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 MARCH 31, 1998, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
Commission file number 1-9393
Interstate General Company L.P.
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(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
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(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 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.
10,331,785 Class A Units
------------------------
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 Three Months Ended March 31, 1998 and
1997. (Unaudited) 3
Consolidated Balance Sheets as of March 31, 1998
(Unaudited) and December 31, 1997 (Audited). 4
Consolidated Statements of Cash Flow for the
Three Months Ended March 31, 1998 and 1997.
(Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited). 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Three
Months Ended March 31, 1998 and 1997. 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Material Modifications of Rights of Registrant's 19
Securities
Item 3. Default upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31,
(In thousands, except per unit amounts)
(Unaudited)
1998 1997
---------- ----------
REVENUES
Community development - land sales $ 5,992 $ 1,449
Homebuilding - home sales 2,030 1,895
Equity in earnings from partnerships
and developer fees 505 396
Rental properties revenue 2,209 2,158
Management and other fees, substantially
all from related entities 976 1,343
Interest and other income 246 146
---------- ----------
Total revenues 11,958 7,387
---------- ----------
EXPENSES
Cost of land sales 3,504 943
Cost of home sales 1,834 1,785
Selling and marketing 333 244
General and administrative 1,695 1,661
Interest expense 866 922
Rental properties operating expense 896 835
Depreciation and amortization 493 577
Write-off of deferred project costs -- 5
Spin-off costs 757 --
---------- ----------
Total expenses 10,378 6,972
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST 1,580 415
PROVISION FOR INCOME TAXES 335 112
---------- ----------
INCOME BEFORE MINORITY INTEREST 1,245 303
MINORITY INTEREST (198) (48)
---------- ----------
NET INCOME $ 1,047 $ 255
========== ==========
BASIC NET INCOME PER UNIT $ .10 $ .02
========== ==========
NET INCOME
General Partners $ 10 $ 3
Limited Partners 1,037 252
---------- ----------
$ 1,047 $ 255
========== ==========
WEIGHTED AVERAGE UNITS OUTSTANDING 10,332 10,257
========== ==========
The accompanying notes are an integral part
of these consolidated statements.
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
A S S E T S
March 31, December 31,
1998 1997
----------- -----------
(Unaudited) (Audited)
CASH AND CASH EQUIVALENTS
Unrestricted $ 3,234 $ 2,273
Restricted 2,136 508
-------- --------
5,370 2,781
-------- --------
ASSETS RELATED TO COMMUNITY DEVELOPMENT
Land and development costs
Puerto Rico 30,877 32,918
St. Charles, Maryland 29,124 28,417
Other United States locations 15,197 14,698
Notes receivable on lot sales and other 4,479 6,476
-------- --------
79,677 82,509
ASSETS RELATED TO RENTAL PROPERTIES -------- --------
Operating properties, net of accumulated
depreciation of $21,707 and $21,392, as of
March 31, 1998 and December 31, 1997,
respectively 37,860 37,829
Investment in unconsolidated rental property
partnerships, net of deferred income of
$2,096 and $2,193 as of March 31, 1998 and
December 31, 1997, respectively 7,015 8,657
Other receivables, net of reserves of
$285 and $223 as of March 31, 1998
and December 31, 1997, respectively 858 805
-------- --------
45,733 47,291
-------- --------
ASSETS RELATED TO HOMEBUILDING
Homebuilding construction and land 1,598 1,914
Investment in joint venture 853 591
Receivables and other 102 68
-------- --------
2,553 2,573
OTHER ASSETS -------- --------
Deferred costs regarding waste technology and
other projects, receivables and other 5,218 8,797
Property, plant and equipment, less accumulated
depreciation of $2,365 and $2,460 as of March
31, 1998 and December 31, 1997, respectively 1,068 1,087
-------- --------
6,286 9,884
-------- --------
Total assets $139,619 $145,038
======== ========
The accompanying notes are an integral part
of these consolidated balance sheets.
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
LIABILITIES AND PARTNERS' CAPITAL
March 31, December 31,
1998 1997
----------- ------------
(Unaudited) (Audited)
LIABILITIES RELATED TO COMMUNITY DEVELOPMENT
Recourse debt $ 29,535 $ 35,176
Non-recourse debt 2,324 2,295
Accounts payable, accrued liabilities
and deferred income 4,582 5,245
-------- --------
36,441 42,716
-------- --------
LIABILITIES RELATED TO RENTAL PROPERTIES
Recourse debt 918 969
Non-recourse debt 38,995 39,101
Accounts payable and accrued liabilities 3,663 3,331
-------- --------
43,576 43,401
-------- --------
LIABILITIES RELATED TO HOMEBUILDING
Recourse debt 211 159
Accounts payable and accrued liabilities 2,196 2,501
-------- --------
2,407 2,660
-------- --------
OTHER LIABILITIES
Accounts payable and accrued liabilities 5,893 6,330
Notes payable and capital leases 604 615
Accrued income tax liability - current 2,454 1,541
Accrued income tax liability - deferred 3,909 4,487
-------- --------
12,860 12,973
-------- --------
Total liabilities 95,284 101,750
-------- --------
PARTNERS' CAPITAL
General partners' capital 4,355 4,345
Limited partners' capital-10,332 Units
issued and outstanding as of
March 31, 1998 and December 31, 1997 39,980 38,943
-------- --------
Total partners' capital 44,335 43,288
-------- --------
Total liabilities and partners' capital $139,619 $145,038
======== ========
The accompanying notes are an integral part
of these consolidated balance sheets.
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31,
(In thousands)
(Unaudited)
1998 1997
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,047 $ 255
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 493 577
(Benefit) provision for deferred income taxes (578) 144
Equity in earnings from unconsolidated
partnerships and development fees (243) (417)
Distributions from unconsolidated partnerships 1,750 331
Cost of sales-community development
and homebuilding 5,338 2,728
Homebuilding construction expenditures (1,518) (1,461)
Equity in loss from homebuilding joint venture (262) 21
Write-off of deferred project cost -- 5
Collection of fines 3,212 --
Changes in notes and accounts receivable, due
from affiliates changed $2,887 and $386 2,351 115
Changes in accounts payable, accrued liabilities
and deferred income (160) (47)
------- -------
Net cash provided by operating activities 11,430 2,251
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in land improvements for future sales (2,669) (749)
Change in assets related to unconsolidated
rental property partnerships 135 34
Change in restricted cash (1,628) (126)
(Additions to) disposals of rental operating
properties, net (458) (145)
Acquisitions of other assets, net (121) (296)
Contributions to homebuilding joint venture -- (224)
------- -------
Net cash used in investing activities (4,741) (1,506)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash proceeds from debt financing 1,705 1,289
Payment of debt (7,433) (3,132)
------- -------
Net cash used in financing activities (5,728) (1,843)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 961 (1,098)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,273 2,212
------- -------
CASH AND CASH EQUIVALENTS, MARCH 31, $ 3,234 $ 1,114
======= =======
The accompanying notes are an integral part
of these consolidated statements.
INTERSTATE GENERAL COMPANY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(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's management considers necessary for a fair presentation of the
results of operations for the interim periods. Certain account balances in
the 1997 financial statements have been reclassified to conform to the 1998
presentation. The operating results for the three months ended March 31,
1998 are not necessarily indicative of the results that may be expected for
the year. Net income per Unit is calculated based on weighted average
Units outstanding. Outstanding options, warrants to purchase Units and
Unit Appreciation Rights do not have a material dilutive effect on the
calculation of earnings per Unit and therefore are not presented.
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, 1997.
(2) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
During 1998, IGC adopted the provisions of SFAS No. 130 "Reporting
Comprehensive Income." The adoption of SFAS No. 130 did not have a
material effect on IGC's financial statements.
(3) INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS
Housing Partnerships
The following information summarizes financial data and principal
activities of unconsolidated housing partnerships which the Company
accounts for under the equity method (in thousands).
SUMMARY OF FINANCIAL POSITION: AS OF
------------------------
March 31, December 31,
1998 1997
--------- ------------
Total assets $133,541 $138,840
Total non-recourse debt 144,315 144,595
Total other liabilities 24,778 24,926
Total equity (35,553) (30,681)
Company's investment 7,015 8,657
SUMMARY OF OPERATIONS: FOR THE THREE MONTHS ENDED
--------------------------
March 31, March 31,
1998 1997
----------- -----------
Total revenue $8,002 $8,217
Net (loss) income (324) 151
Company's recognition of equity
in earnings and developer fees 243 417
SUMMARY OF OPERATING CASH FLOWS: FOR THE THREE MONTHS ENDED
--------------------------
March 31, March 31,
1998 1997
----------- -----------
Cash flows from operating activities $2,987 $ 505
Company's share of cash flows from
operating activities 915 349
Operating cash distributions 4,451 509
Company's share of operating cash
distributions 1,750 331
The unconsolidated rental properties partnerships as of March 31, 1998
include 19 partnerships owning 4,563 rental units in 22 apartment complexes
owned by Alturas Del Senorial Associates Limited Partnership, Bannister
Associates Limited Partnership, Bayamon Gardens Associates Limited
Partnership, Brookside Gardens Limited Partnership, Carolina Associates
Limited Partnership, Chastleton Apartments Associates, Coachman's Limited
Partnership, Colinas de San Juan Associates Limited Partnership, Crossland
Associates Limited Partnership, Essex Apartments Associates Limited
Partnership, Huntington Associates Limited Partnership, Jardines de Caparra
Associates Limited Partnership, Lakeside Apartments Limited Partnership,
Monserrate Associates Limited Partnership, Monte de Oro Associates Limited
Partnership, New Center Associates Limited Partnership, San Anton
Associates Limited Partnership, Turabo Limited Dividend Partnership and
Valle del Sol Limited Partnership. The Company holds a general partner
interest in these partnerships and generally shares in zero to 5% of
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. Pursuant to the partnership agreements, the
general partners of the unconsolidated partnerships are prohibited from
selling or refinancing the apartment complexes without majority limited
partner approval. Due to the absence of control and non-majority
ownership, these partnerships are accounted for under the equity method of
accounting.
During 1997, the rental complexes owned by Monte de Oro and New Center
were refinanced to provide distributions to their partners and funds to
convert the rental units into condominiums. Rental revenues significantly
decreased during 1997 and 1998 as the units were vacated in preparation for
conversion. As a result, the combined net income for 1997 was $1,239,000
less than the 1996 net income and the cash flow from operations was
$2,789,000 less in 1997 than the 1996 cash flow from operations.
Homebuilding Joint Venture
The Company holds a 50% joint venture interest in Escorial Builders
S.E. Escorial Builders was formed in 1995 to purchase lots from the
Company and construct homes for resale. It purchased land to construct 118
units in 1997 and land to construct 98 units in 1996. The profit on these
lots are deferred until sold by Escorial Builders to a third party. The
following tables summarize Escorial Builders' financial information (in
thousands):
SUMMARY OF FINANCIAL POSITION: AS OF
------------------------
March 31, December 31,
1998 1997
--------- ------------
Total assets $13,552 $13,374
Total liabilities 11,846 12,191
Total equity 1,706 1,183
Company's investment 853 591
SUMMARY OF OPERATIONS: FOR THE THREE MONTHS ENDED
--------------------------
March 31, March 31,
1998 1997
----------- -----------
Total revenue $2,185 $ --
Net income (loss) 524 (47)
Company's recognition of equity
in earnings (losses) 262 (24)
SUMMARY OF OPERATING CASH FLOWS: FOR THE THREE MONTHS ENDED
--------------------------
March 31, March 31,
1998 1997
----------- -----------
Cash flows from operating activities $ 633 $(3,445)
Company's share of cash flows from
operating activities 316 (1,722)
Operating cash distributions -- --
Company's share of operating cash
distributions -- --
(4) DEBT AND EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT
Debt
The Company's outstanding debt is collateralized primarily by land,
land improvements, housing, receivables, investments in partnerships, and
rental properties. The following table summarizes the indebtedness of IGC
at March 31, 1998 and December 31, 1997 (in thousands):
Outstanding
Maturity Interest ----------------------
Dates Rates (a) March 31, December 31,
From/To From/To 1998 1997
-------- --------- --------- ------------
Related to community development:
Recourse debt Demand/ P+2.5%/ $29,535 $35,176
07-31-04 10.0% (b)
Non-recourse debt 08-02-09 P+1.5% 2,324 2,295
Related to investment properties:
Recourse debt Demand 7.35% 918 969
Non-recourse debt 10-01-19/ 6.85%/ 38,995 39,101
10-01-28 8.5%
Related to homebuilding projects:
Recourse debt Demand P+1% 211 159
General:
Recourse debt Demand P+1.25%/ 604 615
08-01-02 12% ------- -------
Total debt $72,587 $78,315
======= =======
(a) P = Prime lending interest rate.
(b) Approximately $14,536,000 of this debt requires additional
interest payments on each annual anniversary date. The amount
due is 1% of the outstanding balance in 1998 and 1999, and
increases 1/2% each year thereafter, through 2003.
As of March 31, 1998, the $29,535,000 of recourse debt related to
community development assets is fully collateralized by substantially all
of the community development assets. Approximately $14,536,000 of this
amount is further secured by investments in apartment rental partnerships.
As of March 31, 1998, recourse investment property debt is secured by
cash receipts received by the Company pursuant to the terms of a sales
contract. The non-recourse investment properties debt is collateralized by
apartment projects and secured by FHA or the Maryland Housing Fund.
Mortgage notes payable of $7,212,000 have stated interest rates of 7.5% and
7.75%; however, after deducting interest subsidies provided by HUD, the
effective interest rate over the life of the loans is 1%.
The homebuilding debt is secured by three homes under construction.
(5) RELATED PARTY TRANSACTIONS
Certain officers, directors and a general partner, IBC, of the Company
have ownership interests in various entities that conducted business with
IGC during the last two years. The financial impact of the related party
transactions on the accompanying financial statements are reflected below:
Three Months Ended
March 31,
------------------
1998 1997
---- ----
INCOME STATEMENT IMPACT
Management and Other Fees (B)
Unconsolidated subsidiaries $ 639 $1,154
Affiliate of IBC, general partner of IGC 58 54
Affiliate of James Michael Wilson, director,
Thomas B. Wilson, director, and James
J. Wilson, director 38 37
Affiliate of James Michael Wilson, director,
Thomas B. Wilson, director, James J. Wilson,
director, and an Affiliate of IBC, general
partner of IGC 17 12
------ ------
$ 752 $1,257
====== ======
Interest and Other Income
Unconsolidated subsidiaries $ 12 $ 12
Affiliate of a former director 43 23
Affiliate of IBC, general partner of IGC
IBC, general partner of IGC 39 --
Affiliate of Thomas B. Wilson, director -- 4
------ ------
$ 94 $ 39
====== ======
General and Administrative Expense
Affiliate of IBC, general partner of IGC (D1) $ 89 $ 79
Reserve additions and other write-offs-
Affiliate of IBC, general partner of IGC 32 28
Unconsolidated subsidiaries (D4) 74 27
------ ------
$ 195 $ 134
====== ======
Increase Increase
Balance (Decrease) Balance (Decrease)
March 31, in Reserves December 31, in Reserves
1998 1998 1997 1997
--------- ----------- ------------ -----------
BALANCE SHEET IMPACT:
Assets Related to Rental Properties
Receivables, all unsecured and due on demand-
Unconsolidated subsidiaries $ 547 $ 31 $ 552 $ 111
Affiliate of IBC, general partner
of IGC 61 32 51 (9)
Affiliate of James Michael Wilson,
director and James J. Wilson,
director 29 -- 20 --
------ ----- ------ -----
$ 637 $ 63 $ 623 $ 102
====== ===== ====== =====
Assets Related to Community Development
Notes receivable and accrued interest-
Affiliate of a former director, Interest 10%
secured by land payments per month
$27,000, matures
April 1, 1998 (A1) $ 965 $ -- $ 980 $ --
Affiliate of a former director, Interest 10%
secured by land payments per month
$27,000, matures
April 1, 1999 (A1) 2,151 -- 2,088 388
Affiliate of IBC, general partner Interest P+1.5%
of IGC, secured by land matures
June 29, 1998 (A2) -- -- 2,520 --
------ ----- ------ -----
$3,116 $ -- $5,588 $ 388
====== ===== ====== =====
Other Assets
Receivables - All unsecured
IBC, general partner of IGC Payable from IGC
distributions (D2) $ 240 $ -- $ 681 $ --
Affiliate of IBC, general partner demand
of IGC, and Thomas B. Wilson,
director (C) 8 -- 12 --
IBC, general partner of IGC demand (34) -- (39) --
------ ----- ------ -----
$ 214 $ -- $ 654 $ --
====== ===== ====== =====
Liabilities Related to Community Development
Accounts payable
Whitman, Requardt (D3) $ 106 $ -- $ 121 $ --
====== ===== ====== =====
(A) Land Sales
IGC sells land to affiliates and non-affiliates with similar terms.
The sales prices to affiliates are based on third party appraisals, payable
in cash or a combination of a 20% cash down payment and a note for the
balance. The notes receivable are secured by deeds of trust on the land
sold, and bear an interest rate equal to those charged at that time for
land sales. The notes mature in one year or mature in five or less years
with annual amortizations. As circumstances dictate, the maturity dates
and repayment terms of the notes receivable due from affiliates or non-
affiliates have been modified. Any sales transactions that vary from these
terms are described below:
(1) The notes receivable due from an affiliate of a former director
did not bear interest until certain infrastructure improvements
were completed. This infrastructure was delayed and the interest
commencement dates modified. These delays created the additional
discount reflected above.
(2) On June 30, 1997, IGC sold 374 acres to an affiliate of IBC for
$3,000,000 and recognized a profit of $1,311,000. As payment for
this parcel, IGC received a 20% down payment and assumption of a
note payable.
(B) Management and Other Services
IGC provides management and other support services to its
unconsolidated subsidiaries and other related entities in the normal course
of business. These fees are typically collected on a monthly basis, one
month in arrears. These receivables are unsecured and due upon demand.
Certain partnerships experiencing cash shortfalls have not paid timely. As
such, these receivable balances are reserved until satisfied or the
prospects of collectibility improves.
(C) Operations Distributed to Unitholders
The Company's 99% limited partnership interest in Equus was
distributed to its unitholders in February 1995 (the "Equus Distribution").
Since that time through April 1996, the Company continued to manage and
provided certain reimbursable administrative services and support to Equus
pursuant to a Master Support and Services Agreement.
Pursuant to the Transfer Control Agreement effective December 31, 1996
(the "Transfer Agreement"), IGC transferred its remaining interests in and
control over EMC and Equus (subject to NASDAQ's approval) to IBC. In
addition, the Transfer Agreement called for IGC to issue 75,000 IGC Units
to Equus to satisfy the outstanding employee option and incentive rights
for the employees who were transferred to EMC. The Transfer Agreement was
amended in December 1997 to allow IGC to withdraw as a general partner of
Equus provided it granted a guarantee to EMC. IGC agreed to guarantee
$20,000,000 of EMC's liabilities in excess of assets should Equus or EMC
become insolvent.
(D) Other
Other transactions with related parties are as follows:
(1) IGC rents executive office space and other property from
affiliates both in the United States and Puerto Rico pursuant to
leases that expire through 2005. In management's opinion, all
leases with affiliated persons are on terms generally available
from unaffiliated persons for comparable property.
(2) During 1996, the sale of four properties in Puerto Rico triggered
a taxable gain, a portion of which is passed through to the
predecessor of IGC that contributed those assets. IGC's
partnership agreement provides for (1) an allocation to that
predecessor of the income tax payable in Puerto Rico on such
portion of the gain and (2) a reduction from its cash
distributions in an amount equivalent to the Puerto Rico income
tax specifically allocated to the predecessor. In accordance with
these provisions, IGC recorded a receivable from IBC of $881,000
and will recover the amount from future distributions due to IBC.
(3) Thomas J. Shafer became a director of IGMC in 1998 after his
retirement from Whitman, Requardt, where he was a Senior Partner.
Whitman, Requardt provides engineering services to IGC. In
management's opinion, services performed are on terms available to
other clients.
(4) 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.
(6) COMPANY RESTRUCTURING
Management, together with its advisors, is continuing to develop the
restructuring plan described in the Registrant's 1997 Form 10-K, whereby
the Company distributes shares of American Community Properties Trust
("ACPT") to its owners.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General:
Historically, the Company's financial results have been significantly
affected by the cyclical nature of the real estate industry. Accordingly,
the Company's historical financial statements may not be indicative of
future results.
For the Three Months Ended March 31, 1998 and 1997
Community Development Operations.
Community development land sales revenue increased $4,543,000 to
$5,992,000 during the three months ended March 31, 1998, compared to sales
of $1,449,000 during the three months ended March 31, 1997. The increase
was attributable to a sale of residential lots in Puerto Rico of
$4,000,000. Residential lots in Puerto Rico are sold to homebuilders in
bulk creating fluctuations in lot sales revenues when compared on a
quarterly basis. The gross profit margin for the three months ended March
31, 1998 increased to 41%, as compared to 35% in the same period of 1997.
This increase was due primarily to the sales mix. During the first quarter
of 1998, the U.S. division sold a large industrial parcel, located in an
undeveloped industrial park, which had a low cost basis. There were not
any similar sales during the comparable quarter of 1997.
Homebuilding Operations.
Revenues from home sales increased 7% to $2,030,000 during the three
months ended March 31, 1998, as compared to $1,874,000 during the three
months ended March 31, 1997 primarily due to an 8% increase, $9,000, in the
average home selling price. The number of homes sold remained constant at
17 for the three months ended March 31, 1998 and March 31, 1997. The gross
profit margin was 10% for the first quarter 1998 and 6% for the first
quarter 1997. The increase in the gross profit margin can be attributable
to the increase in the average selling price discussed above.
Rental Property Revenues and Operating Results.
Rental property revenues, net of operating expenses, decreased less
than 1% to $1,313,000 for the three months ended March 31, 1998, as
compared to $1,323,000 in the same period in 1997. The decrease is
primarily attributable to a 7% increase in operating expenses offset by a
2% increase in rental revenues. The increase in operating expenses is a
result of an increase in overhead and timing difference of utility costs.
Equity in Earnings from Partnerships and Developer Fees.
Equity in earnings increased 28% to $505,000 during the three months
ended March 31, 1998 as compared to $396,000 during the three months ended
March 31, 1997. This increase is primarily due to earnings generated from
the Homebuilding Joint Venture during the first quarter of 1998, with no
such earning in the first quarter of 1997, offset in part by reduced
earnings from partnerships that paid refinancing fees or had reduced income
due to temporary reduction in occupancy in the first quarter of 1998 as
compared to the same period in 1997.
Management and Other Fees.
Management and other fees decreased 27% to $976,000 in the first
quarter of 1998, as compared to $1,343,000 in the first quarter of 1997.
The decrease is primarily attributable to a reduction of $457,000 in fees
earned from the refinancing of certain apartment complexes, offset by
$100,000 of incentive fees earned during the first quarter of 1998 as
compared to the same period in 1997.
Interest Expense.
Interest expense decreased 6% to $866,000 during the three months
ended March 31, 1998, as compared to $922,000 for the three months ended
March 31, 1997. This decrease is primarily attributable to a $3,422,000
decrease in outstanding debt from March 31, 1998 as compared to March 31,
1997.
General and Administrative Expense.
General and administrative expenses increased 2% to $1,695,000 for the
three months ended March 31, 1998, as compared to $1,661,000 for the same
period of 1997. This increase was a result of general inflation offset in
part by management's continued focus on cost efficiency and the reduction
of expenses.
Spin-off Costs
Costs of $757,000 related to the restructuring of the Company were
recognized as an expense for the three months ended March 31, 1998. There
were no such costs in the first quarter of 1997.
Liquidity and Capital Resources
Cash and cash equivalents were $3,234,000 and $2,273,000 at March 31,
1998 and December 31, 1997, respectively. This increase was attributable
to $11,039,000 provided by operating activities, offset by $3,867,000 and
$5,728,000 used in investing and financing activities, respectively. The
cash inflow from operating activities was primarily attributable to
distributions from unconsolidated partnerships, land sales, collection of
wetlands fines previously paid and other notes receivable. The cash
outflow for investing activities was primarily attributable to land
improvements put in place for future land sales and deposits into escrow
accounts. During the first three months of 1998, $7,433,000 of debt
repayments were made as compared to $1,705,000 of debt advances received.
IGC has historically met its liquidity requirements principally from
cash flow generated from home and land sales, property management fees,
distributions from residential rental partnerships and from bank financing
providing funds for development and working capital.
Over the past several years, IGC's cash flows have been constrained
because of the terms of its existing debt agreements and the reluctance of
lenders to provide financing in the U.S. as a result of the wetlands
litigation. As a result, substantially all of the cash generated has been
used to pay debt service requirements with existing lenders. This resulted
in limited opportunities for new construction and development in the U.S..
The recently closed Banc One financing provided funding to commence
construction in Fairway Village, the third village in St. Charles, and will
allow IGC to retain a greater portion of its U.S. land sales proceeds. IGC
currently has other development projects in various stages of completion.
Substantially all of the projects under construction have sufficient
development loans in place to complete the construction.
IGC's principal demands for liquidity are expected to be the continued
funding of its current debt service and operating costs, including
potential ongoing legal costs for the Wetlands Litigation as well as
capital for its waste technology investments. After the Restructuring,
management expects to obtain additional funding which can be used by ACPT
to fund new community development projects. Such sources of funding may
include, but are not limited to, excess operating cash flows, secured or
unsecured financings, private or public offerings of debt or equity
securities and proceeds from sales of properties. IGC's anticipated cash
provided by operations, new and existing financing facilities, and
extension or refinancing of $12,500,000 of loans that are due in 1998 are
expected to satisfy the Company's capital needs in 1998. However, there
are no assurances that these funds will be generated.
Debt Summary
As of March 31, 1998, substantially all of IGC's assets, with a book
value, $140,000,000 were encumbered by $31,000,000 of recourse debt and
$41,000,000 of non-recourse debt; $39,000,000 of the non-recourse debt is
attributable to the mortgages of consolidated rental property partnerships.
The significant terms of IGC's recourse debt financing arrangements are
shown below (dollars in thousands):
Balance
Maximum Interest Maturity Outstanding
Descriptions Borrowings Rate Date 3/31/98
------------ ---------- -------- -------- -----------
Banc One-term loan (a) $11,000 P+2.5% 7/31/04 $10,000
Banc One-development loan (a) 4,000 P+2.5% 7/31/04 1,170
Banc One-remediation loan (a) 5,000 P+2.5% 7/31/04 3,366
First Bank-term loan (b) 9,685 P+1.5% 8/31/98 7,399
First Bank-construction loan (b) 5,500 P+1.5% 6/30/98 2,113
Banco Popular (c) 4,000 P+1.5% 12/5/98 --
RG-Premier Bank (d) 1,560 P+1.5% 4/30/99 1,479
Citibank (e) 969 (e) demand 918
Banco Santander (f) 707 P+1% 9/29/98 640
Washington Savings Bank (g) 1,317 9.5% 9/30/99 818
Miscellaneous land and
development loans 2,165 Various Various 2,306
Other miscellaneous 346 Various Various 455
------- -------
$46,249 $30,664
======= =======
(a) The three notes are cross-collateralized by substantially all
of the U.S. land and the U.S. and Puerto Rico future cash
entitlements pursuant to its ownership interest in the housing
partnerships. Interest is paid monthly. The loan agreement
calls for a minimum of $2,000,000 principal curtailments in
1998, and $3,000,000 in each of the following six years. In
addition, IGC is to establish a $1,000,000 development reserve
during 1998. It is IGC's intention to meet the required
payments from land sales and proceeds from the refinancing of a
rental property. On each anniversary date, IGC is to pay an
additional fee, 1% in 1998 and 1999, increasing 1/2% in the
following four years, and grant an option to the lender to
purchase an additional 75,000 shares at a strike price to be
determined after the restructure. The loan agreement covenants
include restrictions on additional indebtedness of IGC and St.
Charles Community LLC. The loan agreement contains a cross
default provision for any amounts in excess of $1,000,000 past
due for 45 days after demand notification.
(b) The two notes are cross collateralized by the Puerto Rico land
assets. The interest is paid monthly from an interest reserve.
Principal payments are funded through the partial release
prices of the collateral. IGC expects to extend the maturity
date of these loans. The loan agreement covenants include
restrictions on distributions by LDA and additional
indebtedness of LDA and cross default provisions for other loan
payment defaults.
(c) The note was assumed in March 1998 by IBC in connection with
the sale of property to IBC.
(d) The note requires monthly principal payments of $27,000 and is
secured by three mortgage notes receivable totalling
$2,717,600. Interest is paid monthly by advances under the
loan agreement.
(e) The note requires monthly payments of interest calculated at
250 basis points over the cost of funds, 8.406% at December 31,
1997. The note was secured by a letter of credit that expired
in January 1998. Management is currently renegotiating the
terms of this loan.
(f) The loan is collateralized by a pledge of two mortgage notes
receivable totalling $2,760,000. Monthly principal payments of
$27,000 are required. Additional principal is paid from the
sale of residential parcels in Phase II of Parque Escorial.
(g) The note requires monthly payments of interest and is
collateralized by the land under development for 115 townhome
lots in St. Charles, Maryland. The loan is to be repaid from
the sale of townhome lots that are currently under an option
contract.
Year 2000
IGC has assessed and continues to assess the impact of the Year 2000
issue on its reporting systems and operations. The Year 2000 issue exists
because many computer systems and applications and other systems using
computer chips currently use two-digit fields to designate a year. As the
century date occurs, date sensitive systems may recognize the year 2000 as
1900 or not at all. This inability to recognize or properly treat the year
2000 may cause the systems to process critical financial and operations
information incorrectly.
IGC's reporting systems are Year 2000 compliant with the exception of
one module. The Company has engaged a programmer at a nominal cost to
bring this module into compliance. Management is continuing to review the
remaining operating systems and computer systems that affect the properties
the Company manages.
Forward-Looking Statements
Certain matters discussed and statements made within this Form 10-Q
are forward-looking statements within the meaning of the Private Litigation
Reform Act of 1995 and as such may involve known and unknown risks,
uncertainties, and other factors that may cause the actual results,
performance or achievements of the company to be different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Although the Company believes the expectations
reflected in such forward-looking statements are based on reasonable
assumptions, it can give no assurance that its expectations will be
attained. These risks are detailed from time to time in the Company's
filings with the Securities and Exchange Commission or other public
statements.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In a separate proceeding, the Company filed suit in 1990 against
Charles County and its County Commissioners in the Circuit Court for
Charles County to enforce another provision of the 1989 settlement
agreement. The Company claims that the County has failed to conduct an
appropriate water and sewer connection fee study as the basis on which to
set such fees for the St. Charles communities. This matter has been the
subject of extensive previous litigation and in 1992 the Circuit Court for
Charles County rendered a judgment in favor of the Company requiring the
County to conduct an appropriate study. That decision was affirmed in 1995
by the Court of Special Appeals of Maryland. The litigation filed by IGC
in 1997 seeks to enforce the prior court orders that require the County to
conduct the appropriate water and sewer connection fee study, to reduce the
connection fees paid prospectively in the St. Charles communities, and to
obtain repayment of excess fees paid in the past. The Circuit Court has
recently ruled in favor of SCA and IGC and has enjoined the County from
charging them sewer and water connection fees that exceed $2,040 per
housing unit. It is anticipated that the County will vigorously attack the
Circuit Court ruling on appeal.
ITEM 2. MATERIAL MODIFICATIONS OF RIGHTS OF REGISTRANT'S SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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) Sixth Amendment to Second Amended and Filed herewith
Restated Certificate and Agreement of
Limited Partnership of Interstate
General Properties Limited Partnership
S.E. dated as of April 1, 1998
(b) None.
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: May 15, 1998 By: /s/ James J. Wilson
----------------- -----------------------------
James J. Wilson
Chairman and Chief
Executive Officer
Dated: May 15, 1998 By: /s/ J. Michael Wilson
----------------- -----------------------------
J. Michael Wilson
Vice Chairman, Chief Financial
Officer and Director
Dated: May 15, 1998 By: /s/ Cynthia L. Hedrick
----------------- -----------------------------
Cynthia L. Hedrick
Vice President and Controller
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10(a) Sixth Amendment to Second Amended and Restated Certificate
and Agreement of Limited Partnership of Interstate General
Properties Limited Partnership S.E. dated as of April 1,
1998