, acquired substantially all of the community development, homebuilding,
investment properties and management services businesses of Interstate General
Business Corporation, Interstate St. Charles, Inc. and a trust for the benefit
of the stockholders of Interstate General Business Corporation (the
"Predecessors"). The assets relating to these businesses were acquired in
exchange for (1) 7,900,000 Units representing assignment of beneficial
ownership of limited partnership interest ("Units"), (2) a 1% general
partnership interest in IGC and (3) the assumption by IGC of certain
indebtedness relating to these businesses. The 1% general partner interest is
shared by the managing general partner, Interstate General Management
Corporation, and Interstate Business Corporation ("IGMC" and "IBC,"
respectively, referred to collectively as "General Partner") as successors to
Interstate General Business Corporation and Interstate St. Charles, Inc.
Net income (loss) per Unit for the years ended December 31, 1993, 1992 and
1991, is calculated on weighted average Units outstanding. Outstanding options
and warrants to purchase Units do not have a material dilutive effect on the
calculation of earnings per Unit (see Note 12).
The accompanying consolidated financial statements include the accounts of
IGC and all of its controlled subsidiaries, after eliminating intercompany
transactions. Reference to IGC or the Company refers to the consolidated group
of entities or to any one of the individual entities involved. IGC's
investments in partnerships in which IGC's interest is 50% or less are
accounted for by the equity method of accounting.
For purposes of reporting cash flows, cash and short-term investments
include cash on hand, unrestricted deposits with financial institutions and
short-term investments with original maturities of three months or less.
Sales and Profit Recognition
Revenues from community development and homebuilding are recognized at
closing, when sufficient down payments have been obtained, possession and other
attributes of ownership have been transferred to the buyer and IGC has no
significant continuing involvement.
During 1992 and 1991, IGC transferred developed lots, undeveloped land and
houses to third-party vendors in satisfaction of certain short-term payables.
In accordance with generally accepted accounting principles, the transactions
are recognized as sales in the year of transfer. Revenues from community
development include $518,000 and $782,000 in 1992 and 1991, respectively,
related to these transfers. Revenues from homebuilding in 1991 include
$481,000 related to these transfers.
18
Revenues from Investment Properties
Revenues from investment properties include revenue from partnerships,
rental income and equity in earnings (losses) of HDA. Revenue from
partnerships is comprised of income from sponsor and developer fees, income
related to a previous investment in a cable television partnership (see Note 7)
and IGC's share of the earnings (losses) of the unconsolidated rental apartment
project partnerships. Apartment rental income includes the revenues of the
consolidated apartment partnerships. HDA rental income includes HDA's equity
in earnings (losses) of El Comandante Operating Company ("ECOC") through
September 30, 1991 when HDA's accounts were consolidated (see Note 5). Equity
in earnings (losses) of HDA include HDA's equity in earnings (losses) of ECOC
since October 1, 1991.
Management Fees
IGC performs property management services including sales, leasing,
maintenance and accounting for properties owned by affiliated entities. Fees
are recorded in the period in which the services are rendered and/or paid.
Community Development and Homebuilding Inventories
The costs of acquiring and developing land and homebuilding construction
are allocated and charged to cost of sales as the related inventories are sold.
IGC carries land, development and homebuilding costs (including capitalized
interest) at the lower of cost or net realizable value. Net realizable value
is defined as the estimated amount IGC expects to realize in the ordinary
course of business less costs of completion.
Capitalization of Interest
IGC's interest costs related to homebuilding and land assets were
allocated to these assets based on book value. The portion of interest
allocated to land, finished building lots and homebuilding construction during
the development and construction period, provided the assets book value is less
than its net realizable value is capitalized. The remaining interest is
expensed. A summary of interest for 1993, 1992 and 1991 is as follows:
Years Ended December 31,
---------------------------
1993 1992 1991
------ ------- -------
(In thousands)
Expensed $3,158 $2,103 $ 6,258
Capitalized 2,655 4,399 6,728
------ ------ -------
Total interest incurred $5,813 $6,502 $12,986
====== ======= =======
19
Investment in Residential Rental Partnerships
IGC's investment in residential rental partnerships consist of long-term
receivables, nominal capital contributions, working capital loans and IGC's
share of unconsolidated partnership income/loss. The working capital loans are
collectible from the first cash flow from operations of the partnerships. The
long-term receivables represent loans to the partnerships for payment of
construction and development costs in excess of the project mortgages.
Substantially all of the long-term receivables are non-interest bearing and
have been discounted at an effective rate of 14% based on the projected
maturity date which will occur upon the refinancing, sale or other disposition
of the partnerships' properties. The discount, which represents deferred
sponsor and developer fees, is netted in the consolidated financial statements
against the long-term receivables.
For partnerships syndicated prior to December 31, 1985, IGC amortizes the
discount over the estimated holding period of the properties and recognizes
such discount as income beginning when the respective partnerships have cash
flow that reasonably assures realization of the long-term receivables. Due to
a change in generally accepted accounting principles, deferred sponsor and
developer fees on partnerships syndicated after December 31, 1985 will be
recognized when the long-term receivables are collected. The sponsor and
developer fees recognized on the cash basis for syndications consummated after
December 31, 1985 are not materially different than amounts computed under the
previously applied generally accepted accounting principles.
Certain partnerships are accumulating cash from operations in excess of
amounts permitted by U.S. Department of Housing and Urban Development ("HUD")
and other regulatory authorities to be distributed to IGC and limited partners,
and such excess is placed in restricted cash accounts. At the time the
partnerships' projects are refinanced or sold, this accumulated cash will be
available to pay the long-term receivables and to make cash distributions to
limited partners and IGC.
Property, Plant and Equipment
Property, plant and equipment is carried at cost, less accumulated
depreciation. Depreciation is provided principally by the straight-line method
for financial reporting purposes and by accelerated methods for tax purposes.
Income Taxes
IGC is not subject to U.S. income taxes under current law. Its partners
are taxed directly on their share of IGC's income without regard to
distributions, and the partners may generally deduct their share of losses.
The corporate subsidiaries of IGC are subject to tax at the applicable
corporate rates. Furthermore, IGC is subject to Puerto Rico income tax on its
Puerto Rico source income and District of Columbia income tax on its District
of Columbia source income.
Accounting Change
As discussed in Note 13, on January 1, 1993, the Company implemented
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." SFAS No. 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of existing differences
between financial reporting and tax reporting bases of assets and liabilities
and operating loss and tax credit carry forwards for tax purposes.
20
In 1991, the Financial Accounting Standards Board issued SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." This statement is
effective for financial statements issued for fiscal years ending after
December 15, 1992, except for entities with less than $150,000,000 in total
assets. For these entities, the effective date is for fiscal years ending
after December 15, 1995.
SFAS No. 107 requires disclosure of the fair value of certain financial
instruments, including cash, evidence of ownership interest in other entities
and contracts that impose either an obligation to deliver a financial
instrument or a right to receive a financial instrument. The Company's
ownership interests are accounted for under the equity method of accounting or
are consolidated. Both of these accounting methods are excluded from SFAS No.
107 as required fair value disclosures. The Company's total assets are less
than $150,000,000, therefore fair value disclosures will be required for fiscal
years ending after December 15, 1995. Upon the effective date for IGC, the
Company will disclose the fair value of any contracts, as defined by SFAS No.
107, outstanding at that date. The Company does not expect SFAS No. 107 to
have a material effect on its financial statements.
Reclassifications
Certain amounts presented for 1992 on the Consolidated Balance Sheet and
1992 and 1991 amounts on the Consolidated Statement of Cash Flows have been
reclassified to conform with the 1993 presentation.
(2) FINANCING, LIQUIDITY AND RELATED MATTERS
The Company has historically met its liquidity requirements principally
from cash flow generated from home and lot sales, property management fees, and
from bank financing providing funds for development and working capital. In
response to the decline in the real estate markets and the decline in the
availability of financing, the Company undertook a financial restructuring in
1992.
The Company continues to make progress in completing the objectives it set
forth in its restructuring. New or amended loan agreements have now been
executed for all loans which required restructuring except for two loans
currently in default aggregating $7.4 million with MNC Financial Corporation
("MNC") which is now owned by NationsBank. In May 1994, the Company received a
commitment letter from the bank granting an extension to May 31, 1995, and an
option for two six-month extensions on each loan if mandatory principal
payments have been made by the time of the extensions. The closing of the
restructured loans is expected to occur by June 30, 1994 which will clear the
event of default. The commitment terms provide for minimum principal payments
totaling $3.5 million from December 1, 1994 to November 30, 1995, if all
extensions are granted, and cross-collateralization with another NationsBank
loan. Management expects to meet these required payments through the sale or
refinancing of land held as collateral by NationsBank. The commitment also
requires additional collateral represented by a second lien on certain
commercial land and the Company's interest in partnerships which own rental
apartments.
Under the terms of IGC's loans, most of the cash flow generated by U.S.
home and lot sales and distributions from partnerships, including distributions
from partnership refinancings, will be used to further reduce bank loans and
meet debt service requirements. Working capital for overhead and other cash
needs in 1994 is expected to be met through property management fees, and net
21
proceeds from the LDA land sale discussed below. In the opinion of IGC
management, these sources will be adequate to meet IGC's liquidity
requirements. As discussed in Note 8, the Company could be called in technical
default on additional debt as a result of certain financial and other
restrictive covenants.
In March 1991, the Company's 80% owned subsidiary, Land Development
Associates, S.E. ("LDA"), sold a 61 acre parcel of land in the planned Parque
Escorial development to a major retailer who intends to develop a shopping
center ("LDA Land Sale"). The Company expects to close the $12 million sale by
June 30, 1994 and receive approximately $1.9 million from the sales proceeds
after setting aside amounts for infrastructure development and making land
release payment and distributions to LDA's 20% minority partner.
Additional potential sources of cash include amounts that could be
generated from four partnerships in Puerto Rico which applied in March 1993 for
economic incentives under the 1990 Low-Income Housing Preservation and Resident
Homeownership Act ("LIHPRHA"). Under LIHPRHA the partnerships have the option
of obtaining additional HUD insured financing and additional subsidy funds, and
distributing net refinancing proceeds to partners, or selling the projects to
non-profit organizations which would continue the projects in HUD's low income
housing program. Management believes that the economic benefit to the Company
and the partners will be greater from a sale of the projects, in which case the
Company will endeavor to retain the right to manage the properties. It is
anticipated that any closing pursuant to LIHPRHA will be accomplished in 1995
and the Company would expect to receive approximately $10.0 million net of
taxes. These distributions are assigned to the FDIC for debt of $9.6 million
and, as discussed above, NationsBank will be given a secondary assignment of
the distributions.
(3) RESTRUCTURING
During 1992, in response to the decline in the real estate markets and
significant liquidity concerns, IGC developed a comprehensive business plan to
restructure its operations. IGC's management performed a detailed review of
the profit potential of its homebuilding and land development operations on a
project-by-project basis, and decisions were made as to the extent and manner
in which IGC should continue to conduct operations in each market. The plan
emphasized the generation of cash flow as rapidly as possible and the reduction
of expenses. In addition, the Company performed a review of the net realizable
value of its non-real estate related assets in light of its liquidity
constraints and the financial restructuring it has undertaken.
This plan was presented to various financial institutions and new or
amended loan agreements have been executed for all loans which required
restructuring, except for loans with one lender which management expects to
restructure during the second quarter of 1994. The overall plan called for
certain concessions from lenders and changes in the business strategy of IGC as
follows:
Financial Institution Concessions - IGC requested deferral of interest and
loan fees, extended maturity dates, relief of current principal payments,
new financing and waivers of certain restrictive covenants on
substantially all of its loans.
22
IGC has been successful in extending bank debt in accordance with the
Company's restructuring plans, except for two loans totalling $7,366,000,
as of December 31, 1993 with one lender which management expects to
restructure during the second quarter of 1994.
In 1993, IGC's bank debt (excluding apartment mortgages) was reduced over
$23 million.
Homebuilding - IGC discontinued expansion in less profitable markets and
exited certain other markets. The mix of homes offered by IGC has been
adjusted toward lower priced homes, the market segment currently
possessing the strongest sales potential.
Land Development and Acquisition - IGC reduced land development operations
until it disposed of its existing developable inventory and discontinued
certain development efforts. Certain land holdings have been offered for
sale as undeveloped or semi-developed, shifting the risk of development to
third parties.
Investment in Partnerships - Management has refinanced several apartment
properties to enhance current and future cash distributions to IGC.
Four projects containing 855 apartments owned by one partnership in Puerto
Rico were refinanced in December 1993, and three other partnerships owning
696 apartments refinanced their projects in March 1994. These
refinancings provided approximately $7.4 million to IGC used to further
reduce debt. In December 1993, HDA, a 49% owned partnership that owns the
El Comandante Race Track in Puerto Rico, completed a $68 million mortgage
note offering, coupled with warrants aggregating the right to purchase a
15% equity interest in HDA. IGC received approximately $13 million as a
result of this refinancing, most of which was used for bank debt and other
IGC obligations. In addition, two projects containing 340 apartments
owned by two partnerships in the United States were refinanced in February
1993. IGC received approximately $129,000 as a result of these
refinancings; however, future cash flow will increase as the interest
rates on the new mortgage notes reduced these partnership interest
obligations from 10.85% to 7.28%.
Five other Puerto Rico projects containing 1,102 apartments are being
processed through HUD's LIHPRHA program and sales or refinancings of these
projects is expected to begin in early 1995. In addition, two other
United States projects containing 256 apartments are being processed
through mortgage brokers for refinancing in 1994.
Management Services - IGC continues to offer management services.
General and Administrative - IGC reduced the number of employees in 1992
and is monitoring corporate expenses closely.
23
Certain new terms resulting from the loan restructure negotiations require
an accelerated sale pace for the disposition of homebuilding and land
development assets. Management also evaluated its investments, deferred
project costs, notes receivable and non-real estate assets for any potential
losses. In 1992, IGC recorded a provision for various net realizable value
reductions and restructuring costs as set forth below:
Reserve for land and homebuilding inventory,
notes receivable and investment in partnerships $13,279,000
Reserves against other assets and expenses
related to the restructuring 2,516,000
-----------
$15,795,000
===========
During 1993, in response to improving conditions with certain of its real
estate assets and reductions in its estimates of expenses related to the
restructuring as well as its decision to abandon certain development efforts
with respect to its waste technology investment as discussed in Note 6,
management reallocated $420,000 of reserves from the land and homebuilding
category to the reserve for other assets and expenses related to the
restructuring.
As a part of its ongoing determination of the realizable value of its
assets, management continually monitors the need for additional adjustments to
the carrying value of its assets. At December 31, 1993, management has
concluded that additional reserves are not required at this time.
(4) INVESTMENT IN RESIDENTIAL RENTAL PARTNERSHIPS
As of December 31, 1993, IGC manages and is a general partner in 28 real
estate partnerships which own 31 apartment projects in Puerto Rico, Maryland,
Virginia and Washington, D.C. The apartment projects are financed by non-
recourse mortgages. Of the 6,503 rental units in the various partnerships, the
Federal Housing Administration ("FHA") provides subsidies for low and moderate
income tenants in 5,371 units.
During 1991, IGC entered into an agreement with the limited partners of
Lancaster Associates L.P., the owner of the Lancaster Apartments, to purchase
their 99% limited partnership interest over a five-year period, payable in five
annual installments of $170,000 which commenced in 1991. In 1993, the Company
purchased an additional 19.8% limited partnership interest in Lancaster
Apartments Limited Partnership ("Lancaster"), increasing its ownership to
60.4%. As a result, the accounts of Lancaster are consolidated as of December
31, 1993 and for the year ended December 31, 1993.
IGC, IBC and the Resolution Trust Corporation ("RTC") as Receiver for
Perpetual Savings Bank F.S.B. were general partners in New Forest General
Partnership ("New Forest") and Fox Chase General Partnership ("Fox Chase").
New Forest and Fox Chase each own an apartment project in St. Charles. During
August, 1993 New Forest and Fox Chase bought the RTC's general partner interest
for $200,000. The buy-out was funded by surplus cash in the partnerships and
an additional capital contribution from IGC. As a result of this transaction,
IGC owns a 90% general partner interest in both New Forest and Fox Chase. The
Company's December 31, 1993 consolidated financial statements reflect the
operations of Fox Chase and New Forest from August 20, 1993.
24
Prior to these purchases the Company accounted for the interests in these
three partnerships under the equity method. The December 31, 1993 financial
statements reflect the effect of consolidation of these partnerships by an
increase in the consolidated assets and liabilities of $22,641,000 and
$22,532,000, respectively.
The following table summarizes IGC's investment in residential rental
partnerships:
DECEMBER 31,
---------------------------
1993 1992
------------ -----------
Long-term receivables, net of deferred
income of $4,100,692 and $5,003,320
at December 31, 1993 and 1992,
respectively $ 4,254,908 $ 3,508,210
Other receivables, net of reserves of $952,776
as of December 31, 1993 and $710,037
as of December 31, 1992 1,377,537 2,096,890
Investment in partnerships 9,320,559 8,350,715
----------- -----------
$14,953,004 $13,955,815
=========== ===========
For the years ended December 31, 1993, 1992 and 1991, IGC recognized
$1,668,206, $1,030,000 and $1,105,000, respectively, of equity in earnings from
certain of these partnerships. In January and March 1994, the Company
collected approximately $7.4 million from funds received from partnerships in
Puerto Rico which refinanced seven apartment projects. These payments
represented the collection of long-term receivables and payment of
distributions. In addition, the Company recognized the remaining unamortized
sponsor and developer fees of $555,000 from the apartment projects that were
refinanced.
25
The combined condensed statements of income (loss) and the combined
condensed statements of cash flow for the years ended December 31, 1993, 1992
and 1991, and the combined condensed balance sheets as of December 31, 1993 and
1992 are shown below for the partnerships owning residential rental properties:
HOUSING PARTNERSHIPS'
COMBINED CONDENSED STATEMENTS OF INCOME (LOSS)
(Unaudited)
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 (1) 1992 1991
------------ ----------- -----------
(In thousands)
Revenues $44,767 $44,618 $43,966
------- ------- -------
Operating expenses
Depreciation 6,637 6,830 6,795
Other 36,677 37,141 37,326
------- ------- -------
43,314 43,971 44,121
------- ------- -------
Net income (loss) $ 1,453 $ 647 $ (155)
======= ======= =======
(1) The income and expenses of Fox Chase and New Forest after August 20,
1993 and the income and expenses of Lancaster after December 31, 1992
are excluded from these statements. The operations of these
partnerships are consolidated on the Company's statement of income
for these periods for the year ended December 31, 1993.
26
HOUSING PARTNERSHIPS'
COMBINED CONDENSED BALANCE SHEETS
(Unaudited)
A S S E T S
DECEMBER 31,
--------------------------
1993 (1) 1992
---------- ----------
(In thousands)
Rental apartments, at cost $240,554 $264,092
Accumulated depreciation (75,493) (73,318)
-------- --------
165,061 190,774
-------- --------
Restricted cash and marketable securities:
Securities held by trustee of bonds -- 1,245
Residual receipt accounts 18,781 22,638
Replacement reserves and escrows 10,320 11,741
-------- --------
Total restricted cash and marketable securities 29,101 35,624
Cash and certificates of deposit
(including $1,360 in restricted accounts in 1992) 18,862 6,077
-------- --------
Total cash and marketable securities 47,963 41,701
-------- --------
Other assets 4,084 3,328
-------- --------
Total assets $217,108 $235,803
======== ========
27
LIABILITIES AND PARTNERS' CAPITAL
DECEMBER 31,
--------------------------
1993 (1) 1992
---------- ----------
(In thousands)
Non-recourse mortgage notes and accrued interest $185,099 $203,429
Loans and interest payable to the Company 19,660 20,979
Other liabilities 3,949 3,922
-------- --------
Total liabilities 208,708 228,330
-------- --------
Partners' capital (2)
Capital contributions, net of distributions 17,908 22,929
Accumulated deficit (9,508) (15,456)
-------- --------
Total partners' capital 8,400 7,473
-------- --------
Total liabilities and partners' capital $217,108 $235,803
======== ========
(1) The assets, liabilities and partners' capital of Lancaster, Fox Chase
and New Forest at December 31, 1993 are excluded as they are
consolidated into the accounts of the Company.
(2) The difference between the partners' capital account at December 31,
1993 and December 31, 1992 is due to accumulated losses,
distributions and the effect of the consolidation of Lancaster, Fox
Chase and New Forest with the Company during 1993.
28
HOUSING PARTNERSHIPS'
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 (1) 1992 1991
------------ ----------- -----------
(In thousands)
Revenues $44,767 $44,618 $43,966
------- ------- -------
Cash expenditures
Total expenses 43,314 43,971 44,121
Less - Depreciation (6,637) (6,830) (6,795)
Other non-cash expenses (706) (679) (651)
------- ------- -------
35,971 36,462 36,675
Mortgage principal and capital
additions 2,232 2,533 2,517
------- ------- -------
Total cash expenditures 38,203 38,995 39,192
------- ------- -------
Cash flow before distributions $ 6,564 $ 5,623 $ 4,774
======= ======= =======
Distributions to the Company $ 1,178 $ 885 $ 1,065
======= ======= =======
(1) The cash flow activity for Lancaster during the period January 1,
1993 to December 31, 1993 and for Fox Chase and New Forest from
August 20, 1993 to December 31, 1993 are excluded from these
statements. These activities are reflected on IGC's Consolidated
Statement of Cash Flow for the year ended December 31, 1993.
The FHA, Puerto Rico Housing Finance Corporation ("PRHFC"), State and
District of Columbia housing agencies and the partnership agreements require
that the accumulation of cash in the partnerships be sufficient to liquidate
all current liabilities before distributions to partners are permitted. Most
of the partnership agreements provide that IGC receive a zero to 5% interest in
profits, losses and cash flow from operations until such time as the limited
partners have received cash distributions equal to their capital contributions.
29
Thereafter, IGC generally shares in 50% of cash distributions from operations.
During 1994, seven partnerships were released from these restrictions as part
of mortgage refinancings. The combined disposition of cash flow is as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1992 1991
------------ ----------- -----------
Unaudited
(In thousands)
Distributions to unaffiliated
limited partners $1,373 $ 996 $1,342
Distributions to affiliated
limited partner 306 288 192
Distributions to the Company 1,178 885 1,065
Distributions to syndicators 42 56 42
Deposits into escrow
Replacement reserves 1,018 645 1,105
Residual receipts 1,763 2,542 2,422
Accrued costs, borrowings, and
use of prior period cash flow 884 211 (1,394)
------ ------ ------
$6,564 $5,623 $4,774
====== ====== ======
(5) INVESTMENT IN REAL ESTATE VENTURES RELATING TO HORSE RACING
On December 14, 1989, IGC's affiliates, HDA and LDA, purchased
substantially all the Puerto Rico assets of San Juan Racing Association, Inc.
for approximately $68 million. The purchase was financed by a $50 million
mortgage loan to HDA and LDA. The additional funds required for the
acquisition were provided by the two partners as capital and loans in
accordance with their original partnership interest (80% from IGC and 20% by
the minority partner of HDA and LDA). The transaction was accounted for under
the purchase method of accounting. As such, the purchase price was allocated
to the net tangible assets acquired based on their fair values at the date of
acquisition which included land and the only thoroughbred race track and off-
track betting operations in Puerto Rico.
On September 30, 1991, IGC sold a 31% ownership interest in HDA (38.75% of
IGC's ownership) to IBC, reducing IGC's 80% general partner interest in HDA to
49%. The terms of the sale provide that IGC has a priority position over IBC
for any cash distributions from HDA to the extent of IGC's loans to and equity
interest in HDA. The purchase price consisted of $10,000 and a $120,628 note
payable by IBC out of distributions from HDA. The sale was approved by a vote
of the independent members of IGC's Board of Directors based on an independent
appraisal of the principal asset of HDA.
In December 1993, HDA refinanced the Race Track with $68 million of 11.75%
first mortgage notes due December 2003 (the "Refinancing"). The note
purchasers also received warrants (the "Warrants") representing the right to
acquire 15% of the equity in HDA for a nominal amount. Exercise of the
Warrants is subject to approval of the Puerto Rico Racing Board ("Racing
Board"). Upon Racing Board approval and the resulting dilution from issuance
of the Warrants, IGC's interest in HDA will be reduced to 41.65% and IBC's
interest will be reduced to 26.35%. The net proceeds of the Refinancing were
30
used by HDA to repay its original mortgage debt and pay a prepayment penalty
(totalling $46.2 million), pay deferred management fees, repay loans and make
distributions to IGC and other HDA partners ($9.1 million), and make loans of
$8.4 million to LDA. LDA used substantially all of loan proceeds in connection
with a December 1993 refinancing of its original mortgage loan and to make
payments on loans from IGC and LDA's 20% unaffiliated minority partner, Supra
and Company S.E. ("Supra"). IGC received from HDA and LDA approximately $13
million from the refinancing proceeds, $1.2 million from HDA distributions of
cash from operations during the year and $2.4 million from HDA in payment of
intercompany loans during the year. Of these amounts approximately $10.4
million was used to repay IGC bank debt, including $8.4 million to Banco
Popular de Puerto Rico. The remaining balance was used to pay accounts payable
and other obligations.
IGC accounts for its investment in HDA on the equity basis of accounting.
In 1993, HDA had income of $2,623,000 before a prepayment penalty on a mortgage
note and write-off of deferred financing costs of $7,157,000 for a net loss of
$4,534,000. HDA made cash distributions of $2,000,000 to the Company in 1993.
Equity in earnings of HDA in the accompanying consolidated statements of income
in 1993 is comprised of (1) the Company's $2.2 million share of earnings before
the prepayment penalty, (2) the Company's share ($.6 million) of the prepayment
penalty which reduced the Company investment in HDA to zero, (3) a cash
distribution of $800,000 received after the investment in HDA had been reduced
to zero by the Company's share of the prepayment penalty and (4) by previous
cash distributions of $1,200,000.
In December 1992, IGC announced plans to distribute to its public
unitholders all or a substantial portion of its interest in HDA (the "Proposed
Distribution"). The announcement also provided that the interests in HDA owned
by IGC and IBC would be distributed prorata to IGC unitholders. The Proposed
Distribution is subject to IGC's obtaining required regulatory approvals,
including the Racing Board, and consent of certain IGC creditors. In addition,
to provide limited liability for recipients of the distributed HDA interests,
IGC may transfer its interests in HDA to a newly formed intermediary entity and
then distribute to its unitholders interests in such intermediary entity.
In September 1993, IGC and IBC formed a general partnership, Equus Gaming
Company ("Equus") to hold their interests in HDA and to organize and to hold
the stock of Virginia Jockey Club, Inc. ("VJC"). IBC is the managing general
partner of Equus. IGC and IBC each contributed $100 and currently their
ownership interests are approximately 62% and 38%, respectively. In October
1993, VJC (100% owned by Equus) submitted an application to the Virginia State
Racing Commission to construct and operate a thoroughbred horse racing facility
in Virginia. As part of this application, a "highly confident letter" was
issued regarding the financing of VJC. Compensation for this letter was the
issuance of 100,000 limited partnership unit purchase warrants of IGC. The
warrant exercise price is $5.30 and expires September 30, 2003. IGC's Board of
Directors has authorized IGC to provide funds to cover all of VJC's costs.
Deferred costs regarding VJC totalled $593,000 as of December 31, 1993. Equus'
partnership agreement provides that in the event VJC obtains a Virginia racing
license, in lieu of the Proposed Distribution IBC and IGC will transfer their
interests in HDA to Equus. The transfer will be structured in a manner to
avoid a termination of HDA for federal income tax purposes. IGC and IBC would
then expect to convert Equus to a limited partnership or other form of limited
liability entity prior to IGC's distributing to its unitholders all or a
substantial portion of its interest in Equus. The transfer to Equus and the
subsequent Equus distribution would be subject to required regulatory
approvals, including the Racing Board, and consent of certain IGC creditors.
31
Equus, including its investments in VJC, is consolidated in the Company's
financial statements. The Company's financial statements reflect the equity
method of accounting for its investment in HDA. HDA's condensed balance sheets
as of December 31, 1993 and December 31, 1992 and the condensed statements of
income for the periods ended December 31, 1993 and 1992 are shown as follows:
HDA
CONDENSED BALANCE SHEET
(Unaudited)
DECEMBER 31,
---------------------------
1993 1992
------------ -----------
(In thousands)
Assets
Cash ($610 Restricted in 1992) $ 1,886 $ 1,133
Leased property, less accumulated
depreciation of $6,157 and $5,214 at
December 31, 1993 and 1992, respectively 42,267 44,728
Receivables from LDA 12,690 3,363
Other assets 4,308 1,478
------- -------
$61,151 $50,702
======= =======
Liabilities and partners' deficit
Accounts payable and accrued liabilities $ 669 $ 714
Debt-third parties 65,960 40,431
Debt-partners -- 9,915
------- -------
66,629 51,060
Partners' deficit (5,478) (358)
------- -------
$61,151 $50,702
======= =======
32
HDA
CONDENSED STATEMENT OF (LOSS) INCOME
(Unaudited)
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1992 1991
------------ ----------- -----------
(In thousands)
Revenues
Rental income $12,258 $ 9,954 $ 7,958
Equity in earnings (losses) of ECOC 135 (356) (1,417)
Interest income 440 297 159
------- ------- -------
12,833 9,895 6,700
------- ------- -------
Expenses
General and administrative 795 573 703
Depreciation and amortization 3,618 2,313 1,728
Interest 5,669 5,648 5,693
------- ------- -------
Total expenses 10,082 8,534 8,124
------- ------- -------
Net income (loss) before provision
for income tax 2,751 1,361 (1,424)
Provision for income tax 129 303 --
------- ------- -------
Income (loss) before extraordinary item 2,622 1,058 (1,424)
Extraordinary item - prepayment
penalty on mortgage note and write-
off of deferred financing costs (7,157) -- --
------- ------- -------
Net (loss) income $(4,535) $ 1,058 $(1,424)
======= ======= =======
The race track facilities owned by HDA are leased to ECOC, an effectively
29.4%-owned non-consolidated affiliate of IGC. The lease agreement requires
ECOC to pay annual rent of the greater of 25% of the race track commissions
("Basic Rent") or $7,500,000 with annual adjustments based on any increase in
the Consumer Price Index ("Minimum Basic Rent"). In addition, ECOC is
responsible for payment of all insurance, taxes and other costs to operate and
to maintain the race track, and HDA is responsible for capital improvements, if
any, up to certain specified limits.
In December 1993, the Lease Agreement was amended to modify the rent and
provide certain other covenants. The Basic Rent and Minimum Basic Rent under
the revised Lease Agreement is unchanged. In addition, ECOC is obligated to
pay additional fixed rent ("Fixed Rent") of $150,000 in 1994, $400,000 annually
in 1995 through 1998 and $1,250,000 in 1999.
33
The condensed balance sheets as of December 31, 1993 and 1992, and the
condensed statements of loss for the years ended December 31, 1993, 1992 and
1991, are shown below for ECOC:
ECOC
CONDENSED BALANCE SHEETS
(Unaudited)
DECEMBER 31,
---------------------------
1993 1992
------------ -----------
(In thousands)
Assets
Cash (restricted cash of $354 and $720
for 1993 and 1992, respectively) $1,033 $1,218
Accounts and notes receivable, net 952 985
Inventories 89 165
Prepaid expenses and deferred charges 735 525
Other assets 3,169 2,182
------ ------
5,978 $5,075
====== ======
Liabilities and stockholders' equity (deficit)
Accounts payable $3,383 $4,275
Payables to HDA -- 2,199
Capital lease obligations 1,624 1,703
Note payable to stockholder 783 266
Deposits 38 80
------ ------
5,828 8,523
Stockholders' equity (deficit) (1) 150 (3,448)
------ ------
$5,978 $5,075
====== ======
(1) In December 1993 HDA contributed to the capital of ECOC a rent
receivable from ECOC of $1,921,000, personal property of $652,000 and
cash of $800,000. An additional cash contribution of $250,000 was made
in January 1994.
34
ECOC
CONDENSED STATEMENTS OF INCOME (LOSS)
(Unaudited)
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1992 1991
------------ ----------- -----------
(In thousands)
Revenues
Commissions on wagering $49,905 $40,815 $30,128
Other 2,210 2,141 1,776
------- ------- -------
52,115 42,956 31,904
------- ------- -------
Expenses
Payments to horse owners and horse
owners' association 25,008 20,457 15,119
General and administrative 14,949 13,190 11,189
Rent to HDA 12,258 9,954 7,958
------- ------- -------
52,215 43,601 34,266
------- ------- -------
Loss before income taxes and
cumulative effect of change
in method of accounting for
income taxes (100) (645) (2,362)
Provision for income taxes 20 -- --
------- ------- -------
Loss before cumulative effect of
change in method of accounting
for income taxes (120) (645) (2,362)
Cumulative effect on prior years of
change in method of accounting for
income taxes 345 -- --
------- ------- -------
Net income (loss) $ 225 $ (645) $(2,362)
======= ======= =======
(6) INTERSTATE WASTE TECHNOLOGIES, INC.
IGC formed a wholly-owned corporation, Interstate Waste Technologies, Inc.
("IWT"), to pursue contracts with municipalities regarding waste treatment
facilities. IWT's first project (in the pre-development stage) was a sludge
reduction facility in Carteret, New Jersey for the Passaic Valley Sewerage
Commissioners ("PVSC"). IWT located a site and entered into a contract with
the Borough of Carteret to serve, for a fee, as a host community. However, on
December 30, 1991, the Borough Council passed a resolution rescinding the
Carteret Mayor's authority to enter into the agreement. IWT commenced legal
action seeking a declaratory judgment that the contract is valid and
enforceable. In February 1993, the contract was ruled valid and enforceable.
The suit filed by IWT against the Borough of Carteret also seeks reimbursement
35
of costs associated with its proposed plant in Carteret, New Jersey. IWT has
determined that the attempt to invalidate the contract and the lawsuit has
required IWT to discontinue its plans to develop the Carteret project.
IWT responded to a Request for Proposals from a Northeastern U.S. city for
a regional sludge management facility to dispose of the city's sludge as well
as sludge from other communities. In February 1994, IWT was notified that it
was identified by the city as the preferred vendor for the regional sludge
management facility. The procurement process calls for the negotiation of a
host community agreement with the city and a sludge disposal service agreement
with the city's wastewater authority. IWT holds an option on the site
described in the proposal.
Three individuals representing IWT have filed for patent protection for a
process which converts sludge into three useful and saleable products:
methanol, sulfur and an aggregate material. There is no assurance that patents
for such process will be issued. IWT utilized the methanol production process
for the conversion of sludge in its Statement of Qualifications response to a
public Request for Qualifications issued by PVSC. Accordingly, the original
plans for an incineration facility for the Carteret site have been abandoned in
favor of the new process.
IWT has abandoned its development efforts for contracts with certain other
municipalities as well as the incineration technology, and provided a reserve
as part of the restructuring provision in 1992 of approximately $1,000,000 for
deferred costs related to these efforts. During 1993, as a result of the legal
action discussed above and its decision to abandon another site, IGC reserved
approximately an additional $1,000,000 against the investment. At December 31,
1993 and 1992, deferred costs regarding waste technology, net of reserves, were
$1,863,000 and $1,902,000, respectively.
(7) FEES FROM SALE OF CABLE TELEVISION SYSTEM
IGC is the general and a limited partner of a partnership that owned a
cable television system serving Charles County, Maryland. The assets of this
partnership were sold on January 6, 1988. IGC earned fees of $508,000,
$456,000 and $495,000 during the years ended December 31, 1993, 1992 and 1991,
respectively. An additional $2.6 million of fees is expected to be paid to IGC
over the next six years. These fees are generally earned as collected and are
comprised of the following:
Consulting services for a period of five years at $250,000
per year with no remaining balance at December 31, 1993.
Services for this fee included rendering advice and
consultation regarding operations and marketing.
Non-compete fees for a period of 10 years at $115,000 per
year with a remaining balance at December 31, 1993 of
$460,000.
Construction management and payment for easements in St.
Charles, Maryland of $3,660,000 based on payments of $732
per dwelling unit for the first 5,000 dwelling units where
cable is placed, and limited to a 12-year period that began
January 6, 1988. The remaining expected balance at
December 31, 1993 was $2,188,000.
36
(8) DEBT
The following notes are primarily collateralized by land, receivables, and
investments in partnerships. The following table summarizes the
indebtedness of IGC:
Stated
Maturity Interest December 31, December 31,
Description by Lender Date Rate 1993 1992
- - ------------------------- -------------- -------- ------------ ------------
Non-recourse debt:
Purchase money Various from
mortgages (6) 10-01-94 to
05-03-97 9% $ 670,485 $ 939,057
Chase Manhattan Bank Paid Paid -- 7,200,000
Community Development
Administration (10) 06-01-16 10.3% 4,054,911 --
Community Development
Administration (10) 10-01-27 9.575% 6,417,066 --
Community Development
Administration (10) 10-01-28 9.875% 11,984,753 --
Supra & Co. (minority
partner in LDA) None (1) 2,091,886 2,726,849
----------- -----------
Total non-recourse 25,219,101 10,865,906
----------- -----------
Recourse debt:
MNC Financial Paid Paid -- 979,513
Bank of Southern MD Paid Paid -- 487,457
Banco Popular de P.R. Paid 1-94 (1) 5,420,171 13,831,395
(6,8,13)
Branch Banking & Paid 3-94 Prime 55,555 277,509
Trust (9) + 1.75%
Citibank (12) Demand (2) 1,856,800 2,312,593
MNC Financial (6) Demand (3,11) Prime 1,352,486 1,426,993
+ 1%
MNC Financial (6) Demand (3,11) Prime 6,013,419 6,374,286
+ 1%
Purchase money Various from 9%-12% 2,361,716 2,697,454
mortgages (6) 04-24-94 to
04-01-98 (11)
Washington Savings (6,7) Various from 7%-8% 656,455 477,825
06-22-94 to
12-27-95
1st National 06-30-94 Prime 150,000 120,000
St. Mary's (7) + 1.5%
Signet Bank (7) 08-13-94 (5) Prime 11,508,161 19,220,029
+ 2%
Wachovia Bank & Trust 04-30-95 (11) Prime 347,474 961,470
(6,8) + .5%
NationsBank (6,8) 05-01-95 (11) Prime 7,774,396 8,805,560
+ 1%
FDIC (6,8,13) 09-30-96 (11) Prime 10,992,694 11,992,694
+ 1%
37
Stated
Maturity Interest December 31, December 31,
Description by Lender Date Rate 1993 1992
- - ------------------------- -------------- -------- ------------ ------------
Banco Central
Hispano (6) 12-31-97 (4) 6,400,000 --
Wachovia Bank & Trust Various from Prime 94,738 98,371
(8) 04-26-00 to + 1%
10-25-00
Various (6,8,9) Various from Various 757,540 691,402
04-15-94 to
02-28-98
----------- -----------
Total recourse 55,741,605 70,754,551
----------- -----------
Total debt $80,960,706 $81,620,457
=========== ===========
Balance Sheet Classification
- - ----------------------------
Mortgage and notes payable - Recourse debt $ 427,563 $ 307,709
Related to community development -
Non-recourse debt 2,762,370 10,865,906
Recourse debt 50,137,318 55,596,234
Related to homebuilding projects - Recourse debt 3,319,926 7,538,015
Related to investment properties -
Recourse debt 1,856,799 7,312,593
Non-recourse debt 22,456,730 --
----------- -----------
Total debt $80,960,706 $81,620,457
=========== ===========
(1) Interest rate is 936 rate plus 3% which was 6.321% at December 31, 1993.
The Banco Popular de Puerto Rico loan was fully paid in January 1994.
(2) The interest rate is not fixed to maturity and is renegotiated on a
periodic basis. The interest rate was 5.15% at December 31, 1993.
(3) The Company received a commitment letter for these facilities aggregating
$7,365,905 on May 13, 1994 to extend the maturity dates of the loans to
May 31, 1995. The extension requires additional collateral in the form
of a second lien on certain commercial land and the Company's interest in
partnerships owning rental apartments (see Note 2).
(4) Interest rate is 936 rate plus 3%, with minimum of 6% and maximum of 9%.
The rate at December 31, 1993 was 6.55%.
(5) At December 31, 1993, the Company was in technical default on this loan
as it has not met certain minimum quarterly sales goals; however, this
requirement has been permanently waived as of December 31, 1993 and May
31, 1994. Current negotiations are being made with lender to extend this
loan's maturity date.
(6) These facilities are collateralized with land and improvements.
38
(7) These facilities are collateralized with land and housing.
(8) These facilities are collateralized with receivables.
(9) These facilities are collateralized with land and building.
(10) These facilities are FHA mortgages on apartment projects.
(11) These loans are in violation of affirmative and financial covenants as
the Company is delinquent with respect to real estate tax, vendor
payments and certain other restrictive covenants.
(12) This loan is collateralized with a letter of credit.
(13) These facilities are collateralized by investments in partnerships.
Information regarding short-term borrowings is summarized as follows:
1993 1992 1991
------------ ----------- -----------
(In thousands)
Principal outstanding
At year end $39,347 $36,316 $42,859
Weighted average during the year $35,338 $31,962 $46,163
Maximum during the year $53,840 $54,145 $69,255
Interest
Weighted average rate at year end 7.20% 6.97% 8.40%
Weighted average rate during the year 7.12% 7.42% 10.33%
Debt matures as follows based upon renewal or expiration date:
December 31,
1993
-----------
Year of maturity:
1994 $39,347,150
1995 10,239,428
1996 1,405,415
1997 5,890,034
1998 and thereafter 24,078,679
-----------
$80,960,706
===========
(9) COMMITMENTS AND CONTINGENCIES
IGC is guarantor of letters of credit of $4,569,000, on behalf of
Chastleton (see Note 10), and $6,117,000 for completion guarantees regarding
land and homebuilding development. The letters of credit related to Chastleton
serve as collateral for public and private borrowing arrangements undertaken by
the respective investment property partnerships. Likewise, the letters of
credit related to the land development and homebuilding operations serve as
collateral for IGC's performance guarantee and support borrowing arrangements.
39
In addition to the letters of credit, IGC shares the general partner
interests in two investment property partnerships with IBC which are currently
experiencing negative cash flow. Under the terms of the partnership agree-
ments, IBC is the primary obligor for funding operating advances. However,
should IBC fail to fulfill its funding obligations, IGC is obligated as a
general partner to provide financial support. This obligation involves varying
degrees of credit risk in excess of amounts recognized in the consolidated
financial statements.
The National Association of Home Builders has issued a warning that
certain fire-retardant treated plywood commonly used in the roof construction
of multi-family homes may contain a product defect causing accelerated
deterioration of the plywood. Since 1991, the homeowners association of three
projects that IGC had built notified IGC of roof problems that they suspected
were related to such fire-retardant plywood. IGC has completed the replacement
of roofs at one project of 60 units, and has agreed to complete the replacement
of roofs at another project of 203 units. IGC is currently working with the
third homeowners association to determine the nature and extent of their
roofing problem. At this time, the extent of IGC's share of the cost for these
projects is estimated to be approximately $50,000. Also, management has
notified the supplier of the plywood to determine the type of treatment used.
Furthermore, IGC is reviewing its records and inspecting the plywood that had
been used in the construction of other IGC projects to determine the nature of
the plywood treatment and the extent of such use. At this time, the extent of
additional loss is considered to be minimal. IGC believes that if the plywood
used in any of its projects had been defectively treated, then the liability
for repair or replacement rests primarily with the insurance company,
manufacturer or the provider of the chemical treatment and others involved in
the manufacturing process.
In March 1990, the Company received a notice (the "Notice") from the U.S.
Army Corps of Engineers (the "Corps") asserting that unauthorized fill
materials had been placed in portions of an approximately five-acre parcel in
Charles County, Maryland (the "Site") owned by the Company and claimed by the
Corps to constitute wetlands subject to regulation pursuant to the Clean Water
Act. Following receipt of the Notice, the Company ceased development of the
Site and remediated a portion of the Site in accordance with instructions
issued by the Corps. The Company also commenced discussions with the Corps
regarding mitigation plans that would preserve some commercial value for the
Site. The Company took the position that a prohibition of development on the
entire Site would constitute a governmental taking for which the Company would
be entitled to compensation. In November 1993, the Company believed it had an
agreement in principle with the Corps that would permit commercial development
of a portion of the Site. However, in early 1994, the Company became aware
that this matter had been referred to the U.S. Attorney for the District of
Maryland who is now conducting an investigation. The investigation is in a
preliminary stage and the Company is not in a position to determine whether it
will be charged with a violation of the Clean Water Act or other laws relating
to wetlands preservation or, if charged, what the outcome will be.
In the opinion of management, IGC is not involved in any litigation
(including the matters above) which is likely to have a material adverse effect
on the accompanying financial statements.
40
(10) RELATED PARTY TRANSACTIONS
In 1993, 1992 and 1991, IGC paid or accrued $94,000, $109,000 and
$151,000, respectively, to reimburse the managing general partner for
director's meeting fees and expenses. At December 31, 1993 and 1992, $72,000
and $224,000, respectively, of directors fees were accrued and unpaid.
IGC and IBC, an entity primarily owned by James J. Wilson (Chairman of the
Board of Directors for IGC's managing general partner) and his family, own the
general partnership interest in Chastleton, a partnership owning a rental
apartment project of 300 units in the District of Columbia. During the first
quarter of 1990, IBC assumed IGC's obligation to provide future funding of
operating advances, indemnified IGC against any liability resulting from
certain letters of credit and certain liabilities regarding Chastleton and
purchased from IGC for $1,948,000 receivables of $2,132,000 due from
Chastleton. This transaction in 1990 resulted in a gain to IGC of $884,000,
which was equal to the collection of reserves recorded in prior years by IGC.
Of the $1,948,000, IBC paid $300,000 to IGC in cash, $404,000 in mortgage
receivables and the balance by a demand note with an outstanding balance
including interest of $680,000 and $707,000 as of December 31, 1993 and 1992,
respectively, which is secured by certain real estate parcels. At December 31,
1993, $317,000 of this amount is reserved until paid. In addition, as part of
IBC's purchase, IGC and IBC agreed that IGC would continue to manage the
project, and IGC subordinated 50% of its management fees until IBC collects its
working capital advances to Chastleton.
In October 1992, IBC, as general partner of Chastleton, arranged the
refunding of certain tax-exempt housing bonds issued in 1985. The refunding of
the 1985 bonds provides lower cost long-term financing and cured a Chastleton
payment default on the mortgage that secured the 1985 bonds and defaults under
the HUD regulatory agreement. As part of this refinancing, IGC agreed to defer
collection of all of its management fees until Chastleton has sufficient cash
flow after debt service and other operating expenses to pay the fees. As of
January 1, 1993, the Board of Directors approved a reduction of Chastleton's
management fees from 5% to 2.5% while the project is operating at a cash flow
deficit. At December 31, 1993 and 1992, Chastleton owed approximately $311,000
and $207,000, respectively of management fees and other receivables, which
$211,000 and $179,000, respectively, are reserved. IGC is also contingently
liable under $4.6 million in letters of credit issued by NationsBank which
secure additional bonds issued for Chastleton.
IBC owned two commercial properties in Puerto Rico which it contributed to
two Puerto Rico special partnerships, Santa Maria Associates S.E. ("Santa
Maria") formed December 1990, and El Monte Properties S.E. (which owns a
shopping center and the Doral Building) formed December 1992, in exchange for
99% partnership interests in each. IGC is a 1% managing partner and provides
property management services under the same terms as previously provided to
IBC, including management fees which are 3.5% of rental income. During 1993,
1992 and 1991, property management fees for these affiliates were approximately
$148,000, $122,000 and $99,000, respectively. During the years ended December
31, 1993, 1992 and 1991, IGC earned $102,000, $61,000 and $65,000,
respectively, from IBC for development fees for the Doral Building which was
under construction in Puerto Rico and received fees of $35,000 and $80,000 in
1993 and 1992, respectively, from Santa Maria for services rendered in
connection with a Santa Maria bond issue. IGC's Puerto Rico executive office
has been located in the Doral Building since November 1991 under a five-year
lease providing for a first-year payment of rent of approximately $187,000 and
certain escalations for CPI and pro-rata share of operating expenses in years
41
two through five. Rental expense for the executive office and certain other
leased property in Puerto Rico in 1993, 1992 and 1991 leased from affiliates
was $206,000, $187,000 and $23,000, respectively. All leases with affiliated
persons are on terms at least as favorable to IGC as that generally available
from unaffiliated persons for comparable property.
IGC has a property management agreement with Capitol Park Associates, a
third-party partnership that owns 937 apartment units in Washington, D.C. In
1984, this partnership purchased these apartment units from a company
controlled by James J. Wilson, certain other stockholders of IBC's predecessor
and third parties. IGC has the right to continue the property management
agreement until 1999, which provides for fees of 3.5% of annual gross rentals.
As of December 31, 1993, 1992 and 1991, IGC earned fees of approximately
$238,000, $210,000 and $228,000, respectively. As of December 31, 1993,
$31,000 of these fees, and other reimbursements of allocated costs were owed by
an entity controlled by Mr. Wilson.
IGC and IBC formed Coachman's Limited Partnership, which owns a 104-unit
apartment complex in St. Charles, Maryland. IGC contributed its 99% interest
in the land and IBC contributed its 1% interest in the land and $218,000 in
cash. IBC is obligated to fund any operating deficits; however, IGC has
provided these funds. Both partners retain a 1% general partner and 49%
limited partner interest in the cash flows, and IGC provides management
services for this property. Fees in 1993, 1992 and 1991 were $22,000, $45,000
and $45,000, respectively. At December 31, 1993, unpaid management fees and
operating deficit loans due IGC was $416,000 of which $272,000 is reserved.
IBC and its affiliates own certain U.S. commercial properties and
apartment projects in the U.S. for which IGC provides property management
services for fees of 2.5% to 4.5% of rental income. Effective January 1993,
the Board of Directors approved a reduction in the management fees for one of
these projects from 4.5% to 2.5% until the project has cash flow sufficient to
bring the unpaid fees up to date and pay the 4.5% fee. During 1993, 1992 and
1991, property management fee income from these affiliates was approximately
$190,000, $242,000 and $252,000, respectively. In 1993 and 1992, IGC earned
$64,000 and $88,000, respectively, from IBC for development fees for the
Village Lake Apartment project. As of December 31, 1993, $419,000 of
management and development fees and other allocated costs were unpaid of which
$397,000 was reserved.
IGC and affiliates lease office space from Smallwood Village Associates
Limited Partnership ("SVA"), one of IBC's commercial properties in which IGC's
principal executive offices are located. A total of 23,400 square feet of
office space is leased by IGC and affiliates at approximately $282,000 per year
(subject to adjustment for inflation). The lease expires in the year 2001. In
1993, 1992 and 1991, IGC's annual rentals from its share of the leases are
approximately $181,000, $193,000 and $197,000, respectively.
During the second quarter of 1991, IGC sold 56 undeveloped residential
lots to Community Homes, Inc. ("Community Homes"), a company majority-owned by
relatives of James J. Wilson, for a total sales price of $1,176,000. In the
opinion of management, the sales price and the terms of this sale were not
materially different from those of similar land sale transactions with
unaffiliated third parties.
As of September 30, 1991, IGC sold a 31% interest (38.75% of its ownership
interest) in HDA to IBC, reducing IGC's 80% partnership interest in HDA to 49%.
An unaffiliated partner holds the remaining 20% interest. The purchase price
42
consisted of $10,000 cash payment, a $121,000 note payable by IBC out of
distributions from HDA. As a result of this transaction which reduced IGC's
ownership interest to 49%, the assets and liabilities of HDA are no longer
consolidated with those of IGC.
IGC, as limited partner, and IBC, as general partner, have formed Equus
Gaming Company ("Equus), a general partnership that through its wholly-owned
subsidiary, Virginia Jockey Club, Inc. ("VJC"), has applied for a license to
construct and operate a thoroughbred racing facility in Virginia, and IGC
currently is funding all costs regarding VJC. Deferred costs regarding VJC as
of December 31, 1993 totaled approximately $593,000. Equus' partnership
agreement provides that in the event VJC obtains a Virginia racing license, in
lieu of the Proposed Distribution IBC and IGC will transfer their interest in
HDA to Equus. The transfer will be structured to avoid a termination of HDA
for federal income tax purposes. IGC and IBC expect to convert Equus to a
limited partnership or other form of limited liability entity prior to IGC's
distributing to its unitholders all or a substantial portion of its interests
in Equus. The transfer to Equus and the subsequent distribution would be
subject to required regulatory approvals, including the Racing Board, and
consent of certain IGC creditors.
IGC and IBC have also engaged in property sales and certain other related
party transactions. During 1989, IBC purchased 5.01 acres of commercial land
for the development of an apartment complex for the appraised value of
$1,092,000 ($218,000 cash down payment and a five-year note of $874,000
requiring quarterly payments of $22,000 and a balloon payment of $741,000 on
September 28, 1994). The outstanding balance of the note and interest as of
December 31, 1993 was $776,000. This note was originally secured by the 5.01-
acre site purchased. In 1992, the Company pledged this note to a vendor as
collateral for outstanding payables. To permit the construction of the Village
Lake Apartments to proceed, the vendor and the Company's Board of Directors
approved the release of 3.78 of the 5.01 acres, without payment, in exchange
for an assignment of IBC's 99% interest in Village Lake L.P., Santa Maria and a
mortgage on an additional real estate parcel.
The Company and IBC entered into an agreement in 1990 pursuant to which
$1,749,000 of the Company's outstanding advances to IBC in 1990 were satisfied
by the conveyance by IBC to the Company of approximately $3.8 million in
receivables from SVA, in which IBC is the sole general partner and a limited
partner, together with options to purchase IBC's 1% general and 51% limited
partnership interests in SVA. As SVA has been operating at a cash deficit
since inception, none of these receivables have been paid to IGC. Pursuant to
the agreement, in order to enhance the ultimate liquidity of the Company's
receivables from SVA, the Company has the right at any time after December 31,
1993 to require IBC to repurchase the receivables ("SVA Repurchase") for an
amount equal to $2 million plus interest from the date of the agreement. The
repurchase amount was $2,726,000 at December 31, 1993, of which $893,000 is
reserved until collected. To date, the Company has not exercised the SVA
Repurchase.
The maximum amounts of outstanding receivables due IGC from IBC and other
Wilson related entities (which include WSC, Advanced Power Systems, Inc.,
Community Homes and certain apartment projects), and excluding SVA receivables
discussed in the previous paragraph, was $2,806,000 and $3,743,000 during 1993
and 1992. The outstanding receivables from these parties at December 31, 1993
and 1992 were $2,636,000 and $2,806,000, respectively, of which $1,200,000 and
$799,000, respectively, were reserved until collected.
43
IGC provides management services to HDA pursuant to a management agreement
which has a term of 15 years ending in December 2004. The management agreement
was amended in December 1993 upon closing of a HDA refinancing to reduce the
management fee to an annual fee of $250,000, adjusted beginning in 1994 by the
percentage increase in CPI over the prior year. Prior to such amendment IGC
received a management fee equal to 5% of the HDA's rental income. The HDA
management fees earned in 1993 and 1992 were $593,000 and $498,000,
respectively. Pursuant to an agreement with HDA's previous lender, collection
of 50% of the fees earned from March 1992 was deferred. The unpaid fees of
$499,000 at December 15, 1993 were paid to IGC from the proceeds of the HDA
refinancing.
Pursuant to a consulting agreement effective December 15, 1993, ECOC has
retained as executive management three racing consultants employed by IGC.
ECOC reimburses all of IGC's payroll, bonus, fringe benefits and out-of-pocket
disbursements with respect to IGC's employment of the three consultants and
bonuses for these consultants and/or other personnel from time to time
providing services to ECOC, subject to certain limits on increases in
reimbursable costs during the term of the consulting agreement.
ECOC, the lessee of properties owned by HDA, uses certain land owned by
LDA for a sanitary landfill in connection with its operation of the El
Comandante Race Track. LDA has authorized this use, but has reserved the right
to terminate such use if it conflicts with future development by LDA.
The PRHFC regulatory agreements require approval of audit reports before
annual distributions can be made. In January 1992, surplus cash of $194,000
accumulated at December 31, 1991 was distributed to IGC from a partnership in
advance of receiving the March 1992 approval of the 1991 audit reports from the
PRHFC (this is not a HUD-insured project). In the first quarter of 1992, IGC
received distributions from this same partnership of $118,000 of cash
accumulated in 1992. This violation was cured in March 1993 when the PRHFC
approved the distribution of 1992 surplus cash.
During 1991, IGC agreed to pay Joel Cowan, a director of the managing
general partner of IGC, a $25,000 fee for the arrangement of certain mortgage
financing for IGC's AFH division. Mr. Cowan earned $51,000 in 1990 relating to
a 1989 retainer agreement. As of December 31, 1993, fees of $5,000 were
unpaid.
James J. Wilson, as a general partner of IGP, is entitled to priority
distributions made by each housing partnership in which IGP is the general
partner. If IGP receives a distribution which represents 1% or less of a
partnership's total distribution, Mr. Wilson receives the entire distribution.
If IGP receives a distribution which represents more than 1% of a partnership's
total distribution, Mr. Wilson receives the first 1% of such total.
R. Daniel Saxe, Jr., a director of IGMC, is a limited partner in Alturas
del Senorial Associates Limited Partnership and Valle del Sol Associates
Limited Partnership. IGC is the sole general partner of each of these housing
partnerships.
44
In March 1984, IBC acquired from unaffiliated parties a 51% limited
partnership interest in four partnerships which own 596 apartment units in St.
Charles. IGC is the 1% general partner in each of these partnerships. The
potential for a conflict of interest exists between IBC and IGC as to whether
and when to convert these units to condominiums. IGC provides property
management services for these properties. The contracts provide for fees of 6%
to 9.8% of gross rental and can be terminated upon 30 days written notice.
(11) PROFIT SHARING AND RETIREMENT PLANS
IGC established a retirement plan (the "Retirement Plan") effective
January 1, 1988 for non-union employees of IGC. Such employees are eligible
for the Retirement Plan when they have completed a minimum employment period of
generally one year. In 1992, the union employees were added to the Retirement
Plan. IGC's contributions to the Retirement Plan and U.S. Social Security Plan
for eligible employees were equal to 11.65% of basic salaries and wages for
1993, 1992 and 1991 that were not in excess of the U.S. Social Security taxable
wage base, plus 8% of salaries which exceeded the U.S. Social Security taxable
wage base. Employees' salaries in excess of $235,840, $228,860 and $222,220,
for 1993, 1992 and 1991, respectively, were excluded from the calculation of
contributions. Payments are also made to the Retirement Plan from IGC
contributions to a profit sharing plan, as described below, and from voluntary
contributions by employees.
In 1987, IGC established an incentive compensation plan (the "Profit
Sharing Plan") based on net income of the Company. No contributions were made
for 1993, 1992 or 1991.
(12) UNIT OPTIONS AND WARRANTS
IGC established Unit option plans for Directors (the "Directors Plan") and
for employees (the "Employees Plan"). The Directors Plan is for directors of
the Managing General Partner who are not officers or employees of the Company
or any General Partner. The Employees Plan is for employees of IGC, including
employees who are Directors of any general partner of IGC or any affiliate of
IGC. Activity during 1993 and 1992 is summarized below:
Directors
----------------------
Plan Plan
Exercise Exercise
Price $9 Price $4
-------- --------
Options outstanding, December 31, 1991 30,000 30,000
Cancelled -- (15,000)
------- --------
Options outstanding, December 31, 1992 30,000 15,000
Awarded (1) -- 30,000
Cancelled (1) (30,000) --
------- --------
Options outstanding, December 31, 1993 -- 45,000
======= ========
45
Employees
----------------------
Plan Plan
Exercise Exercise
Price $9 Price $4
-------- --------
Options outstanding, December 31, 1991 112,950 40,000
Cancelled (15,150) --
------- --------
Options outstanding, December 31, 1992 97,800 40,000
Awarded (1) -- 147,800
Cancelled (1) (97,800) (1,750)
Exercised -- (2,500)
------- --------
Options outstanding, December 31, 1993 -- 183,550
======= ========
(1) The Board of Directors of IGMC in 1992 approved a change in the
exercise price of $9 to $4 for both the Employees and Directors Plan.
IGC subsequently cancelled the original $9 options and reissued the
options at $4 effective January 1, 1993. The reissued options are
exercisable in various increments from July 1, 1993 to September 1,
1994. Also, on January 1, 1993, the Company granted options for
50,000 Units exercisable in 20% increments from July 1, 1993 to
January 1, 1997.
As of December 31, 1993, an additional 155,000 Units are reserved for
issuance under the Directors Plan and an additional 1,012,200 Units are
reserved under the Employees Plan.
46
As of December 31, 1993, the dates that options become exercisable and the
expiration dates are as follows:
Directors Options
--------------------------
Expiring Expiring
12-1-97 2-1-00
---------- ----------
Exercisable:
As of December 31, 1993 30,000 12,000
September 1, 1994 -- 3,000
------ ------
30,000 15,000
====== ======
Employees Options
----------------------------------------
Expiring Expiring Expiring
1-1-99 8-1-01 1-1-03
---------- ---------- ----------
Exercisable:
As of December 31, 1993 93,550 16,000 10,000
January 1, 1994 -- 8,000 10,000
January 1, 1995 -- -- 10,000
February 1, 1995 -- 8,000 --
January 1, 1996 -- -- 10,000
March 1, 1996 -- 8,000 --
January 1, 1997 -- -- 10,000
------ ------ ------
93,550 40,000 50,000
====== ====== ======
In 1993, 100,000 limited partnership unit purchase warrants were issued to
an investment firm in connection with a "highly confident letter" relating to
the VJC financing. The warrants have an exercise price of $5.30 per warrant
and expire on September 30, 2003. Management has valued the warrants at
$75,000 and has accounted for the issued warrants as a deferred cost of VJC.
(13) INCOME TAXES
As a U.S. Company doing business in Puerto Rico, IGC is subject to Puerto
Rico income tax on its Puerto Rico based income. The taxes reflected below are
a result of that liability. As discussed in Note 1, the Company adopted SFAS
No. 109 as of January 1, 1993, and the cumulative effect of this change is
reported in the Consolidated Statement of Income (Loss) for the year ended
December 31, 1993. Prior years' financial statements have not been restated to
apply the provisions of SFAS No. 109.
47
The provision for income taxes amounted to 10.5%, 3.3% and 21.8% of the
income before taxes for the years ended December 31, 1993, 1992 and 1991,
respectively. The primary reason for the differences between these rates and
the statutory federal income tax rate is due to partnership income not being
taxable at the entity level, noted as follows:
December 31,
-------------------------------------------------
1993 1992 1991
--------------- -------------- --------------
(In thousands, except amounts in %)
% of % of % of
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
Provision (benefit) for
income taxes at the
statutory Federal
income tax rate $2,226 35.0% $(4,922) (34.0%) $207 34.0%
Reduction of provisions
(benefits) for
partnership income
not taxable to Company (1,756) (27.6%) 5,735 39.6% (95) (15.6%)
Net change in deferred
income tax liabilities 275 4.3% -- -- -- --
Other items (80) (1.3%) (342) (2.3%) 21 3.4%
------- ------ ------ ------ ---- -----
$665 10.5% $ 471 --% $39 21.8%
======= ====== ====== ====== ==== =====
The provision for income taxes consists of the following:
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1992 1991
------------ ----------- -----------
(In thousands)
Currently payable
United States $ -- $ -- $ --
Puerto Rico 390 2 4
Deferred 275 469 129
---- ---- ----
$665 $471 $133
==== ==== ====
48
The components of deferred taxes payable include the following:
YEARS ENDED DECEMBER 31,
------------------------
1993 1992
----------- -----------
(In thousands)
Tax on amortization of deferred
income related to long-term
receivables from partnerships
operating in Puerto Rico $ 942 $ 538
Tax on equity in earnings of
partnerships operating in
Puerto Rico 1,989 1,514
Carryforward of Puerto Rico losses (1,941) --
Other items (1) 162
------ ------
$ 989 $2,214
====== ======
49
The reconciliation between book income and taxable income (excluding built-in
gain allocable to Predecessors) is as follows:
December 31,
-------------------------------------------------
1993 1992 1991
--------------- -------------- --------------
(In thousands, except per unit amounts)
Per Per Per
Total Unit Total Unit Total Unit
------ ------ ------ ------ ------ ------
Net (loss) income
per books $7,194 $.71 $(14,947) $(1.47) $ 476 $ .05
Cumulative effect of
change in accounting
principle (1,500) (.15) -- -- -- --
Built-in gain allocable
to Predecessors:
Current (301) (.03) (252) (.03) (312) (.03)
Deferred (900) (.09) (309) (.03) (218) (.02)
Difference in income or
losses from subsidiary
partnerships (5,427) (.53) (1,630) (.16) (894) (.09)
Losses from corporation
subsidiaries not
deductible by the
partnership 1,418 .14 1,631 .16 1,862 .18
Capitalization of general
and administrative
expenses under the
Uniform Capitalization
Rules 49 -- 162 .02 (167) (.02)
Deferred (losses) income
recognized currently
for tax purposes 1,057 .10 1,442 .14 939 .09
Additional tax depreciation
on the race track
properties -- -- -- -- (1,500) (.15)
Interest expense related
to the acquisition of
the race track properties
deducted for taxes (1,347) (.13) (1,445) (.14) (1,717) (.17)
Losses from restructuring (1,409) (.14) 11,527 1.14 -- --
Other book to tax
reconciling items, none
of which is individually
significant (332) (.03) 597 .05 (371) (.03)
-------- ------ ------- ----- -------- -----
Net taxable loss per
partnership federal
return $(1,498) (.15) $(3,224) $(.32) $(1,902) $(.19)
======== ====== ======= ===== ======== =====
50
Deferred income taxes for 1993 reflect the "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. These temporary differences are determined in
accordance with SFAS No. 109 and are more inclusive in nature than "timing
differences" as determined under previously applicable accounting principles.
In determining the impact of SFAS No. 109, certain carry-forwards related to
Puerto Rico operations were benefitted as there are no existing uncertainties
associated with their realization. The benefit of implementing SFAS No. 109
has been reported as a $1.5 million cumulative effect of a change in accounting
principal in the accompanying statements of income (loss). As of December 31,
1993, the Company had $6.7 million in carryforward losses available for Puerto
Rico tax purposes. Puerto Rico unused losses can be carryforwarded
indefinitely as they do not expire, however, their use in any given year is
limited to 50% of taxable income.
On December 22, 1987, the Omnibus Budget Reconciliation Act of 1987 ("the
1987 Act") was signed into law. It contained several provisions relating to
the tax treatment of publicly traded partnerships. Among other things, the
1987 Act provides that publicly traded partnerships will be taxed as
corporations unless at least 90% of their gross income is derived from
qualifying "passive-type" sources. Income qualifying for this purpose includes
interest, dividends, real property income and gains from the sale of real
property. IGC, as an existing partnership publicly traded as of December 17,
1987, has been grandfathered for a 10-year transition period. As such, IGC
will not be taxed as a corporation until 1998 even if it does not meet the
qualifying gross income test, unless a substantial new line of business is
added. IGC expects to be able to comply with the qualifying income test.
Proposed regulations define a new line of business as substantial if the
partnership derives more than 15% of its gross income from that line of
business or if more than 15% (by value) of the partnership's total assets are
used in that line of business. Management believes that its acquisitions
subsequent to the 1987 Act do not constitute new lines of business.
Furthermore, it is management's intention not to enter into any new lines of
business that may impair IGC's tax status as a partnership.
51
(14) QUARTERLY SUMMARY (UNAUDITED)
IGC's quarterly results are summarized as follows:
Year Ended December 31, 1993
----------------------------------------------
1st 2nd 3rd 4th Total for
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ---------
Revenues $ 9,827 $13,884 $13,752 $11,530 $48,993
Income before taxes 1,115 1,723 2,190 1,331 6,359
Net income 2,319 1,499 1,811 1,565 7,194
Year Ended December 31, 1992
----------------------------------------------
1st 2nd 3rd 4th Total for
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ---------
Revenues $11,154 $11,147 $ 8,984 $10,697 $41,982
Provision for restructuring -- (15,795) -- -- (15,795)
(Loss) income before taxes (44) (15,934) 718 784 (14,476)
Net (loss) income (118) (16,018) 599 590 (14,947)
Year Ended December 31, 1991
----------------------------------------------
1st 2nd 3rd 4th Total for
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ---------
Revenues $11,022 $12,364 $13,109 $11,313 $47,808
(Loss) income before taxes (352) 646 194 121 609
Net (loss) income (446) 559 120 243 476
(15) SUPPLEMENTARY INCOME STATEMENT INFORMATION
Advertising expense totalled $1,223,000, $1,076,000 and $1,432,000 for the
years ended December 31, 1993, 1992 and 1991, respectively. These expenses
included advertising, printed materials, signs, displays, model home costs and
other general marketing costs.
Depreciation and amortization expense of intangible assets, pre-operating
costs and similar deferrals totalled $358,000, $413,000 and $925,000 for the
years ended December 31, 1993, 1992 and 1991, respectively.
52
EXHIBIT
NEWS RELEASE
FOR IMMEDIATE RELEASE CONTACT
Thursday, June 2, 1994 Gregory A. TenEyck
(301) 843-8600
IGC RESTRUCTURES $6.8 MILLION IN LOANS;
AUDITORS LIFT QUALIFIED REPORT
ST. CHARLES, MD - Interstate General Company L.P. (AMEX: IGC) has received
a commitment to restructure $6.8 million in loans with NationsBank. As a
result, Arthur Andersen & Co. has reissued its audit report on IGC's 1993 year
end financial statements to eliminate the "going concern" qualification that
had appeared on its report dated March 29, 1994.
IGC has filed a Form 8-K with the Securities and Exchange Commission which
contains the new audit report and updates the debt and liquidity discussions
reported in its Form 10-K for the year ended December 31, 1993.
The agreement with NationsBank will extend the maturity date of two loans
to May 31, 1995, and includes options for two six-month extensions on each
loan, conditioned by terms of the loans.
James J. Wilson, Chairman and Chief Executive Officer of IGC, said, "These
events are significant milestones toward the successful completion of the
restructuring plan we began two years ago. Since that time we have paid more
than $37 million in bank debt and are in excellent position to further improve
liquidity and profitability."
IGC reported net income of $7.2 million on revenue of $49 million for the
year ended December 31, 1993. For the three months ended March 31, 1994, the
company produced net income of $2.1 million on revenue of $12.6 million.
Founded in 1957, IGC is a diversified real estate organization
specializing in community development, homebuilding, investment properties and
management services. The company is a publicly traded partnership, listed on
the American and Pacific stock exchanges under the symbol IGC.