SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1994, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
Commission file number 1-9393
Interstate General Company L.P.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1488756
------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Smallwood Village Center
St. Charles, Maryland 20602
----------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(301) 843-8600
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
10,119,460 Class A Units
------------------------
2
INTERSTATE GENERAL COMPANY L.P.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION Page
Number
Item 1. Consolidated Financial Statements ------
Consolidated Statements of Income for
the Six Months Ended June 30, 1994 and
1993. (Unaudited) 3
Consolidated Statements of Income for
the Three Months Ended June 30, 1994 and
1993. (Unaudited) 5
Consolidated Balance Sheets at June 30, 1994
(Unaudited) and December 31, 1993. 6
Consolidated Statements of Changes in
Partners' Capital for the Six
Months Ended June 30, 1994.
(Unaudited) 9
Consolidated Statements of Cash Flow for the
Six Months Ended June 30, 1994 and 1993.
(Unaudited) 10
Consolidated Statements of Cash Flow for the
Three Months Ended June 30, 1994 and 1993.
(Unaudited) 11
Notes to Consolidated Financial Statements. 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Six
and Three Months Ended June 30, 1994 and 1993. 26
PART II OTHER INFORMATION
Item 1. Legal Proceedings 39
Item 5. Other Information 40
Item 6. Exhibits and Reports on Form 8-K 41
Signatures 42
3
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30,
(In thousands, except per unit amounts)
(Unaudited)
1994 1993
----------- ------------
REVENUES:
Homebuilding - home sales $ 10,005 $ 10,798
Community development - lot sales 16,719 7,137
Revenues from investment properties -
Investment in partnerships 4,255 1,425
Equity in income of
Housing Development Associates S.E. ("HDA") -- 1,436
Apartment rental income 2,158 408
Management fees, substantially all
from related entities 1,876 2,063
Interest and other income 187 300
---------- ----------
Total revenues 35,200 23,567
---------- ----------
EXPENSES:
Cost of home sales 9,073 9,305
Cost of lot sales 10,671 5,018
Selling and marketing 680 571
General and administrative 3,903 4,091
Rental apartment expense 2,173 441
Depreciation and amortization 307 280
Interest expense 1,093 983
---------- ----------
Total expenses 27,900 20,689
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 7,300 2,878
---------- ----------
PROVISION FOR INCOME TAXES:
Current 2,002 10
Deferred 833 510
---------- ----------
Total taxes 2,835 520
---------- ----------
INCOME BEFORE MINORITY INTERESTS 4,465 2,358
Minority interest in
Land Development Associates S.E. ("LDA") 700 41
---------- ----------
NET INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 3,765 2,317
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- 1,500
---------- ----------
NET INCOME $ 3,765 $ 3,817
========== ==========
4
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME (continued)
FOR THE SIX MONTHS ENDED JUNE 30,
(In thousands, except per unit amounts)
(Unaudited)
1994 1993
----------- ------------
PER UNIT AMOUNTS--
NET INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE $ .37 $ .23
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- .14
---------- ----------
NET INCOME PER UNIT $ .37 $ .37
========== ==========
NET INCOME
GENERAL PARTNERS $ 38 $ 38
LIMITED PARTNERS 3,727 3,779
---------- ----------
$ 3,765 $ 3,817
========== ==========
WEIGHTED AVERAGE UNITS OUTSTANDING 10,085 10,079
========== ==========
The accompanying notes are an integral part
of these consolidated statements.
5
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30,
(In thousands, except per unit amounts)
(Unaudited)
1994 1993
----------- ------------
REVENUES:
Homebuilding - home sales $ 5,056 $ 6,263
Community development - lot sales 14,676 4,741
Revenues from investment properties -
Investment in partnerships 797 574
Equity in income of
Housing Development Associates S.E. -- 601
Apartment rental income 1,107 408
Management fees, substantially all
from related entities 907 1,019
Interest and other income 88 138
---------- ----------
Total revenues 22,631 13,744
---------- ----------
EXPENSES:
Cost of home sales 4,784 5,444
Cost of lot sales 9,445 3,142
Selling and marketing 396 319
General and administrative 1,998 2,055
Rental apartment expense 1,053 441
Depreciation and amortization 162 125
Interest expense 628 475
---------- ----------
Total expenses 18,466 12,001
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,165 1,743
---------- ----------
PROVISION FOR INCOME TAXES:
Current 886 --
Deferred 929 224
---------- ----------
Total taxes 1,815 224
---------- ----------
INCOME BEFORE MINORITY INTERESTS 2,350 1,519
Minority interest in LDA 678 20
---------- ----------
NET INCOME $ 1,672 $ 1,499
========== ==========
NET INCOME PER UNIT $ .16 $ .15
========== ==========
NET INCOME
GENERAL PARTNERS $ 17 $ 15
LIMITED PARTNERS 1,655 1,484
---------- ----------
$ 1,672 $ 1,499
========== ==========
WEIGHTED AVERAGE UNITS OUTSTANDING 10,088 10,079
========== ==========
The accompanying notes are an integral part
of these consolidated statements.
6
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
A S S E T S
June 30, December 31,
1994 1993
----------- -----------
(Unaudited) (Audited)
CASH AND SHORT-TERM INVESTMENTS
including restricted cash of $8,492
and $2,587 at June 30, 1994 and
December 31, 1993, respectively $ 10,183 $ 4,596
-------- --------
ASSETS RELATED TO COMMUNITY DEVELOPMENT
Land and development costs
St. Charles, Maryland 26,387 26,683
Puerto Rico 24,607 31,389
Other United States locations 18,107 18,660
Notes receivable on lot sales, net of
reserves of $310 and $230
as of June 30, 1994 and
December 31, 1993, respectively 1,596 1,785
Other 281 359
-------- --------
70,978 78,876
-------- --------
ASSETS RELATED TO HOMEBUILDING PROJECTS
Homebuilding construction and land 5,892 6,645
Mortgages receivable 230 396
Receivables on home sales 663 405
Other 123 120
-------- --------
6,908 7,566
-------- --------
ASSETS RELATED TO INVESTMENT PROPERTIES
Investment in residential rental
partnerships, net of deferred income and
reserves of $4,795 and $5,054 at June 30,
1994 and December 31, 1993, respectively 10,782 14,953
Investment properties, net of accumulated
depreciation and amortization of
$4,419 and $4,106 as of June 30,
1994 and December 31, 1993, respectively 24,215 24,551
Other receivables, net of reserves of
$2,918 and $2,800 as of June 30,
1994 and December 31, 1993, respectively 2,298 2,610
Other 1,202 593
-------- --------
38,497 42,707
-------- --------
7
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
A S S E T S (continued)
June 30, December 31,
1994 1993
----------- -----------
(Unaudited) (Audited)
OTHER ASSETS
Property, plant and equipment, less
accumulated depreciation of $1,857
and $1,837 as of June 30, 1994 and
December 31, 1993, respectively 1,591 1,704
Costs in excess of net assets acquired,
less accumulated amortization of
$660 and $584 as of June 30,
1994 and December 31, 1993, respectively 2,374 2,450
Deferred costs regarding waste technology
and other 2,037 2,415
-------- --------
6,002 6,569
-------- --------
$132,568 $140,314
======== ========
The accompanying notes are an integral part
of these consolidated balance sheets.
8
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
LIABILITIES AND PARTNERS' CAPITAL
June 30, December 31,
1994 1993
------------ ------------
(Unaudited) (Audited)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and other accrued
liabilities $ 4,184 $ 3,661
Mortgages and notes payable 412 428
Accrued income tax liability
Current 2,392 390
Deferred 1,822 989
-------- --------
8,810 5,468
-------- --------
LIABILITIES RELATED TO COMMUNITY DEVELOPMENT
Recourse debt 37,510 50,137
Non-recourse debt 2,464 2,762
Loan payable to HDA 13,296 12,684
Accounts payable and accrued liabilities 2,006 2,553
Deferred income 171 199
-------- --------
55,447 68,335
-------- --------
LIABILITIES RELATED TO HOMEBUILDING
Recourse debt 3,016 3,320
Accounts payable and accrued liabilities 3,438 4,231
-------- --------
6,454 7,551
-------- --------
LIABILITIES RELATED TO INVESTMENT PROPERTIES
Recourse debt 1,742 1,857
Non-recourse debt 22,400 22,457
Accounts payable, accrued liabilities
and deferred income 2,140 2,401
-------- --------
26,282 26,715
-------- --------
Total Liabilities 96,993 108,069
-------- --------
PARTNERS' CAPITAL
General partners' capital 193 155
Limited partners' capital-10,098,960 Units
issued and outstanding as of June 30, 1994
and 10,081,810 as of December 31, 1993 35,382 32,090
-------- --------
Total partners' capital 35,575 32,245
-------- --------
$132,568 $140,314
======== ========
The accompanying notes are an integral part
of these consolidated balance sheets.
9
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 1994
(In thousands)
(Unaudited)
General Limited
Partners' Partners'
Capital Capital Total
-------- --------- ---------
1994
- - ----
Balances, December 31, 1993 $ 155 $32,090 $32,245
Net income for the three
months ended March 31, 1994 21 2,072 2,093
Employee Unit option exercised -- 2 2
------- ------- -------
Balances, March 31, 1994 $ 176 $34,164 $34,340
Net income for the three months
ended June 30, 1994 17 1,655 1,672
Employee/Director Unit option exercised -- 67 67
Cash distributions to partners -- (504) (504)
------- ------- -------
Balances, June 30, 1994 $ 193 $35,382 $35,575
======= ======= =======
The accompanying notes are an integral part
of these consolidated statements.
10
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30,
(In thousands)
(Unaudited)
1994 1993
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,765 $3,818
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization
Corporate 307 390
Investment properties 313 --
Provision for income taxes
Current 2,002 10
Deferred 833 510
Equity in earnings of partnerships (932) (1,995)
Increase in sponsor and developer fees
from partnerships and other (162) (168)
Cumulative effect of accounting change -- (1,500)
(Decrease) in
Accounts payable and accrued liabilities (812) (561)
Deferred income (28) (16)
Decrease (increase) in
Receivables 355 1,305
Homebuilding assets 492 702
Community development assets 7,679 1,352
Restricted cash (5,905) (192)
------- -------
Net cash provided by operating activities 7,907 3,655
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in assets related to investment properties 4,668 2,054
Reductions (additions) to other assets 289 (579)
------- -------
Net cash provided by investing activities 4,957 1,475
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans from HDA 613 --
Cash proceeds from debt financing 2,238 3,724
Payment of debt (15,598) (10,370)
Employee/Director Unit options exercised 69 --
Cash distributions to partners (504) --
------- -------
Net cash used in financing activities (13,182) (6,646)
------- -------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS (318) (1,516)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR 2,009 2,263
------- -------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 1,691 $ 747
======= =======
SUPPLEMENTAL DISCLOSURES
Interest paid (net of amount capitalized) 2,121 1,767
Income taxes paid -- --
The accompanying notes are an integral part
of these consolidated statements.
11
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED JUNE 30,
(In thousands)
(Unaudited)
1994 1993
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,672 $1,498
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization
Corporate 144 220
Investment properties 156 --
Provision for income taxes
Current 886 --
Deferred 929 224
Equity in earnings of partnerships (265) (839)
Increase in sponsor and developer fees
from partnerships and other (81) (56)
Increase (decrease) in
Accounts payable and accrued liabilities 815 (451)
Deferred income -- (431)
Decrease (increase) in
Receivables 40 1,760
Homebuilding assets 103 245
Community development assets 7,524 1,677
Restricted cash (6,376) (35)
------- -------
Net cash provided by operating activities 5,547 3,812
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase (decrease) in assets related
to investment properties (853) 517
Reductions (additions) to other assets 480 (423)
------- -------
Net cash (used) provided by investing activities (373) 94
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans from HDA 344 --
Cash proceeds from debt financing 1,186 2,138
Payment of debt (6,166) (7,076)
Employee/Director Unit options exercised 67 --
Cash distributions to partners (504) --
------- -------
Net cash used in financing activities (5,073) (4,938)
------- -------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 101 (1,032)
CASH AND SHORT-TERM INVESTMENTS, MARCH 31 1,590 1,779
------- -------
CASH AND SHORT-TERM INVESTMENTS, JUNE 30 $ 1,691 $ 747
======= =======
SUPPLEMENTAL DISCLOSURES
Interest paid (net of amount capitalized) 1,059 1,497
Income taxes paid -- --
The accompanying notes are an integral part
of these consolidated statements.
12
INTERSTATE GENERAL COMPANY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1994
(Unaudited)
(1) BASIS OF PRESENTATION AND PRINCIPLES OF ACCOUNTING
The accompanying consolidated financial statements are unaudited but
include all adjustments (consisting of normal recurring adjustments) which the
Company considers necessary for a fair presentation of the results of
operations for the interim periods. Certain account balances in the 1993
financial statements have been reclassified to conform to the 1994
presentation. The operating results for the six months ended June 30, 1994 are
not necessarily indicative of the results that may be expected for the year.
Net income per unit is calculated on weighted average units outstanding and on
1% general partnership interest.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with Generally Accepted Accounting Principles ("GAAP")
have been condensed or omitted. While the Managing General Partner believes
that the disclosures presented are adequate to make the information not
misleading, it is suggested that these financial statements be read in
conjunction with the financial statements and the notes included in the
Partnership's Annual Report filed on Form 10-K for the year ended December 31,
1993.
In the first quarter of 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109) Accounting for Income Taxes, which
changes the method of accounting for income taxes under GAAP. The Company
recognized a cumulative benefit due to the change in accounting principle of
$1,500,000 or $.15 per unit, as of January 1, 1993. The benefit is included
under the caption "Cumulative Effect of Accounting Change" in the Consolidated
Statement of Income.
(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.
During 1994, the Company continued to make progress in completing the
objectives it set forth in its restructuring. New or amended loan agreements
have been executed for all loans which required restructuring. 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. Signet Bank is considering the Company's proposal to reduce the
collateral release prices in exchange for additional land as collateral. Based
on discussions with the bank, management expects the loan to be extended to
December 31, 1995, but the documents for the extension and modification of the
release prices will not be executed by the August 13, 1994 maturity date.
13
Working capital for overhead and other cash needs in 1994 is expected to
be met through property management fees, current sales proceeds in excess of
release payments on debt and the additional proceeds to be available under the
proposed Signet modification.
If IGC's pending request for an extension and modification of the Signet
bank debt is granted, and IGC continues to generate lot sales consistent with
or in excess of 1993 levels, the proceeds of financing together with cash from
operations will, in the opinion of IGC management, be adequate to meet IGC's
liquidity requirements.
Additional potential sources of liquidity include cash that could be
generated in 1995 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 $9.3 million and then to NationsBank.
(3) INVESTMENT IN RESIDENTIAL RENTAL PARTNERSHIPS
As of June 30, 1994, IGC manages and is a general partner in 29 real
estate partnerships which own 32 apartment projects in Puerto Rico, Maryland,
Virginia and Washington, D.C. The apartment projects are financed by non-
recourse mortgages. Of the 6,559 rental units in the various partnerships, the
Federal Housing Administration ("FHA") provides subsidies for low and moderate
income tenants in 5,371 units.
The following table summarizes IGC's investment in residential rental
partnerships:
June 30, December 31,
1994 1993
----------- -----------
(Unaudited) (Audited)
(In thousands)
Long-term receivables, net of deferred
income of $3,939 and $4,101 at
June 30, 1994 and December 31, 1993,
respectively $ 3,011 $ 4,255
Other receivables, net of reserves of
$856 as of June 30, 1994 and $953
as of December 31, 1993 1,245 1,377
Investment in partnerships 6,526 9,321
------- -------
$10,782 $14,953
======= =======
14
The combined condensed statements of income and the combined condensed
statements of cash flow for the six month period ended June 30, 1994 and 1993,
and the combined condensed balance sheets as of June 30, 1994 and December 31,
1993 are shown below for the partnerships owning residential rental properties:
HOUSING PARTNERSHIPS'
COMBINED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended June 30,
----------------------------
1994 1993 (1)
----------- -----------
(In thousands)
Revenues $20,989 $22,097
------- -------
Operating expenses
Depreciation 3,223 3,393
Other 16,981 18,499
------- -------
20,204 21,892
------- -------
Net income $ 785 $ 205
======= =======
(1) The income and expenses of Fox Chase Apartments General Partnership
("Fox Chase") and New Forest Apartments General Partnership ("New
Forest") for the six months ended June 30, 1993 are included above.
The operations of these partnerships for the six months ended June
30, 1994 are consolidated with the Company's other operations in
IGC's consolidated Statement of Income.
15
HOUSING PARTNERSHIPS'
COMBINED CONDENSED BALANCE SHEETS
(Unaudited)
A S S E T S
June 30, December 31,
1994 1993
----------- -----------
(In thousands)
Rental apartments, at cost $241,164 $240,554
Accumulated depreciation (78,662) (75,493)
-------- --------
162,502 165,061
-------- --------
Restricted cash and marketable securities:
Residual receipt accounts 6,063 18,781
Replacement reserves and escrows 9,760 10,320
-------- --------
Total restricted cash and marketable securities 15,823 29,101
Cash and certificates of deposit 4,154 18,862
-------- --------
Total cash and marketable securities 19,977 47,963
-------- --------
Other assets 4,491 4,084
-------- --------
Total assets $186,970 $217,108
======== ========
LIABILITIES AND PARTNERS' CAPITAL
June 30, December 31,
1994 1993
----------- -----------
(In thousands)
Non-recourse mortgage notes and accrued interest $172,947 $185,099
Loans and interest payable to the Company 18,511 19,660
Other liabilities 3,449 3,949
-------- --------
Total liabilities 194,907 208,708
-------- --------
Partners' capital
Capital contributions, net of distributions 786 17,908
Accumulated deficit (8,723) (9,508)
-------- --------
Total partners' capital (7,937) 8,400
-------- --------
Total liabilities and partners' capital $186,970 $217,108
======== ========
16
HOUSING PARTNERSHIPS'
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
----------------------------
1994 1993 (1)
----------- -----------
(In thousands)
Revenues $20,989 $22,097
------- -------
Cash expenditures
Total expenses 20,204 21,892
Less - Depreciation (3,223) (3,393)
Other non-cash expenses (251) (405)
------- -------
16,730 18,094
Mortgage principal 1,269 760
Capital additions 356 605
------- -------
Total cash expenditures 18,355 19,459
------- -------
Cash flow before distributions $ 2,634 $ 2,638
======= =======
(1) The cash flow activity for Fox Chase and New Forest for the six
months ended June 30, 1993 are included above. These activities for
the six months ended June 30, 1994 are reflected in IGC's
Consolidated Statement of Cash Flow.
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. During
1993 and 1994, four partnerships owning seven apartment projects were released
from these restrictions as part of mortgage refinancings. 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.
Thereafter, IGC generally shares in 50% of cash distributions from operations.
(4) INVESTMENT IN REAL ESTATE VENTURES RELATING TO HORSE RACING
As of June 30, 1994, HDA, a limited partnership that owns the only
thoroughbred race track in Puerto Rico was owned 49% by IGC, 31% by IBC and 20%
by an unaffiliated partnership. The race track facilities are leased to ECOC,
which as of June 30, 1994, was an effectively 29.4% owned non-consolidated
affiliate of IGC.
17
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 pro rata to IGC unitholders.
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 in exchange for ownership
interests of 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. IGC's Board of Directors has authorized IGC to provide up to
$1,250,000 to cover VJC's costs. Deferred costs regarding VJC totalled
$1,202,000 and $593,000 as of June 30, 1994 and December 31, 1993,
respectively.
Equus, including its investment 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 is a special partnership
under Puerto Rico law and partners of such partnerships are not liable for
losses in excess of their capital investment. Due to the costs related to the
refinancing of HDA debt in 1993 and HDA cash distributions, the partners'
capital account is in a deficit position. Also, the Company has announced the
Proposed Distribution of its interest in HDA to its unitholders. As a result
of the deficit position in HDA and the Proposed Distribution, IGC did not
recognize earnings from HDA during the first half of 1994 and does not expect
to recognize any earnings in the future.
Subsequent to June 30, 1994, IGC has completed a series of intermediary
transactions to the Proposed Distribution. On July 21, 1994, the Puerto Rico
Racing Board approved the issuance by HDA of a 15% interest to HDA Management
Corporation ("HDAMC"). The entire equity interest in HDAMC is represented by
warrants issued in December 1993 in connection with the refinancing of HDA
indebtedness. As a result, IGC's, IBC's and the unaffiliated owner's interest
in HDA were diluted to 41.65%, 26.35%, and 17%, respectively.
On August 1, 1994, ECOC was reorganized as a nonstock corporation. As a
result, IGC's ownership interest in ECOC was terminated. This transaction
resulted in no financial impact to the Company.
On August 2, 1994, IBC transferred its entire 26.35% HDA interest and IGC
transferred a 40.65% profits interest in HDA to Equus. Equus was reorganized
as a limited partnership between IGC (holding 99%) and a wholly owned
subsidiary (holding 1%). IBC contributed its 38% interest in Equus to IGC.
On August 12, 1994, Equus filed a registration statement with the
Securities and Exchange Commission ("SEC") relating to the distribution by IGC
of 10,100,000 Units representing in the aggregate a 99% limited partnership
interest in Equus. IGC expects to complete the Proposed Distribution when the
Equus registration statement is declared effective by the SEC.
18
HDA's condensed balance sheets as of June 30, 1994 and December 31, 1993
and the condensed statements of income for the six month period ended June 30,
1994 and 1993 are shown as follows:
HDA
CONDENSED BALANCE SHEET
(Unaudited)
June 30, December 31,
1994 1993
----------- -----------
(In thousands)
Assets
Cash $ 3,551 $ 1,886
Leased property, less accumulated
depreciation of $6,919 and
$6,157 at June 30, 1994 and
December 31, 1993, respectively 41,920 42,267
Receivables from LDA 13,217 12,690
Other assets 4,337 4,308
------- -------
$63,025 $61,151
======= =======
Liabilities and partners' deficit
Accounts payable and accrued liabilities $ 413 $ 669
Debt-third parties 66,028 65,960
------- -------
66,441 66,629
------- -------
Partners' deficit
Capital contribution 1,914 1,914
Accumulated deficit (2,346) (4,892)
Distributions to partners (2,984) (2,500)
------- -------
(3,416) (5,478)
------- -------
$63,025 $61,151
======= =======
19
HDA
CONDENSED STATEMENT OF INCOME
(Unaudited)
Six Months Ended June 30,
----------------------------
1994 1993
----------- -----------
(In thousands)
Revenues
Rental income $ 7,227 $ 6,293
Equity in earnings of ECOC -- 755
Interest income 581 188
------- -------
7,808 7,236
------- -------
Expenses
General and administrative 184 364
Depreciation and amortization 1,005 877
Interest 4,073 2,792
------- -------
Total expenses 5,262 4,033
------- -------
Net income $ 2,546 $ 3,203
======= =======
The race track facilities owned by HDA are leased to ECOC, an effectively
29.4%-owned non-consolidated affiliate of IGC until August 1, 1994. The lease
agreement requires ECOC to pay annual rent of the greater of 25% of the race
track commissions ("Basic Rent") or $7.5 million with annual adjustments based
on any increase in the Consumer Price Index from 1989 ("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 are unchanged. However, ECOC is obligated to pay
additional fixed rent ("Fixed Rent") of $150,000 in 1994, $400,000 annually in
1995 through 1998 and $1.3 million in 1999.
20
(5) 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 June 30, December 31,
Description by Lender Date Rate 1994 1993
- - ------------------------- -------------- -------- ------------ ------------
(In thousands)
Non-recourse debt:
Purchase money Various from
mortgages (6) 10-01-94 to
05-03-97 (3) 9% $ 670 $ 670
Community Development
Administration (10) 06-01-16 10.3% 4,031 4,055
Community Development
Administration (10) 10-01-27 9.575% 6,404 6,417
Community Development
Administration (10) 10-01-28 9.875% 11,965 11,985
Supra & Co. (minority
partner in LDA) None (1) 1,794 2,092
-------- --------
Total non-recourse 24,864 25,219
-------- --------
Recourse debt:
Banco Popular de P.R. Paid Paid -- 5,420
Branch Banking & Paid Paid -- 56
Trust
1st National Paid Paid -- 150
St. Mary's
Citibank (12) Demand (2) 1,742 1,857
NationsBank (6,8,13) 05-31-95 Prime 1,133 1,353
+ 1.5%
NationsBank (6,8,13) 05-31-95 Prime 5,646 6,013
+ 1.5%
Purchase money Various from 9%-12% 2,211 2,362
mortgages (6) 09-24-95 to
04-01-98
Washington Savings (6) 12-27-95 8% 700 656
Signet Bank (7) 08-13-94 (5) Prime 8,746 11,508
+ 2%
Wachovia Bank & Trust 07-31-95 (11) Prime 347 347
(6,8) + .5%
NationsBank (6,8,13) 05-01-95 Prime 7,785 7,774
+ 1%
FDIC (6,8,13) 09-30-96 Prime 9,306 10,993
+ 1%
Banco Central
Hispano (6) 12-31-97 (4) 4,150 6,400
Wachovia Bank & Trust Various from Prime 93 95
(8) 04-26-00 to + 1%
10-25-00
21
Stated
Maturity Interest June 30, December 31,
Description by Lender Date Rate 1994 1993
- - ------------------------- -------------- -------- ------------ ------------
Various (6,9,14) Various from Various 821 758
08-19-94 to
02-28-98
-------- --------
Total recourse 42,680 55,742
-------- --------
Total debt $ 67,544 $ 80,961
======== ========
Balance Sheet Classification
- - ----------------------------
Mortgage and notes payable - Recourse debt $ 412 $ 428
Related to community development -
Non-recourse debt 2,464 2,762
Recourse debt 37,510 50,137
Related to homebuilding projects - Recourse debt 3,016 3,320
Related to investment properties -
Recourse debt 1,742 1,857
Non-recourse debt 22,400 22,457
-------- --------
Total debt $ 67,544 $ 80,961
======== ========
(1) At June 30, 1994, the interest rate is 2.5% over the prime rate (9.75%).
On December 31, 1993, the interest rate was the 936 rate plus 3%
(6.321%).
(2) The interest rate is not fixed to maturity and is renegotiated on a
periodic basis. The interest rate was 6.43% on June 30, 1994 and 5.15%
on December 31, 1993.
(3) Purchase money mortgages of $.7 million due one lender are past due and
will be satisfied by giving the note holder a deed in lieu of payment.
(4) Interest rate is 936 rate plus 3%, with minimum of 6% and maximum of 9%.
The rate at June 30, 1994 and December 31, 1993 was 7.55% and 6.55%,
respectively.
(5) The Company was in technical default on this loan as it has not met
certain minimum sales requirements as of June 30, 1994. However, the
bank has agreed to formally waive this technial default. Based on
discussions with the bank, management expects the loan to be extended to
December 31, 1995, but the loan extension will not be executed prior to
the maturity date.
(6) Collateralized with land and improvements.
(7) Collateralized with land and housing.
(8) Collateralized with receivables.
(9) Collateralized with land and building.
22
(10) These loans are FHA mortgages on apartment projects.
(11) The Company's total tangible partners' capital is below the minimum limit
as specified in the financial covenants of the loan agreement.
(12) Collateralized with a letter of credit.
(13) Collateralized by investments in partnerships.
(14) Collaterlized by property, plant and equipment.
(6) RELATED PARTY TRANSACTIONS
During the first six months in 1994 and 1993, IGC paid or accrued $50,000
and $46,000, respectively, to reimburse the managing general partner for
director's meeting fees and expenses. At June 30, 1994 and 1993, $40,000 and
$250,000, 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 (1) assumed IGC's obligation to provide future funding of
operating advances, (2) indemnified IGC against any liability resulting from
certain letters of credit and liabilities regarding Chastleton and (3)
purchased from IGC for $1.9 million receivables of $2.1 million due from
Chastleton. This transaction in 1990 resulted in a gain to IGC of $884,000,
which was equal to the collection of loans reserved in prior years by IGC. Of
the $1.9 million, IBC paid IGC $300,000 in cash, $404,000 in mortgage
receivables, and the balance by a demand note. The outstanding balance,
including interest accrued on the demand note secured by certain real estate
parcels, was $692,000 and $680,000 at June 30, 1994 and December 31, 1993,
respectively, of which $329,000 and $317,000, respectively, are reserved until
paid. In addition, as part of IBC's purchase, IGC and IBC agreed that IGC
would continue to manage the project and subordinate 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 June 30, 1994 and December 31, 1993, Chastleton owed approximately
$336,000 and $311,000, respectively of management fees and other receivables,
which $243,000 and $211,000, 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
23
property management services under the same terms as previously provided to
IBC, including management fees which are 3.5% of rental income. During the six
months ended June 30, 1994 and 1993, property management fees for these
affiliates were approximately $77,000 and $71,000, respectively. During the
six months ended June 30, 1994 and 1993, IGC earned $-0- and $125,000,
respectively, from IBC for development fees for the Doral Building and the
Santa Maria expansion project which were under construction in Puerto Rico.
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 two through five. Rental expense for the
executive office and certain other property leased from affiliates in Puerto
Rico was $103,000 and $102,000 during the six months ended June 30, 1994 and
1993, 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
("CP"), 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. In May 1994, this partnership refinanced a substantial
portion of its debt and executed a new property management agreement with IGC.
The initial term of the agreement is two years, and provides for fees of 3.5%
of annual gross collections, plus $6,000 monthly to cover documented expenses
incurred in the management of the project. IGC also simultaneously entered
into a consulting agreement with CP obligating IGC to pay a monthly fee equal
to 1% of gross collections. As of June 30, 1994 and 1993, IGC earned fees of
approximately $134,000 and $111,000, respectively. As of June 30, 1994,
$29,000 of these fees, and other reimbursements of allocated costs were owed by
CP.
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. As of June 30, 1994 and 1993, IGC earned fees of
approximately $12,000 and $11,000, respectively. At June 30, 1994, unpaid
management fees and operating deficit loans due IGC was $439,000 of which
$293,000 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 the first six
months ended June 30, 1994 and 1993, property management fee income from these
affiliates was approximately $96,000 and $90,000, respectively. During the
first six months ended June 30, 1994 and 1993, IGC earned $-0- and $63,000,
respectively, from IBC for development fees for the Village Lake Apartment
project. As of June 30, 1994, $340,000 of management fees and other allocated
costs were unpaid by these affiliates of which $336,000 was reserved.
24
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.
During the first six months ended June 30, 1994 and 1993, IGC's annual rent for
its share of the leases were approximately $96,000 and $94,000, respectively.
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 continued to hold the remaining 20% interest. The
purchase price consisted of a $10,000 cash payment, a $121,000 note payable by
IBC out of distributions from HDA and certain covenants of IBC. In April 1994,
$103,000 was collected, and in August 1994 the remaining balance was collected.
As a result of this transaction, the assets and liabilities of HDA are no
longer consolidated with those of IGC. Effective July 21, 1994, IBC's and
IGC's interests in HDA were diluted to 26.35% and 41.65%, respectively. (See
Note 4 to Financial Statements.)
In September 1993, IGC and IBC 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's Board of Directors has
authorized IGC to fund up to $1,250,000 of VJC's costs. Deferred costs
regarding VJC as of June 30, 1994 totaled approximately $1,202,000. On August
2, 1994, IBC transferred its entire 26.35% HDA interest and IGC transferred a
40.65% profits interest in HDA to Equus. Equus was reorganized as a limited
partnership between IGC (holding 99%) and a wholly owned subsidiary (holding
1%). IBC contributed its 38% interest in Equus to IGC.
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
million ($218,000 cash down payment and a five-year note of $874,000 requiring
quarterly payments of $22,000 and a balloon payment of the balance on September
28, 1994). The outstanding balance of the note and interest as of June 30,
1994 was $516,000. This note was originally secured by the 5.01-acre site. 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
$1.7 million 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 collected by IGC.
Pursuant to the agreement, in order to enhance the ultimate liquidity of the
Company's receivables from SVA, the Company has had the right since 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. To
date, the Company has not exercised the SVA Repurchase. The receivable was
$4.3 million including accrued interest at June 30, 1994, of which $2.5 million
was reserved.
25
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 the first six months of 1994 and 1993 were $128,000
and $315,000, respectively.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The real estate industry is cyclical, and is especially sensitive to
fluctuations in economic activity and movements in interest rates. Sales of
new homes are affected by market conditions for rental properties and by the
condition of the resale market for used homes, including foreclosed homes in
certain cities as well as the competitive supply of other new homes for sale.
An oversupply of rental real estate depresses rents and reduces incentives for
renters to purchase homes. An oversupply of resale units depresses prices and
reduces the margins available on sales of new homes. In addition, the slowing
of the economy and its impact on consumer spending, particularly in over built
markets, can adversely impact construction activity and demand for housing.
However, entry level housing has traditionally not been as negatively
influenced since financing has been readily available to individuals with small
amounts of capital.
The Company's homebuilding and community development sales are greatly
influenced by consumer confidence, housing demand, prevailing market interest
rates, movements in such rates and expectations about future rates. Even
though the long-term interest rates have increased slightly since 1993 when
they declined to their lowest level in approximately 20 years, entry-level
housing remains affordable to homebuyers. As part of the Company's restructure
plan, certain subdivision homebuilding projects were transferred to the
community development division for lot sales to other builders. As a result,
the Company experienced increased lot sales and a decrease in subdivision home
sales.
The following discussion and analysis covers changes in the results of
operations for the six and three months ended June 30, 1994 as compared to the
results of the six and three months ended June 30, 1993.
SIX MONTHS ENDED JUNE 30, 1994 AND 1993
Revenues. Revenues for the six months ended June 30, 1994 increased 49%
to $35.2 million from $23.6 million in the prior comparable period primarily
due to an increase in commercial lot sales, increase in revenues from
investment properties and the impact of the consolidation of two apartment
project partnerships.
27
Lot sales increased to $16.7 million for the six months ended June 30,
1994 from $7.1 million for the same period in 1993. The increase in 1994 is
primarily attributable to the settlement of a shopping center site in Puerto
Rico and an increase in single-family residential lot sales, offset in part by
a decrease in townhome lot sales. Lot sales are summarized as follows:
Six Months Ended
June 30,
----------------------
1994 1993
---- ----
(In thousands)
Industrial/Commercial lots
Commercial:
U.S. (8 acres in 1994, 11 acres in 1993) $ 799 $2,350
Puerto Rico (62 acres) 12,000 --
Puerto Rico
Recognition of deferred income 123 250
Residential lots
St. Charles
Single-family lots (57 in 1994, 36 in 1993) 2,683 1,662
Townhome lots (59 in 1993) -- 1,479
Montclair
Townhome lots
Developed (9 in 1994, 23 in 1993) 335 801
Semi-developed (44 in 1994) 485 --
Condominium lots (45 in 1993) -- 378
Westbury single-family lots (10 in 1994, 2 in 1993) 263 55
U.S. undeveloped land 31 162
------- ------
$16,719 $7,137
======= ======
Average residential lot sales price
St. Charles
Single-family lot $ 47 $ 46
Townhome lot -- 25
Montclair
Townhome lot
Developed 37 35
Semi-developed 11 --
Condominium lot -- 8
Westbury lot 26 28
28
Home sales decreased 7.4% to $10.0 million for the six months ended June
30, 1994 from $10.8 million for same period of 1993. The decrease is
summarized as follows:
Six Months Ended June 30, 1994
----------------------------------
Average
Sales Sales Units
Revenue Prices Closed Backlog
------- ------- ------ -------
(In thousands)
Home Sales
Subdivision
St. Charles, MD $ 3,860 $148 26 20
Lexington Park, MD 162 81 2 --
Montclair, VA 118 118 1 --
Scatter-Site (excludes lots) 5,865 81 72 132
------- --- ---
$10,005 $ 99 101 152
======= === ===
Six Months Ended June 30, 1993
----------------------------------
Average
Sales Sales Units
Revenue Prices Closed Backlog
------- ------- ------ -------
(In thousands)
Home Sales
Subdivision
St. Charles, MD $ 5,683 $132 43 26
Lexington Park, MD 93 93 1 1
Montclair, VA 1,271 127 10 4
Scatter-Site (excludes lots) 3,751 75 50 140
------- --- ---
$10,798 $104 104 171
======= === ===
The decrease in the subdivision homebuilding division is primarily due to
the Company's increased lot sale efforts that reduced the product available for
sale and to increased competition. This decrease was substantially offset by
the increased scatter-site sales that were a result of the Company's expansion
into new geographic locations.
29
Revenues from investment properties, management fees and other income
increased to $8.4 million for the six months ended June 30, 1994 from $5.6
million in the same period of 1993. These changes are summarized below:
Six Months Ended
June 30,
-----------------------------
1994 1993
---- ----
(In thousands)
Revenues from investment properties-
Investment in partnerships $4,255 $1,425
Equity in income of HDA -- 1,436
Management fees 1,876 2,063
Apartment rental income 2,158 408
Interest and other income 187 300
------ ------
$8,476 $5,632
====== ======
Revenues from investment in partnerships during the six months ended June
30, 1994 increased to $4.3 million from $1.4 million for the same period in
1993 primarily due to distributions received from a partnership owning four
Puerto Rico apartment projects that were refinanced. This partnership
qualifies as a Puerto Rico special partnership and, as such, partners are not
liable for losses in excess of their capital investment. Cash flow
distributions received on this investment reduced the carrying value to zero
and additional distributions have been recognized as revenue.
HDA is also a special partnership and therefore IGC is not liable for
losses in excess of its capital investment. Due to the costs related to the
refinancing of HDA debt in 1993 and HDA cash distributions, the partners'
capital accounts are in a deficit position. Also, the Company has announced
the Proposed Distribution of its interest in HDA to its unitholders. As a
result of the deficit position of HDA and the Proposed Distribution, IGC did
not recognize earnings from HDA during the first six months of 1994 and does
not expect to recognize any earnings in the future. During the first six
months of 1993, $1.4 million of equity in earnings of HDA was recorded.
Revenues from management fees decreased due to the reduced HDA management
fee and decreased refinance fees earned in the 1993 period with no similar fee
earned during the 1994 comparable period. This decrease was offset in part by
recognition of a developers fee in the 1994 period.
During August 1993, the partnerships owning the New Forest and Fox Chase
Apartment complexes purchased the unaffiliated party's 50% partnership
interests thereby increasing IGC's interest in these partnerships from 40% to
90%. Prior to these purchases, the Company accounted for these partnership
interests under the equity method. The Company's June 30, 1994 consolidated
financial statements include the operations of New Forest and Fox Chase.
30
GROSS PROFITS FROM COMMUNITY DEVELOPMENT AND HOMEBUILDING.
Gross profit margins from community development increased to 36% from 30%
primarily due to reduced period costs absorbed by increased lot sales. Gross
profits from community development are summarized as follows:
Six Months Ended June 30, 1994
---------------------------------------
Gross
Cost of Gross Profit
Sales Sales Profit Margins
----- ------- ------ -------
(In thousands)
Industrial/Commercial lots
Commercial:
U.S. $ 799 $ 238 $ 561 70%
Puerto Rico 12,000 7,581 4,419 37%
Puerto Rico
Recognition of deferred income 123 20 103 84%
U.S. Residential lots
St. Charles
Developed single-family lots 2,683 1,488 1,195 45%
Montclair
Townhome lots
Developed 335 301 34 10%
Semi-developed 485 431 54 11%
Westbury single-family lots 263 249 14 5%
U.S. undeveloped land 31 -- 31 100%
------- ------- ------
Gross profit before period costs 16,719 10,308 6,411 38%
Period costs -- 363 (363) --
------- ------- ------
$16,719 $10,671 $6,048 36%
======= ======= ======
31
Six Months Ended June 30, 1993
---------------------------------------
Gross
Cost of Gross Profit
Sales Sales Profit Margins
----- ------- ------ -------
(In thousands)
Industrial/Commercial lots
U.S. $2,350 $ 978 $1,372 58%
Puerto Rico
Recognition of deferred income 250 40 210 84%
U.S. Residential lots
St. Charles
Developed single-family lots 1,662 1,019 643 39%
Developed townhome lots 1,479 965 514 35%
Montclair
Townhome lots - developed 801 773 28 4%
Condominium lots 378 361 17 5%
Westbury single-family lots 55 53 2 4%
U.S. undeveloped land 162 162 -- --
------ ------ ------
Gross profit before period cots 7,137 4,351 2,786 39%
Period costs -- 667 (667) --
------ ------ ------
$7,137 $5,018 $2,119 30%
====== ====== ======
Gross profits from homebuilding operations for the six months ended June
30, 1994 and 1993 are summarized as follows:
Six Months Ended June 30, 1994
------------------------------------
Subdivision Scatter-Site Total
----------- ------------ ------
Home sales $ 4,140 $ 5,865 $10,005
Cost of sales excluding marketing 3,647 5,426 9,073
------- ------- -------
Gross profits before selling and
marketing costs $ 493 $ 439 $ 932
======= ======= =======
Gross profit margins 12% 7% 9%
32
Six Months Ended June 30, 1993
------------------------------------
Subdivision Scatter-Site Total
----------- ------------ ------
Home sales $ 7,047 $ 3,751 $10,798
Cost of sales excluding marketing 5,812 3,493 9,305
------- ------- -------
Gross profits before selling and
marketing costs $ 1,235 $ 258 $ 1,493
======= ======= =======
Gross profit margins 18% 7% 14%
Gross profits as a percentage of homebuilding revenues for a particular
period are a function of various factors including pricing, efficiency of
homebuilding operations, financing costs (including costs of subsidizing
customer financing, if any) and differences in gross profit margins between the
homebuilding divisions. The lower margins in 1994 are primarily due to
increased direct costs without a proportionate increase in sales prices and the
change in the mix of sales between subdivision and scatter-site homebuilding
divisions. The subdivision margin, usually higher, includes profit on land
with a below market basis previously held in the community development
inventory, whereas the scatter-site sales consist solely of the homes.
Other Expenses. The other expenses for the six months ended June 30, 1994
and 1993 were as follows:
1994 1993
---------- ----------
Selling and marketing $ 680 $ 571
General and administrative 3,903 4,091
Depreciation and amortization 307 280
Interest expense 1,093 983
Rental apartment expense 2,173 441
------ ------
$8,156 $6,366
====== ======
Selling and marketing expenses, general and administrative expense,
depreciation and amortization and interest expense during the 1994 and 1993
periods were generally comparable. Rental apartment expense in 1994 includes
the expenses of New Forest and Fox Chase which were not consolidated in the
1993 period. The Company's share of these partnership losses were previously
accounted for on the equity method (see Note 3).
Provision for Income Tax. The provision for Puerto Rico income taxes
during the six months ended June 30, 1994 increased to $2.8 million compared to
$.5 million during the first six months of 1993 primarily due to taxable income
resulting from distributions received from partnerships in Puerto Rico that
refinanced their apartment projects and the profits from the sale of the
shopping center site. The implementation of SFAS No. 109 generated a $1.5
million Puerto Rico income tax benefit reported in 1993 as a cumulative effect
of accounting change.
Minority Interest. The minority partner interest increased during the six
months ended June 30, 1994 primarily as a result of the minority partner's 20%
interest in the profit related to the settlement by LDA of the sale of a
shopping center site in Puerto Rico.
33
Net Income. As a result of changes in revenue and expenses discussed
above, net income for the six months ended June 30, 1994 increased to $3.8
million from $2.3 million before the $1.5 million beneficial effect of the
accounting change during the comparable period of 1993.
THREE MONTHS ENDED JUNE 30, 1994 AND 1993
Revenues. Revenues for the three months ended June 30, 1994 increased 65%
to $22.6 million from $13.7 million in the prior comparable period primarily
due to an increase in commercial lot sales and the impact of the consolidation
of two apartment project partnerships reflected in the 1994 quarter.
Lot sales increased to $14.7 million for the three months ended June 30,
1994 from $4.7 million for the same period in 1993. The increase in 1994 is
primarily attributable to the settlement of the sale of a shopping center site
in Puerto Rico and an increase in single-family residential lot sales, offset
in part by a decrease in townhome lot sales and U.S. commercial lot sales. Lot
sales are summarized as follows:
Three Months Ended
June 30,
----------------------
1994 1993
---- ----
(In thousands)
Industrial/Commercial lots
Commercial:
U.S. (1 acre in 1994, 11 in 1993) $ 175 $2,350
Puerto Rico (62 acres in 1994) 12,000 --
Puerto Rico
Recognition of deferred income -- 125
Residential lots
St. Charles
Single-family lots (41 in 1994, 23 in 1993) 1,924 1,071
Townhome lots (10 in 1993) -- 258
Montclair
Townhome lots - developed (9 in 1994, 16 in 1993) 335 559
Condominium lots (45 in 1993) -- 378
Westbury single-family lots (8 in 1994) 211 --
U.S. undeveloped land 31 --
------- ------
$14,676 $4,741
======= ======
Average residential lot sales price
St. Charles
Single-family lot $ 47 $ 47
Townhome lot -- 26
Montclair
Townhome lot - developed 37 35
Condominium lot -- 8
Westbury lot 26 --
34
Home sales decreased 19% to $5.1 million for the three months ended June
30, 1994 from $6.3 million for same period of 1993. The decrease is summarized
as follows:
Three Months Ended June 30, 1994
----------------------------------
Average
Sales Sales Units
Revenue Prices Closed Backlog
------- ------- ------ -------
(In thousands)
Home Sales
Subdivision
St. Charles, MD $ 2,028 $145 14 20
Lexington Park, MD 162 81 2 --
Montclair, VA 118 118 1 --
Scatter-Site (excludes lots) 2,748 86 32 132
------- --- ---
$ 5,056 $103 49 152
======= === ===
Three Months Ended June 30, 1993
----------------------------------
Average
Sales Sales Units
Revenue Prices Closed Backlog
------- ------- ------ -------
(In thousands)
Home Sales
Subdivision
St. Charles, MD $ 3,113 $130 24 26
Lexington Park, MD 93 93 1 1
Montclair, VA 750 125 6 4
Scatter-Site (excludes lots) 2,307 74 31 140
------- --- ---
$ 6,263 $101 62 171
======= === ===
The decrease in the subdivision homebuilding division is primarily due to
the Company's increased lot sale efforts that reduced the Company's product
available for sale and to increased competition.
35
Revenues from investment properties, management fees and other income
increased to $2.9 million for the three months ended June 30, 1994 from $2.7
million in the same period of 1993. These changes are summarized below:
Three Months Ended
June 30,
-----------------------------
1994 1993
---- ----
(In thousands)
Revenues from investment properties-
Investment in partnerships $ 797 $ 574
Equity in income of HDA -- 601
Management fees 907 1,019
Apartment rental income 1,107 408
Interest and other income 88 138
------ ------
$2,899 $2,740
====== ======
During August 1993, the partnerships owning the New Forest and Fox Chase
Apartment complexes purchased the unaffiliated party's 50% partnership
interests thereby increasing IGC's interest in these partnerships from 40% to
90%. Prior to these purchases, the Company accounted for these partnership
interests under the equity method. The Company's June 30, 1994 consolidated
financial statements include the operations of New Forest and Fox Chase.
Because of HDA's status as a special partnership under Puerto Rico law,
IGC is not liable for losses in excess of its capital investment. Due to the
costs related to the refinancing of HDA debt in 1993 and HDA cash
distributions, the partners' capital accounts are in a deficit position. Also,
the Company has announced the Proposed Distribution of its interest in HDA to
its unitholders. As a result of the deficit position of HDA and the Proposed
Distribution, IGC did not recognize earnings from HDA during the three months
ended June 30, 1994 and does not expect to recognize any earnings in the
future. During the three months ended June 30, 1993, $.6 million of equity in
earnings of HDA was recorded.
Revenues from management fees decreased due to the reduced HDA management
fee in 1994 and a decrease in developer fees recognized in the 1994 period as
compared to the 1993 period.
36
GROSS PROFITS FROM COMMUNITY DEVELOPMENT AND HOMEBUILDING.
Gross profits from community development increased to 36% from 34%
primarily due to a greater percentage of the lot sales during the three months
ended June 30, 1993 from U.S. commercial lots which typically produce a higher
gross margin, offset in part by reduced period costs in 1994 period absorbed by
increased lot sales. Gross profits from community development are summarized
as follows:
Three Months Ended June 30, 1994
---------------------------------------
Gross
Cost of Gross Profit
Sales Sales Profit Margins
----- ------- ------ -------
(In thousands)
Industrial/Commercial lots
Commercial:
U.S. $ 175 $ 57 $ 118 67%
Puerto Rico 12,000 7,581 4,419 37%
U.S. Residential lots
St. Charles
Developed single-family lots 1,924 1,104 820 43%
Montclair
Townhome lots - developed 335 301 34 10%
Westbury single-family lots 211 199 12 6%
U.S. undeveloped land 31 -- 31 100%
------- ------ ------
Gross profit before period costs 14,676 9,242 5,434 37%
Period costs -- 203 (203) --
------- ------ ------
$14,676 $9,445 $5,231 36%
======= ====== ======
37
Three Months Ended June 30, 1993
---------------------------------------
Gross
Cost of Gross Profit
Sales Sales Profit Margins
----- ------- ------ -------
(In thousands)
Industrial/Commercial lots
U.S. $2,350 $ 978 $1,372 58%
Puerto Rico
Recognition of deferred income 125 20 105 84%
U.S. Residential lots
St. Charles
Developed single-family lots 1,071 700 372 35%
Developed townhome lots 258 171 87 34%
Montclair
Townhome lots - developed 559 538 21 4%
Condominium lots 378 361 17 5%
------ ------ ------
Gross profit before period costs 4,741 2,768 1,974 42%
Period costs -- 374 (374) --
------ ------ ------
$4,741 $3,142 $1,600 34%
====== ====== ======
Gross profits from homebuilding operations for the three months ended June
30, 1994 and 1993 are summarized as follows:
Three Months Ended June 30, 1994
------------------------------------
Subdivision Scatter-Site Total
----------- ------------ ------
Home sales $ 2,308 $ 2,748 $ 5,056
Cost of sales excluding marketing 2,184 2,600 4,784
------- ------- -------
Gross profits before selling and
marketing costs $ 124 $ 148 $ 272
======= ======= =======
Gross profit margins 5% 5% 5%
Three Months Ended June 30, 1993
------------------------------------
Subdivision Scatter-Site Total
----------- ------------ ------
Home sales $ 3,956 $ 2,307 $ 6,263
Cost of sales excluding marketing 3,312 2,132 5,444
------- ------- -------
Gross profits before selling and
marketing costs $ 644 $ 175 $ 819
======= ======= =======
Gross profit margins 16% 8% 13%
38
The lower margins in 1994 are primarily due to increased direct and
indirect costs without a proportionate increase in sales price, warranty work
performed on a closed project in Puerto Rico and the change in the mix of sales
between subdivision and scatter-site homebuilding divisions. The subdivision
margin, usually higher, includes profit on land with a below market basis
previously held in the community development inventory, whereas the scatter-
site sales consist solely of the homes.
Other Expenses. The other expenses for the three months ended June 30,
1994 and 1993 were as follows:
1994 1993
---------- ----------
Selling and marketing $ 396 $ 319
General and administrative 1,998 2,055
Depreciation and amortization 162 125
Interest expense 628 475
Rental apartment expense 1,053 441
------ ------
$4,237 $3,415
====== ======
Selling and marketing expense, general and administrative expenses,
depreciation and amortization and interest expense during the 1994 and 1993
periods were generally comparable. Rental apartment expense in 1994 includes
the expenses of New Forest and Fox Chase which were not consolidated in the
1993 period. The Company's share of these partnership losses were previously
accounted for on the equity method (see Note 3).
Provision for Income Tax. The provision for income taxes during the three
months ended June 30, 1994 increased to $1.8 million compared to $.2 million in
the three months ended June 30, 1993 due to taxable income resulting primarily
from the profit earned on the shopping center site sale in Puerto Rico.
Minority Interest. The minority partner interest increased during the
three months ended June 30, 1994 as a result of the minority partner's 20%
interest in the profit related to the settlement by LDA of the sale of a
shopping center site in Puerto Rico.
Net Income. As a result of changes in revenue and expenses discussed
above, net income for the three months ended June 30, 1994 increased to $1.7
million from $1.5 million during the comparable 1993 period.
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.
During 1994, the Company continued to make progress in completing the
objectives it set forth in its restructuring. New or amended loan agreements
have been executed for all loans which required restructuring. 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
39
requirements. Signet Bank is considering the Company's proposal to reduce the
collateral release prices in exchange for additional land as collateral. Based
on discussions with the bank, management expects the loan to be extended to
December 31, 1995, but the documents for the extension and modification of the
release prices will not be executed by the August 13, 1994 maturity date.
Working capital for overhead and other cash needs in 1994 is expected to
be met through property management fees, current sales proceeds in excess of
release payments on debt and the additional proceeds to be available under the
proposed Signet modification.
If IGC's pending request for an extension and modification of the Signet
bank debt is granted, and IGC continues to generate lot sales consistent with
or in excess of 1993 levels, the proceeds of financing together with cash from
operations will, in the opinion of IGC management, be adequate to meet IGC's
liquidity requirements.
Additional potential sources of liquidity include cash that could be
generated in 1995 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 $9.3 million and then to NationsBank.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 22, 1993, the Company filed suit against the County
Commissioners of Charles County, Maryland in the Circuit Court for Charles
County seeking compensation for a school site that it had deeded to the County
on June 26, 1990. The Company seeks a minimum of $3.2 million, equal to the
fair market value of the school site. The action seeks to enforce an agreement
settling litigation between the parties that was entered into in 1989. Under
the terms of that agreement, the County agreed to credit the Company for school
sites contributed and also agreed to refund to the Company any excess school
impact fees paid. The County Commissioners and IGC requested a partial summary
judgment and the hearing was held on September 17, 1993. The Court recently
granted the County's partial summary judgment motion and directed the Company
to file its suit for compensation in the Maryland Tax Court. The Company has
appealed that decision in the Court of Special Appeals of Maryland and filed
for relief in the Maryland Tax Court.
In a separate proceeding, the Company filed suit in 1990 against the
County Commissioners in the Circuit Court for Charles County to enforce a
related settlement agreement that required the County to conduct an appropriate
water and sewer connection fee study. On June 22, 1992, judgment was rendered
in favor of the Company. The judgment required the County to conduct the
appropriate water and sewer connection fee study and set fees for St. Charles
in accordance with that study. The County has appealed the judgment to the
40
Court of Special Appeals of Maryland, and has also sought reconsideration of
the judgment from the Circuit Court. On April 26, 1994, the Circuit Court for
Charles County, Maryland denied the County's Motion to Alter or Amend the
Judgment. The County has appealed that decision in the Court of Special
Appeals of Maryland.
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 has convened a grand jury and is now conducting an investigation
of the Company's wetlands practices in St. Charles including the Site. 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.
ITEM 5. OTHER INFORMATION
None.
41
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Securities and Exchange Commission Section
601 of Regulation S-K.
Exhibit
No. Description of Exhibit Reference
- - ------- ----------------------------------------- --------------------------
10(a) Employment Agreement with Edwin L. Filed herewith
Kelly dated May 20, 1994
10(b) Fourth Amended and Restated Filed herewith
Partnership Agreement of Housing
Development Associates S.E. dated as
of July 21, 1994
10(c) Fifth Amended and Restated Filed herewith
Partnership Agreement of Housing
Development Associates S.E. dated
August 1, 1994
10(d) Limited Partnership Agreement of Filed herewith
Equus Gaming Company L.P. dated
August 1, 1994
10(e) First Amendment to the Limited Filed herewith
Partnership Agreement of Equus Gaming
Company L.P. dated August 1, 1994
10(f) Second Amendment to the Limited Filed herewith
Partnership Agreement of Equus Gaming
Company L.P. dated August 1, 1994
(b) Reports on Form 8-K
Form 8-K filed June 2, 1994 reporting the agreement between the
Registrant and NationsBank to restructure two of the Registrant's
loans and the reissuance of Arthur Andersen & Co.'s report, dated May
23, 1994, with respect to Notes 2 and 8 to the Registrant's Financial
Statements for the Years Ended December 31, 1993, 1992 and 1991.
42
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERSTATE GENERAL COMPANY L.P.
-------------------------------
(Registrant)
By: Interstate General Management
Corporation
Managing General Partner
Dated: August 12, 1994 By: /s/ James J. Wilson
--------------- -----------------------------
James J. Wilson
Chairman, President and Chief
Executive Officer
Dated: August 12, 1994 By: /s/ Donald G. Blakeman
--------------- -----------------------------
Donald G. Blakeman
Executive Vice President
43
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- - ------- -------
10(a) Employment Agreement with Edwin L. Kelly dated May 20,
1994.
10(b) Fourth Amended and Restated Partnership Agreement of
Housing Development Associates S.E. dated as of July 21,
1994
10(c) Fifth Amended and Restated Partnership Agreement of Housing
Development Associates S.E. dated August 1, 1994
10(d) Limited Partnership Agreement of Equus Gaming Company L.P.
dated August 1, 1994
10(e) First Amendment to the Limited Partnership Agreement of
Equus Gaming Company L.P. dated August 1, 1994
10(f) Second Amendment to the Limited Partnership Agreement of
Equus Gaming Company L.P. dated August 1, 1994