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 SEPTEMBER 30, 1998, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
Commission file 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.)
5160 Parkstone Drive, Suite 110
Chantilly, Virginia 20151
----------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(703) 263-1191
----------------------------------------------------
(Registrant's telephone number, including area code)
222 Smallwood Village Center
St. Charles, Maryland 20602
-------------------------------------------------------
(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.
10,311,785 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 Nine Months Ended September 30, 1998
and 1997. (Unaudited) 3
Consolidated Statements of Loss for
the Three Months Ended September 30, 1998
and 1997. (Unaudited) 4
Consolidated Balance Sheets at September 30, 1998
(Unaudited) and December 31, 1997. 5
Consolidated Statements of Cash Flow for the
Nine Months Ended September 30, 1998 and 1997.
(Unaudited) 7
Consolidated Statements of Cash Flow for the
Three Months Ended September 30, 1998 and 1997.
(Unaudited) 8
Notes to Consolidated Financial Statements. 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Nine
and Three Months Ended September 30, 1998 and 1997. 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Material Modifications of Rights of Registrant's 33
Securities
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
Signatures 35
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(In thousands, except per unit amounts)
(Unaudited)
1998 1997
---------- -----------
REVENUES
Community development-land sales
Non-affiliates $ 11,986 $ 4,529
Affiliates 1,179 3,000
Homebuilding-home sales 5,455 5,576
Equity in earnings from partnerships
and developer fees 1,144 922
Investment in gaming properties 549 549
Rental property revenues 6,693 6,540
Management and other fees, substantially
all from related entities 2,518 3,038
Interest and other income 1,054 640
---------- ----------
Total revenues 30,578 24,794
---------- ----------
EXPENSES
Cost of land sales 7,954 4,873
Cost of home sales 4,922 5,457
Selling and marketing 979 906
General and administrative 4,850 5,079
Interest expense 2,590 2,683
Rental properties operating expense 2,748 2,784
Depreciation and amortization 1,493 1,582
Wetlands litigation expenses -- 68
Write-off of deferred project costs -- 6
Spin-off costs 1,831 300
---------- ----------
Total expenses 27,367 23,738
---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST 3,211 1,056
PROVISION FOR INCOME TAXES 740 558
---------- ----------
INCOME BEFORE MINORITY INTEREST 2,471 498
MINORITY INTEREST (446) (129)
---------- ----------
NET INCOME $ 2,025 $ 369
========== ==========
BASIC NET INCOME PER UNIT $ .20 $ .04
========== ==========
NET INCOME
General Partners $ 20 $ 4
Limited Partners 2,005 365
---------- ----------
$ 2,025 $ 369
========== ==========
WEIGHTED AVERAGE UNITS OUTSTANDING 10,327 10,274
========== ==========
The accompanying notes are an integral part
of these consolidated statements.
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF LOSS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(In thousands, except per unit amounts)
(Unaudited)
1998 1997
---------- -----------
REVENUES
Community development-land sales
Non-affiliates $ 346 $ 1,910
Affiliates 559 --
Homebuilding-home sales 1,825 1,816
Equity in earnings from partnerships
and developer fees 498 287
Investment in gaming properties 549 --
Rental property revenues 2,261 2,240
Management and other fees, substantially
all from related entities 769 769
Interest and other income 250 152
---------- ----------
Total revenues 7,057 7,174
---------- ----------
EXPENSES
Cost of land sales 815 1,318
Cost of home sales 1,641 1,845
Selling and marketing 311 335
General and administrative 1,393 1,547
Interest expense 936 866
Rental properties operating expense 967 1,016
Depreciation and amortization 504 493
Spin-off costs 783 300
---------- ----------
Total expenses 7,350 7,720
---------- ----------
LOSS BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST (293) (546)
PROVISION FOR INCOME TAXES 236 446
---------- ----------
LOSS BEFORE MINORITY INTEREST (529) (992)
MINORITY INTEREST 15 (116)
---------- ----------
NET LOSS $ (514) $ (1,108)
========== ==========
BASIC NET LOSS PER UNIT $ (.05) $ (.11)
========== ==========
NET LOSS
General Partners $ (5) $ (11)
Limited Partners (509) (1,097)
---------- ----------
$ (514) $ (1,108)
========== ==========
WEIGHTED AVERAGE UNITS OUTSTANDING 10,318 10,274
========== ==========
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
September 30, December 31,
1998 1997
------------- -----------
(Unaudited) (Audited)
CASH AND CASH EQUIVALENTS
Unrestricted $ 1,721 $ 2,273
Restricted cash 2,591 508
-------- --------
4,312 2,781
-------- --------
ASSETS RELATED TO COMMUNITY DEVELOPMENT
Land and development costs
Puerto Rico 31,941 32,918
St. Charles, Maryland 32,284 28,417
Other United States locations 16,061 14,698
Notes receivable on lot sales and other 2,879 6,476
-------- --------
83,165 82,509
-------- --------
ASSETS RELATED TO INVESTMENT PROPERTIES
Operating properties, net of accumulated
depreciation of $22,343 and $21,392 as
of September 30, 1998 and December 31,
1997, respectively 37,321 37,829
Investment in unconsolidated rental property
partnerships, net of deferred income of
$1,901 and $2,193 as of September 30,
1998 and December 31, 1997, respectively 7,376 8,657
Other receivables, net of reserves of
$128 and $223 as of September 30,
1998 and December 31, 1997, respectively 1,378 805
-------- --------
46,075 47,291
-------- --------
ASSETS RELATED TO HOMEBUILDING
Homebuilding construction and land 2,077 1,914
Investment in joint venture 976 591
Receivables and other 121 68
-------- --------
3,174 2,573
-------- --------
OTHER ASSETS
Deferred costs regarding waste technology and
other projects, receivables and other 6,635 8,797
Property, plant and equipment, less accumulated
depreciation of $2,426 and $2,460 as of
September 30, 1998 and December 31, 1997,
respectively 1,057 1,087
-------- --------
7,692 9,884
-------- --------
Total assets $144,418 $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
September 30, December 31,
1998 1997
------------- ------------
(Unaudited) (Audited)
LIABILITIES RELATED TO COMMUNITY DEVELOPMENT
Recourse debt $ 35,242 $ 35,176
Non-recourse debt -- 2,295
Accounts payable and accrued liabilities 3,368 4,648
Deferred income 355 597
-------- --------
38,965 42,716
-------- --------
LIABILITIES RELATED TO INVESTMENT PROPERTIES
Recourse debt 905 969
Non-recourse debt 38,775 39,101
Accounts payable and accrued liabilities 3,482 3,331
-------- --------
43,162 43,401
-------- --------
LIABILITIES RELATED TO HOMEBUILDING
Recourse debt 490 159
Accounts payable, accrued liabilities
and deferred income 2,640 2,501
-------- --------
3,130 2,660
-------- --------
OTHER LIABILITIES
Accounts payable and accrued liabilities 5,936 6,330
Notes payable and capital leases 613 615
Accrued income tax liability - current 2,459 1,541
Accrued income tax liability - deferred 4,781 4,487
-------- --------
13,789 12,973
-------- --------
Total liabilities 99,046 101,750
-------- --------
PARTNERS' CAPITAL
General partners' capital 4,366 4,345
Limited partners' capital-10,312 and 10,332
Units issued and outstanding as of September
30, 1998 and December 31, 1997, respectively 41,006 38,943
-------- --------
Total partners' capital 45,372 43,288
-------- --------
Total liabilities and partners' capital $144,418 $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 NINE MONTHS ENDED SEPTEMBER 30,
(In thousands)
(Unaudited)
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,025 $ 369
Adjustments to reconcile net income to net cash
provided by (used by) operating activities:
Depreciation and amortization 1,493 1,582
Provision (benefit) for deferred income taxes 294 (441)
Equity in earnings from gaming properties (549) (549)
Equity in earnings from unconsolidated
partnerships and developer fees (759) (988)
Distributions from unconsolidated partnerships 1,912 5,142
Cost of sales-community development
and homebuilding 12,876 10,330
Homebuilding construction expenditures (5,085) (5,380)
Equity in loss from homebuilding joint venture (385) 66
Write-off of deferred project cost -- 6
Collection (payment) of fines (see Note 6) 3,212 (3,212)
Changes in notes and accounts receivable, due
from affiliates changed $4,000 and $(259) 3,652 (755)
Changes in accounts payable, accrued liabilities
and deferred income 2,101 (2,128)
------- -------
Net cash provided by operating activities 20,787 4,042
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in land improvements for future sales (11,367) (4,381)
Change in assets related to unconsolidated
rental property partnerships 128 (740)
Change in restricted cash (2,083) 250
Additions to rental operating properties, net (780) (396)
Acquisitions of other assets, net (1,906) (1,461)
Contributions to homebuilding joint venture -- (245)
------- -------
Net cash used in investing activities (16,008) (6,973)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash proceeds from debt financing 12,689 19,332
Payment of debt (14,979) (16,105)
Purchase of minority interest in subsidiary (3,100) --
Distributions to Unitholders (209) --
Issuance of Warrants 268 --
------- -------
Net cash (used in) provided by financing activities (5,331) 3,227
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (552) 296
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,273 2,212
------- -------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30 $ 1,721 $ 2,508
======= =======
The accompanying notes are an integral part
of these consolidated statements.
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(In thousands)
(Unaudited)
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (514) $(1,108)
Adjustments to reconcile net loss to net cash
provided by (used by) operating activities:
Depreciation and amortization 504 493
Provision for deferred income taxes 836 554
Equity in earnings from gaming properties (549) --
Equity in earnings from unconsolidated
partnerships and development fees (276) (305)
Distributions from unconsolidated partnerships 116 175
Cost of sales-community development
and homebuilding 2,456 3,163
Homebuilding construction expenditures (2,157) (2,206)
Equity in loss from homebuilding joint venture (222) 18
Payment of Fines (see Note 6) -- (2,962)
Changes in notes and accounts receivable, due
from affiliates changed $(46) and $(49) (210) (24)
Changes in accounts payable, accrued liabilities
and deferred income 2,645 (1,668)
------- -------
Net cash provided by (used in) operating activities 2,629 (3,870)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in land improvements for future sales (5,055) (791)
Change in assets related to unconsolidated
rental property partnerships (14) 1
Change in restricted cash (239) 162
Additions to rental operating properties, net (224) (46)
Acquisitions of other assets, net (918) (1,625)
Contributions to homebuilding joint venture -- (20)
------- -------
Net cash used in investing activities (6,450) (2,319)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash proceeds from debt financing 8,535 16,011
Payment of debt (2,751) (8,889)
Purchase of minority interest in subsidiary (3,100) --
Issuance of Warrants 268 --
------- -------
Net cash provided by financing activities 2,952 7,122
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (869) 933
CASH AND CASH EQUIVALENTS, JUNE 30 2,590 1,575
------- -------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30 $ 1,721 $ 2,508
======= =======
The accompanying notes are an integral part
of these consolidated statements.
INTERSTATE GENERAL COMPANY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 and nine months ended
September 30, 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. Diluted earnings per Unit for the
three and nine months ended September 30, 1998 and 1998 does not differ
from basic earnings per Unit.
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" and will adopt SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information" at December 31, 1998.
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. The information is presented to
segregate the two projects undergoing condominium conversion from the
operating properties (in thousands).
Projects
Operating Under Condo
Properties Conversions Total
---------- ----------- -----
SUMMARY FINANCIAL POSITION:
Total Assets
September 30, 1998 $122,426 $10,791 $133,217
December 31, 1997 129,332 9,509 138,841
Total Non-Recourse Debt
September 30, 1998 131,396 12,014 143,410
December 31, 1997 132,984 11,612 144,596
Total Other Liabilities
September 30, 1998 25,050 2,253 27,303
December 31, 1997 24,804 122 24,926
Total Equity
September 30, 1998 (34,020) (3,476) (37,496)
December 31, 1997 (28,456) (2,225) (30,681)
Company's Investment
September 30, 1998 7,376 -- 7,376
December 31, 1997 8,657 -- 8,657
SUMMARY OF OPERATIONS:
Total Revenue
Three Months Ended September 30, 1998 7,809 10 7,819
Three Months Ended September 30, 1997 7,618 324 7,942
Nine Months Ended September 30, 1998 23,399 103 23,502
Nine Months Ended September 30, 1997 22,822 1,417 24,239
Net Loss
Three Months Ended September 30, 1998 (118) (433) (551)
Three Months Ended September 30, 1997 (207) (169) (376)
Nine Months Ended September 30, 1998 (403) (1,251) (1,654)
Nine Months Ended September 30, 1997 (518) (99) (617)
Company's recognition of equity in
earnings and developer fees
Three Months Ended September 30, 1998 277 -- 277
Three Months Ended September 30, 1997 341 (35) 306
Nine Months Ended September 30, 1998 760 -- 760
Nine Months Ended September 30, 1997 988 -- 988
Projects
Operating Under Condo
Properties Conversions Total
---------- ----------- -----
SUMMARY OF CASH FLOWS:
Cash flows from operating activities
Three Months Ended September 30, 1998 $ 1,363 $ (899) $ 464
Three Months Ended September 30, 1997 1,050 136 1,186
Nine Months Ended September 30, 1998 4,480 (2,605) 1,875
Nine Months Ended September 30, 1997 3,423 573 3,996
Company's share of cash flows
from operating activities
Three Months Ended September 30, 1998 438 (450) (12)
Three Months Ended September 30, 1997 344 67 411
Nine Months Ended September 30, 1998 1,558 (1,303) 255
Nine Months Ended September 30, 1997 1,300 286 1,586
Cash distributions
Three Months Ended September 30, 1998 261 -- 261
Three Months Ended September 30, 1997 479 -- 479
Nine Months Ended September 30, 1998 5,074 -- 5,074
Nine Months Ended September 30, 1997 1,335 9,292 10,627
Company's share of cash distributions
Three Months Ended September 30, 1998 116 -- 116
Three Months Ended September 30, 1997 204 (25) 179
Nine Months Ended September 30, 1998 1,912 -- 1,912
Nine Months Ended September 30, 1997 500 4,646 5,146
The unconsolidated rental properties partnerships as of September 30,
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 started to
decline in 1997 as the units were vacated in preparation for conversion.
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
----------------------------
September 30, December 31,
1998 1997
------------- ------------
Total assets $11,660 $13,374
Total liabilities 9,709 12,191
Total equity 1,951 1,183
Company's investment 976 591
SUMMARY OF OPERATIONS:
FOR THE NINE MONTHS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
Total revenue $ 8,431 $ 2 $3,950 $ 2
Net income (loss) 768 (136) 442 (41)
Company's recognition of
equity in earnings (losses) 384 (68) 221 (20)
SUMMARY OF OPERATING CASH FLOWS:
FOR THE NINE MONTHS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
Cash flows from operating
activities $ 3,801 $(7,642) $ 2,423 $(2,012)
Company's share of cash flows
from operating activities 1,900 (3,821) 1,211 (1,006)
Operating cash distributions -- -- -- --
Company's share of operating
cash distributions -- -- -- --
(4) 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 September 30, 1998 and December 31, 1997 (in thousands):
Outstanding
Maturity Interest --------------------------
Dates Rates (a) September 30, December 31,
From/To From/To 1998 1997
-------- --------- ------------- ------------
Related to community
development:
Recourse debt Demand(b)/ P+6.5%/ $35,242 $35,176
07-31-04 10.0% (c)
Non-recourse debt Paid P+1.5% -- 2,295
Related to investment
properties:
Recourse debt Demand 8.19% 905 969
Non-recourse debt 10-01-19/ 6.85%/ 38,775 39,101
10-01-28 8.5%
Related to homebuilding
projects:
Recourse debt Demand/ P+1.5% 490 159
08-03-99
General:
Recourse debt Demand P+1.25%/ 613 615
04-01-03 18.5% ------- -------
Total debt $76,025 $78,315
======= =======
(a) P = Prime lending interest rate.
(b) $1,050,000 is due on demand.
(c) Approximately $15,484,000 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 September 30, 1998, the $35,242,000 of recourse debt related to
community development assets is fully collateralized by substantially all
of the community development assets. Approximately $15,484,000 of this
amount is further secured by investments in apartment rental partnerships.
As of September 30, 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 $7,147,000 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 eight 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:
INCOME STATEMENT IMPACT:
Nine Months Ended Three Months Ended
September 30, September 30,
----------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Community Development - Land Sales (A)
Homebuilding joint venture $1,179 $ -- $ 559 $ --
Affiliate of IBC, general partner of IGC,
and James Michael Wilson, director (A2) -- 3,000 -- --
------ ------ ------ ------
$1,179 $3,000 $ 559 $ --
====== ====== ====== ======
Cost of Land Sales
Homebuilding joint venture $ 936 $ -- $ 446 $ --
Affiliate of IBC, general partner of IGC,
and James Michael Wilson, director (A2) -- 1,689 -- 30
------ ------ ------ ------
$ 936 $1,689 $ 446 $ 30
====== ====== ====== ======
Investment in Gaming Properties
IBC, general partner of IGC, affiliate of Thomas B.
Wilson, director (C) $ 549 $ 549 $ 549 $ --
====== ====== ====== ======
Management and Other Fees (B)
Unconsolidated subsidiaries $1,795 $2,282 $ 530 $ 527
Affiliate of IBC, general partner of IGC (B1,2) 183 291 58 57
Affiliate of James Michael Wilson, director, Thomas B.
Wilson, director, and James J. Wilson, director 118 113 41 39
Affiliate of James Michael Wilson, director, Thomas B.
Wilson, director, James J. Wilson, director, and an
Affiliate of IBC, general partner of IGC 62 52 22 15
------ ------ ------ ------
$2,158 $2,738 $ 651 $ 638
====== ====== ====== ======
Interest and Other Income
Unconsolidated subsidiaries $ 42 $ 36 $ 18 $ 12
Affiliate of a former director 97 126 40 35
Affiliate of IBC, general partner of IGC 39 -- -- --
Affiliate of Thomas B. Wilson, director -- 13 -- 4
------ ------ ------ ------
$ 178 $ 175 $ 58 $ 51
====== ====== ====== ======
General and Administrative Expense
Affiliate of IBC, general partner of IGC (D1) $ 246 $ 246 $ 84 $ 91
Reserve additions and other write-offs-
Affiliate of IBC, general partner of IGC (B3) (59) 88 (123) 31
Unconsolidated subsidiaries (B3,D4) 8 86 (97) 31
------ ------ ------ ------
$ 195 $ 420 $ (136) $ 153
====== ====== ====== ======
Interest Expense
IBC, general partner of IGC $ 8 $ -- $ 8 $ --
====== ====== ====== ======
BALANCE SHEET IMPACT:
Increase Increase
Balance (Decrease) Balance (Decrease)
September 30, in Reserves December 31, in Reserves
1998 1998 1997 1997
------------- ----------- ------------ -----------
Assets Related to Rental Properties
Receivables, all unsecured and due on demand-
Unconsolidated subsidiaries $ 823 $ (35) $ 552 $ 111
Affiliate of IBC, general partner
of IGC (B1,2) 79 (60) 51 (9)
Affiliate of James Michael Wilson,
director and James J. Wilson,
director 69 -- 20 --
------ ----- ------ -----
$ 971 $ (95) $ 623 $ 102
====== ===== ====== =====
Assets Related to Community Development
Notes receivable and accrued interest-
Affiliate of a former director, Interest 10%
secured by land matured April 1,
1998, paid (A1) $ -- $ -- $ 980 $ --
Affiliate of a former director, Interest 10%
secured by land payments per month
$27,000, matures
April 1, 1999 (A1) 2,077 -- 2,088 388
Affiliate of IBC, general partner Interest P+1.5%
of IGC, secured by land matured June 29,
1998, paid (A2) -- -- 2,520 --
------ ----- ------ -----
$2,077 $ -- $5,588 $ 388
====== ===== ====== =====
Other Assets
Receivables - All unsecured
IBC, general partner of IGC Payable from IGC
distributions, paid (D2) $ -- $ -- $ 681 $ --
Affiliate of IBC, general partner demand
of IGC, and Thomas B. Wilson,
director (C) 35 -- 12 --
IBC, general partner of IGC demand (25) -- (39) --
------ ----- ------ -----
$ 10 $ -- $ 654 $ --
====== ===== ====== =====
Liabilities Related to Community Development
Accounts payable
Whitman, Requardt (D3) $ 277 $ -- $ 121 $ --
====== ===== ====== =====
</TABLE)
(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. Decreases to the reserves for other
than routine cash payments are discussed below:
(1) During the second quarter of 1997, an affiliate of IBC purchased
the management fees receivable of $190,000 due from Chastleton,
Coachman's, Rolling Hills, and Village Lake for a cash payment of
$190,000. The collection of these receivables had previously been
questionable and they had been fully reserved. This transaction
resulted in income recognition of $190,000.
(2) During the second quarter of 1997, IGC sold to IBC its 49% limited
partner interest and 99% of its 1% general partner interest in
Coachman's Limited Partnership. This transaction had no financial
effect on the Company's 1997 annual results of operation.
(3) The collectibility of management fee receivables are evaluated
quarterly. Any increase or decrease in the reserves are reflected
as additional expenses or recovery of such expenses.
(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. As a
result of this transfer, IGC recognized as income its $549,000 negative
basis in Equus during the second quarter of 1997. 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. As a result of this
guarantee, IGC reversed its $549,000 income recognition during the fourth
quarter of 1997. Equus was transferred to NASDAQ's Small Cap Companies on
August 7, 1998 and no longer requires IGC's guarantee. As a result of the
release from the guarantee, IGC recognized as income the $549,000 negative
basis. 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. On July 29, 1998
20,000 of these Units were returned to the Company and in turn retired.
(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
which was subsequently paid.
(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) PURCHASE OF MINORITY INTEREST IN LDA
On July 30, 1998, the Company redeemed the 20% minority interest in
Land Development Associates S.E. ("LDA") from an outside partner for
$3,100,000 and assumed a $472,000 deferred tax obligation. LDA also repaid
a $2,400,000 note due to an affiliate of this unrelated partner. This
transaction was financed with a $5,600,000 loan from a commercial bank.
The loan bears interest at prime plus 1%, matures in one year and is
collateralized by an assignment of the 20% partnership interest in LDA and
a second mortgage on Parque El Comandante land held by LDA.
(7) SUBSEQUENT EVENT - COMPANY RESTRUCTURE
On October 1, 1998, in connection with the restructuring plan, Banc
One released its lien on the investment properties in exchange for a pledge
of the stock in four of the major subsidiaries and an increased interest
rate to prime plus 6.5%. The interest rate reverted back to prime plus
2.5% when the security interests in the investment properties were
reestablished on November 13, 1998.
On October 1st and 2nd of 1998, in connection with the Company's
restructure plan, IGC transferred its principal real estate operations and
assets to American Community Properties Trust ("ACPT") in exchange for all
of ACPT's common shares. On October 5, 1998, the Company distributed
ACPT's shares to IGC's owners. The following Pro Forma Consolidated
Financial Data reflects IGC and its continuing businesses subsequent to the
Restructuring and distribution for the nine months ended September 30, 1998
and for the year ended December 31, 1997, as if the restructuring and
distribution had been completed on January 1, 1997. The Pro Forma
Consolidated Financial Data of IGC are provided for information purposes
only and do not purport to be indicative of the results that actually would
have been obtained if the restructuring and distribution had been effected
on the dates indicated or the results that may be obtained in the future.
(8) PUERTO RICO EXPROPRIATION
During the third quarter 1998, a Puerto Rico government agency
expropriated 52 cuerdas located in Parque El Comandante and deposited
$784,000 into an account for the Company. The $784,000 was based on
appraisals that were over five years old that do not reflect the current
market value. The Company believes that the market value is significantly
higher and therefore has begun the appeal process to increase the amount of
payment received for this land to the current market price. As a result of
this transaction during the third quarter, the basis of the land was
removed from inventory but no corresponding income was recorded. This
transaction will be recorded as a sale in the period that the Company and
the government agree upon the fair market value of this property.
INTERSTATE GENERAL COMPANY L.P. ("IGC")
PRO FORMA CONSOLIDATED STATEMENT OF (LOSS) INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(In thousands)
(Unaudited)
Reclassi- IGC Pro
IGC fication Reclas- Forma
Historical Entries sified ACPT(D) IGC(E)
---------- --------- ------- ------- ------
REVENUES
Community development-
land sales $13,165 $ -- $13,165 $12,955 $ 210
Homebuilding-home sales 5,455 -- 5,455 -- 5,455
Equity in earnings from
partnerships and
developer fees 1,144 117 (B) 1,261 1,144 117
Investment in gaming
properties 549 -- 549 -- 549
Rental property revenues 6,693 -- 6,693 6,693 --
Management and other fees,
substantially all from
related entities 2,518 -- 2,518 2,518 --
Interest and other income 1,054 545 (C) 1,599 892 707
------- ------- ------- ------- -------
Total revenues 30,578 662 31,240 24,202 7,038
------- ------- ------- ------- -------
EXPENSES
Cost of land sales 7,954 316 (C) 8,270 8,011 259
Cost of home sales 4,922 -- 4,922 -- 4,922
Selling and marketing 979 -- 979 54 925
General and administrative 4,850 -- 4,850 4,289 561
Interest expense 2,590 174 (C) 2,764 2,726 38
Rental properties
operating expense 2,748 -- 2,748 2,748 --
Depreciation and
amortization 1,493 -- 1,493 1,420 73
Spin-off costs 1,831 -- 1,831 1,831 --
------- ------- ------- ------- -------
Total expenses 27,367 490 27,857 21,079 6,778
------- ------- ------- ------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES AND MINORITY
INTEREST 3,211 172 3,383 3,123 260
PROVISION FOR INCOME TAXES 740 -- 740 582 158
------- ------- ------- ------- -------
INCOME BEFORE MINORITY
INTEREST 2,471 172 2,643 2,541 102
MINORITY INTEREST (446) (117)(B) (563) (607) 44
------- ------- ------- ------- -------
NET INCOME $ 2,025 $ 55 $ 2,080 $ 1,934 $ 146
======= ======= ======= ======= =======
BASIC NET INCOME PER
UNIT/SHARE $ .19 $ .01 $ .20 $ .37 $ .01
======= ======= ======= ======= =======
WEIGHTED AVERAGE
UNITS/SHARES OUTSTANDING 10,327 10,327 10,327 5,216 10,327
======= ======= ======= ======= =======
The accompanying notes are an integral part of this
pro forma consolidated statement of income.
INTERSTATE GENERAL COMPANY L.P. ("IGC")
PRO FORMA CONSOLIDATED STATEMENT OF (LOSS) INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands)
(Unaudited)
Reclassi- IGC Pro
IGC fication Reclas- Forma
Historical Entries sified ACPT(D) IGC(E)
---------- --------- ------- ------- ------
REVENUES
Community development-
land sales $13,357 $105 (A) $13,462 $13,165 $ 297
Homebuilding-home sales 7,805 -- 7,805 -- 7,805
Equity in earnings from
partnerships and
developer fees 1,494 161 (B) 1,655 1,509 146
Rental property revenues 8,737 -- 8,737 8,737 --
Management and other fees,
substantially all from
related entities 3,775 -- 3,775 3,775 --
Interest and other income 1,044 716 (C) 1,760 943 817
------- ------- ------- ------- -------
Total revenues 36,212 982 37,194 28,129 9,065
------- ------- ------- ------- -------
EXPENSES
Cost of land sales 8,881 71 (A) 9,139 8,494 645
187 (C)
Cost of home sales 7,486 (23)(A) 7,463 -- 7,463
Selling and marketing 1,232 -- 1,232 127 1,105
General and administrative 7,034 -- 7,034 6,607 427
Interest expense 3,609 270 (C) 3,879 3,820 59
Rental properties
operating expense 3,597 -- 3,597 3,597 --
Depreciation and
amortization 2,128 -- 2,128 1,850 278
Wetlands litigation
expenses 1,772 -- 1,772 -- 1,772
Write-off of deferred
project costs 6 -- 6 6 --
Write-off of goodwill 1,843 -- 1,843 -- 1,843
Spin-off costs 1,164 -- 1,164 1,164 --
------- ------- ------- ------- -------
Total expenses 38,752 505 39,257 25,665 13,592
------- ------- ------- ------- -------
(LOSS) INCOME BEFORE PROVISION
FOR INCOME TAXES AND
MINORITY INTEREST (2,540) 477 (2,063) 2,464 (4,527)
PROVISION FOR INCOME TAXES 606 -- 606 470 136
------- ------- ------- ------- -------
(LOSS) INCOME BEFORE MINORITY
INTEREST (3,146) 477 (2,669) 1,994 (4,663)
MINORITY INTEREST (439) (161)(B) (600) (600) --
------- ------- ------- ------- -------
NET (LOSS) INCOME $(3,585) $ 316 $(3,269) $ 1,394 $(4,663)
======= ======= ======= ======= =======
The accompanying notes are an integral part of this
pro forma consolidated statement of income.
INTERSTATE GENERAL COMPANY L.P. ("IGC")
PRO FORMA CONSOLIDATED STATEMENT OF (LOSS) INCOME (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands)
(Unaudited)
Reclassi- IGC Pro
IGC fication Reclas- Forma
Historical Entries sified ACPT(D) IGC(E)
---------- --------- ------- ------- ------
BASIC NET (LOSS) INCOME
PER SHARE $ (.35) $ .03 $ (.32) $ .27 $ (.45)
======= ======= ======= ======= =======
WEIGHTED AVERAGE SHARES
OUTSTANDING 10,289 10,289 10,289 5,196 10,289
======= ======= ======= ======= =======
The accompanying notes are an integral part of this
pro forma consolidated statement of income.
INTERSTATE GENERAL COMPANY L.P. ("IGC")
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(In thousands)
(Unaudited)
ASSETS
Reclassi- IGC Pro
IGC fication Reclas- Forma
Historical Entries sified ACPT(D) IGC(E)
---------- --------- ------- ------- ------
CASH AND CASH EQUIVALENTS
Unrestricted $ 1,721 $ -- $ 1,721 $ 1,451 $ 270
Restricted 2,591 -- 2,591 2,467 124
-------- ------- -------- -------- -------
4,312 $ -- 4,312 3,918 394
-------- ------- -------- -------- -------
ASSETS RELATED TO COMMUNITY
DEVELOPMENT
Land and development costs
Puerto Rico 31,941 1,405 (C) 33,346 33,346 --
St. Charles, Maryland 32,284 -- 32,284 25,584 6,700
Other United States
locations 16,061 -- 16,061 -- 16,061
Notes receivable on lot sales
and other, substantially
all due from affiliates 2,879 -- 2,879 2,066 813
-------- ------- -------- -------- -------
83,165 1,405 84,570 60,996 23,574
-------- ------- -------- -------- -------
ASSETS RELATED TO RENTAL PROPERTIES
Operating properties, net 37,321 314 (B) 37,635 37,635 --
Investment in unconsolidated
rental property partnerships 7,376 -- 7,376 7,376 --
Other receivables, net 1,378 -- 1,378 1,314 64
-------- ------- -------- -------- -------
46,075 314 46,389 46,325 64
-------- ------- -------- -------- -------
ASSETS RELATED TO HOMEBUILDING
Homebuilding construction
and land 2,077 -- 2,077 -- 2,077
Investment in joint venture 976 -- 976 976 --
Receivables and other 121 -- 121 -- 121
-------- ------- -------- -------- -------
3,174 $ -- 3,174 976 2,198
OTHER ASSETS -------- ------- -------- -------- -------
Receivables, deferred costs
regarding waste technology and
other projects and other 6,635 7,318 (C) 13,953 2,417 11,536
Property, plant and
equipment, net 1,057 -- 1,057 428 629
-------- ------- -------- -------- -------
7,692 7,318 15,010 2,845 12,165
-------- ------- -------- -------- -------
TOTAL ASSETS $144,418 $ 9,037 $153,455 $115,060 $38,395
======== ======= ======== ======== =======
The accompanying notes are an integral part of this
pro forma consolidated balance sheet.
INTERSTATE GENERAL COMPANY L.P. ("IGC")
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(In thousands)
(Unaudited)
LIABILITIES AND PARTNERS' CAPITAL
Reclassi- IGC Pro
IGC fication Reclas- Forma
Historical Entries sified ACPT(D) IGC(E)
---------- --------- ------- ------- ------
LIABILITIES RELATED TO
COMMUNITY DEVELOPMENT
Recourse debt $ 35,242 $ 7,318 (C) $42,560 $ 40,213 $ 2,347
Non-recourse debt -- -- -- -- --
Accounts payable and
accrued liabilities 3,368 -- 3,368 3,019 349
Deferred income 355 -- 355 356 (1)
-------- ------- -------- -------- -------
38,965 7,318 46,283 43,588 2,695
-------- ------- -------- -------- -------
LIABILITIES RELATED TO RENTAL
PROPERTIES
Recourse debt 905 -- 905 905 --
Non-recourse debt 38,775 -- 38,775 38,775 --
Accounts payable and accrued
liabilities 3,482 314 (B) 3,796 2,905 891
-------- ------- -------- -------- -------
43,162 314 43,476 42,585 891
-------- ------- -------- -------- -------
LIABILITIES RELATED TO HOMEBUILDING
Recourse debt 490 -- 490 -- 490
Accounts payable, accrued
liabilities and deferred
income 2,637 -- 2,637 -- 2,637
-------- ------- -------- -------- -------
3,127 -- 3,127 -- 3,127
OTHER LIABILITIES -------- ------- -------- -------- -------
Accounts payable and
accrued liabilities 5,939 -- 5,939 4,302 1,637
Notes payable and capital
leases 613 -- 613 183 430
Accrued income tax liability-
current 2,459 -- 2,459 2,457 2
Accrued income tax liability-
deferred 4,781 -- 4,781 4,256 525
-------- ------- -------- -------- -------
13,792 -- 13,792 11,198 2,594
-------- ------- -------- -------- -------
TOTAL LIABILITIES 99,046 7,632 106,678 97,371 9,307
-------- ------- -------- -------- -------
PARTNERS' CAPITAL 45,372 1,405 (C) 46,777 17,689 29,088
-------- ------- -------- -------- -------
TOTAL LIABILITIES AND
PARTNERS' CAPITAL $144,418 $ 9,037 $153,455 $115,060 $38,395
======== ======= ======== ======== =======
The accompanying notes are an integral part of this
pro forma consolidated balance sheet.
INTERSTATE GENERAL COMPANY L.P. ("IGC")
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL DATA
(A) Land sales occurred during the year ended December 31, 1997, as IGC's
land business sold lots to its homebuilding business. Gross profit on
these sales, historically eliminated in consolidation, has been
included in IGC and ACPT's historical results for these periods based
upon the estimated fair market value of the land (based on comparable
sales to third parties).
(B) As of September 30, 1998 and during the first nine months of 1998 and
the year ended December 31, 1997, the investment in the four rental
properties are eliminated upon consolidation. Sixty percent of the
general partners' interest in these partnerships will remain in IGC
until one year and one day after the Restructure, at which time they
will be transferred to ACPT. IGC will not consolidate these
partnerships, creating a need to reclassify sixty percent of the
general partners' investment from operating assets and the applicable
minority interest expense to equity in earnings from unconsolidated
subsidiaries. The basis in the general partners interest is negative
and further reclassified to accrued liabilities.
(C) As of September 30, 1998 and during the first nine months of 1998 and
the year ended December 31, 1997, an intercompany note receivable and
intercompany debt existed between IGC and LDA. Interest income and
expense and the note receivable and payable amounts, historically
eliminated in consolidation, have been included in IGC's and ACPT's
historical results.
(D) Reflects the registration, initiation of operations, and distribution
of all Common Shares of American Community Properties Trust ("ACPT").
ACPT, which was formed on March 17, 1997. In October 1998, IGC
transferred its principal operations to ACPT's subsidiaries and
distributed to the partners of IGC, including its Unitholders, all the
Common Shares of ACPT.
(E) Column balances equal "IGC Reclassified" column balances less "ACPT"
column balances. IGC's remaining operations include the U.S.
homebuilding business, waste technology business, land subject to the
wetlands litigation and certain other parcels of land.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITIONS
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 Nine Months Ended September 30, 1998 and 1997
Community Development Operations.
Community development land sales revenue increased $5,636,000 to
$13,165,000 during the nine months ended September 30, 1998, compared to
sales of $7,529,000 during the nine months ended September 30, 1997. The
increase was attributable to residential lot sales in Puerto Rico of
$7,900,000 which are sold to homebuilders in bulk. The gross profit margin
for the nine months ended September 30, 1998 increased to 40%, as compared
to 35% in the same period of 1997. This increase was due primarily to the
sales mix. During the first nine months of 1998, 28% of the sales revenue
was generated by sales of U.S. commercial parcels, compared to 10% in the
first three quarters of 1997. Commercial parcels have historically
produced higher gross profits due to their high sales prices and relatively
low development costs.
Homebuilding Operations.
Revenues from home sales decreased 2% to $5,455,000 during the nine
months ended September 30, 1998, as compared to $5,576,000 during the nine
months ended September 30, 1997. The number of homes sold by the scatter
site operations and the average sales price both increased by 4% during the
first nine months of 1998, as compared to the same period in 1997.
However, the benefits of these increases were reversed by the elimination
of the tract homebuilding operations. The gross profit margins increased
to 10% during the first nine months of 1998, as compared to 2% in the
comparable 1997 period. During the nine months ended September 30, 1997,
the Company closed seven homes that incurred additional costs to cure non-
recurring construction problems.
Rental Property Revenues and Operating Results.
Rental property revenues, net of operating expenses, increased 5% to
$3,945,000 for the nine months ended September 30, 1998, as compared to
$3,756,000 in the same period in 1997. The increase is primarily
attributable to a 2% increase in rental revenues and a less than 1%
decrease in operating expenses. The increase in rental revenues is a
result of a reduction in vacancies and an increase in rental rates.
Equity in Earnings from Partnerships and Developer Fees.
Equity in earnings increased 19% to $1,144,000 during the first nine
months of 1998, as compared to $922,000 during the first nine months of
1997. The increase is primarily attributable to an increase of earnings
generated from the homebuilding joint venture during the first nine months
of 1998, as compared to the first nine months of 1997, offset in part by
reduced earnings from partnerships that paid refinancing fees.
Management and Other Fees.
Management and other fees decreased 21% to $2,518,000 in the first
nine months of 1998, as compared to $3,038,000 in the same period in 1997.
This decrease is primarily due to a reduction of $435,000 in fees earned
from the refinancing of certain apartment complexes and a reduction of
$230,000 in fees recognized related to prior periods earned during the nine
months ended September 30, 1997, offset by $100,000 of incentive fees
earned during the first nine months of 1998.
Interest Expense.
Interest expense decreased 4% to $2,590,000 during the nine months
ended September 30, 1998, as compared to $2,683,000 for the nine months
ended September 30, 1997. This decrease is primarily attributable to a
$5,211,000 decrease in outstanding debt from September 30, 1998 as compared
to September 30, 1997.
General and Administrative Expense.
General and administrative expenses decreased 5% to $4,850,000 for the
nine months ended September 30, 1998, as compared to $5,079,000 for the
same period of 1997. This decrease is a result of the recognition of
receivables previously reserved.
Spin-off Costs.
Costs of $1,831,000 related to the restructuring of the Company were
recognized as an expense for the nine months ended September 30, 1998, as
compared to $300,000 for the same period of 1997.
For the Three Months Ended September 30, 1998 and 1997
Community Development Operations.
Community development land sales revenue decreased $1,005,000 to
$905,000 during the three months ended September 30, 1998, compared to
sales of $1,910,000 during the three months ended September 30, 1997. The
decrease was attributable to a commercial sale in Puerto Rico of $1,500,000
during the third quarter of 1997 and no such sale in the comparable 1998
period. The gross profit margin for the nine months ended September 30,
1998 decreased to 10%, as compared to 41% in the same period of 1997. This
decrease was due primarily to the absorption of period costs by less sales
revenue during the third quarter 1998 compared to the same quarter in 1997
and the sales mix. During the third quarter of 1998, 10% of the sales
revenue was generated by sales of commercial parcels, as compared to 79% in
the third quarter of 1997. Commercial parcels have historically produced
higher gross profits due to their high sales prices and relatively low
development costs. Ninety percent of the sales were generated by
residential sales in the three months ended September 30, 1998, as compared
to 21% in the same period of 1997.
Homebuilding Operations.
Revenues from home sales increased to $1,825,000 during the third
quarter of 1998 compared to $1,816,000 during the same period in 1997. This
increase is due to 18 homes settled in the third quarter of 1998 as
compared to 16 in the third quarter of 1997, offset by the sales mix. The
gross profit margins increased during the third three months of 1998 to 10%
compared to 2% earned during the same period in 1997. This increase is
primarily attributable to a decrease in overhead.
Rental Property Revenues and Operating Results.
Rental property revenues, net of operating expenses, increased 5% to
$1,294,000 for the three months ended September 30, 1998, as compared to
$1,224,000 in the same period in 1997. This increase is primarily due to a
1% increase in rental revenues and a 5% decrease in operating expenses.
The decrease in operating expenses is a result of a decrease in maintenance
expenses and timing difference of utility costs.
Equity in Earnings from Partnerships and Developer Fees.
Equity in earnings increased $211,000 to $498,000 during the three
months ended September 30, 1998, as compared to $287,000 during the three
months ended September 30, 1997. This increase is primarily attributable
to an increase in earnings from the homebuilding joint venture during the
three months ended September 30, 1998, as compared to the same period of
1997.
Management and Other Fees.
Management and other fees remained constant at $769,000 for the three
months ended September 30, 1998, as compared to the three months ended
September 30, 1997.
Interest Expense.
Interest expense increased 7% to $936,000 during the three months
ended September 30, 1998, as compared to $866,000 for the three months
ended September 30, 1997. This increase is a result of increased
outstanding loan balances during the third quarter of 1998 as compared to
the same quarter in 1997.
General and Administrative Expense.
General and administrative expenses decreased 11% to $1,393,000 for
the three months ended September 30, 1998, as compared to $1,547,000 for
the same period of 1997. This decrease is primarily attributable to the
recognition of receivables previously reserved.
Spin-off Costs.
Costs of $783,000 related to the restructuring of the Company were
recognized as an expense for the three months ended September 30, 1998, as
compared to $300,000 for the three months ended September 30, 1997.
Liquidity and Capital Resources
Cash and cash equivalents were $1,721,000 and $2,273,000 at September
30, 1998 and December 31, 1997, respectively. This decrease was
attributable to $16,008,000 and $5,331,000 used in investing and financing
activities, respectively, offset by $20,787,000 provided by operating
activities. 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 nine months of 1998, the Company paid
down debt by $2,290,000 net of advances, purchased a subsidiary's minority
interest for $3,100,000 and distributed $209,000 to the Unitholders.
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 Banc One financing closed in 1997 which provided funding to commence
construction in Fairway Village, the third village in St. Charles, and
allows 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 capital
for its waste technology investments as well as potential fines that may be
imposed should the Company and the U.S. Attorney's office reach a
settlement approved by the court to the Wetlands Litigation. Management
believes that the cost of such a settlement would not be materially greater
than the $1,100,000 reserved by IGC for the Wetlands Litigation (see Part
III, Item 1 to this Form 10-Q). 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 $14,702,000 of loans that are due in the next twelve months
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 September 30, 1998, the consolidated rental properties with a
net asset book value of $37,000,000 were encumbered by $39,000,000 of non-
recourse debt. The remaining assets with a book value of $107,000,000 are
substantially all collateralized by $37,000,000 of recourse debt. 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 9/30/98
------------ ---------- -------- -------- -----------
Banc One-term loan (a) $11,000 P+6.5% 7/31/04 $10,000
Banc One-development loan (a) 4,000 P+6.5% 7/31/04 1,905
Banc One-remediation loan (a) 5,000 P+6.5% 7/31/04 3,578
First Bank-term loan (b) 9,865 P+1.5% 6/30/99 6,399
First Bank-construction loan (b) 5,500 P+1.5% 9/30/98 463
First Bank-construction loan (b) 8,350 P+1.5% 12/31/00 2,523
RG-Premier Bank (c) 1,641 P+1.5% 4/30/99 1,317
Citibank (d) 969 (e) demand 905
Washington Savings Bank (e) 1,317 9.5% 9/30/99 923
Banco Popular (f) 5,600 P+1.0% 7/30/99 5,600
Miscellaneous land and
development loans 3,560 Various Various 2,160
Other miscellaneous 2,287 Various Various 865
------- -------
$59,089 $36,638
======= =======
(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 Units 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 three 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 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.
(d) The note requires monthly payments of interest calculated at
250 basis points over the cost of funds, 8.1875% at September
30, 1998. The note is secured by receivables and distributions
from two apartment projects currently being converted to
condominiums.
(e) 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.
(f) The note requires monthly payment of interest, calculated at 1%
over the prime rate, 9.5% at September 30, 1998. The note is
secured by 549 acres comprising Parque El Comandante, and the
assignment of the purchased 20% partnership interest in LDA.
Year 2000
What is Year 2000?:
The Year 2000 "Y2K" issue exists because many computer systems and
applications and other electronically controlled systems and equipment
currently use two-digit fields to designate a year. As the century date
occurs, date sensitive systems with this deficiency may recognize the year
2000 as 1900 or not at all. This inability to recognize or properly treat
the year 2000 can cause the systems to process critical financial and
operations information incorrectly.
The Company has assessed and continues to assess the impact of the Y2K
issue on its reporting systems and operations.
Current State of Readiness:
The systems and applications that can critically affect the Company's
operations due to the Y2K issue are its financial reporting and billing
systems and those electronically controlled systems and equipment installed
at the commercial and residential properties managed by the Company, many
of which the Company holds an ownership interest. These systems include
five accounting/billing applications, two time and attendance applications
and the computer network systems on which they are installed and the
telephone, security, elevator, HVAC, and other like systems installed at
the Company's properties. Of secondary importance are those administrative
systems and equipment not directly involved in revenue production but can
still minimally impact the Company's operations.
Of the five software financial applications employed by the Company,
three are currently certified by their respective publishers to be Y2K
compliant. Of the two non-compliant applications, the first is in minimal
use and will not be used for active financial reporting after December 31,
1998. The second application, the property management billing system for
the Puerto Rico properties, is non Y2K compliant and is scheduled for
upgrade during the first quarter of 1999. Active testing to verify the Y2K
compliance of the Company's financial systems will be conducted after
December 31, 1998. "Dummy" companies will be setup in the critical systems
with dates forwarded to beyond 2000 for these tests.
The U.S. and Puerto Rico operations rely on separate time and
attendance systems for payroll processing. The U.S. payroll system
utilizes the services of a third party provider and is certified Y2K
compliant. The Puerto Rico payroll system is not Y2K compliant. The
Company is currently evaluating its options and costs in either upgrading
or replacing the Puerto Rico payroll system. This evaluation is expected
to be completed by December 31, 1998.
The hardware component of the Company's financial systems consists of
industry standard PC operating systems, servers, desktop computers, and
networking hardware. These systems have been evaluated and tested for Y2K
compliance. It has been found that two of the network operating systems
maintained by the Puerto Rico division require minor upgrades to achieve
Y2K compliance. These upgrades are available from the publisher at no cost
and are expected to be installed and tested by December 1998. The
remaining information technology "IT" hardware has been verified to be Y2K
compliant.
The non-IT related electronically controlled systems installed at the
Company's owned and managed properties are currently being inventoried and
evaluated for Y2K exposure. This evaluation is expected to be completed by
January 1999. Once the extent of Y2K exposure is determined for these
systems, costs will be ascertained and procedures implemented to bring non-
compliant systems into Y2K compliance. Since it has already been
determined that a majority of these systems are not "date sensitive" and do
not perform data logging, it is expected that Y2K exposure and related
costs in this area will be minimal.
The administrative applications (word processing, spreadsheet,
messaging, etc) utilized by the Company have been certified by the various
publishers to be Y2K compliant. Testing is currently in progress to verify
compliance of these applications and is expected to be completed by
December 31, 1998.
Third Party Impact on Company Operations:
The Company performs all financial and revenue production procedures
in house with the exception of U.S. rental payment processing. Failure to
timely process and deposit tenant payments indirectly impacts the Company's
cash flow. Statements of Y2K compliance have been requested from those
vendors supplying these services to the Company.
Of the administrative procedures, only U.S. payroll processing is
performed by a third party vendor. A statement of Y2K compliance has been
obtained from the vendor in question and ACPT considers Y2K exposure with
U.S. payroll processing to be minimal.
With the exception of payment processing, the Company does not foresee
any adverse impact to company fiscal operations due to third party non-
compliance.
Costs to Achieve Y2K Compliance:
Because of the Company's almost exclusive use of "off the shelf"
applications and hardware and that the Company maintains service
maintenance agreements on all critical business systems, costs to achieve
Y2K compliance have been nominal. Y2K upgrades for a majority of the
Company's financial and billing systems have been included with standard
system updates as part of the normal maintenance procedures.
Costs to upgrade the Puerto Rico property management system is
expected to be in the range of $4,000 to $5,000.
The Company does not separately track the internal costs incurred for
the Y2K project. These costs are principally related to payroll costs for
the Company's information systems and property management groups. The
costs for the financial departments to perform the scheduled tests of the
accounting and billing systems for Y2K compliance has not been ascertained,
though it is expected that these costs will be nominal.
Risks of the Company's Y2K Issues:
The failure of one or all of the Company's financial systems for more
than a few days would create a hardship on company operations. Failure of
the basic accounting systems will affect the Company's general ledger,
accounts payable, accounts receivable, and reporting functions. Of utmost
importance is the correct operation of the Company's property management
systems. Failure of these systems could jeopardize the Company's cash flow
from these rental operations.
Failure of the various non-IT systems installed at the Company's owned
and managed properties could seriously affect employee/tenant ingress and
egress and could affect environmental conditions at these properties.
The Company has not obtained insurance specific to Y2K liability
issues and is evaluating whether current policies will cover damages due to
Y2K non-compliance.
The Company's Contingency Plans:
The Company is currently evaluating its various Y2K failure scenarios
and developing contingency plans to ensure continued company operations.
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
As reported in Registrant's 10-K for December 31, 1997, convictions in
the Wetlands litigation in the United States District Court for the
District of Maryland were reversed by the United States Court of Appeals
for the Fourth Circuit and the case remanded to the District Court for a
new trial.
Counsel for Registrant is currently engaged in negotiations with the
U.S. Attorney's office on a possible disposition of the Wetlands litigation
that would require payment of a fine by Registrant, a portion of which will
be abated by a contribution of approximately two acres of land for
wetlands, remediation of a portion of two parcels in St. Charles and
Registrant's undertaking an environmental compliance program. Registrant
would also plead guilty to a single felony count. All other criminal
charges in the indictment against Registrant and its president, James J.
Wilson, would be dropped. The foregoing settlement proposal has not as yet
been agreed upon by either Registrant or the U.S. Government, and there are
a number of issues that are still under discussion. If agreement is
reached, the disposition must be approved by the court. Management
believes that the cost of such a settlement would not be materially greater
than the amount ($1.1 million) currently reserved by IGC for the Wetlands
litigation. If such a settlement is reached, a portion of the land in St.
Charles presently encumbered by the Wetlands litigation would become
available for development.
On October 30, 1998, St. Charles Community, LLC filed a complaint in
the Circuit Court for Charles County, Maryland against the County
Commissioners of Charles County and five individual members of the
commission. The complaint presents a challenge to Charles County Ordinance
No. 98-69, which became effective on October 1, 1998. That ordinance
places a moratorium on the issuance of building permits for multi-family or
townhouse developments in Charles County for the period of October 2, 1998
through March 15, 1999. The complaint alleges that the County's
enforcement of the moratorium against St. Charles Community, LLC amounts to
a breach of a 1989 settlement agreement between St. Charles Associates and
the County. St. Charles Community, LLC is a successor in interest to the
rights of St. Charles Associates under that agreement. The October 30,
1998 complaint also alleges that the procedure by which the moratorium
ordinance was enacted violated Maryland law relating to open government
meetings. The complaint seeks in excess of $7,000,000 in damages and an
injunction preventing enforcement of the moratorium.
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) Trust Agreement dated September 1, 1998 Filed herewith
by and between Interstate General Company
L.P. and Mark Augenblick, Hans Hertell,
Thomas B. Wilson and J. Michael Wilson
10(b) First Amendment to Master Loan Agreement Filed herewith
between Interstate General Company L.P.,
American Community Properties Trust, St.
Charles Community, LLC and Banc One Capital
Partners, IV, Ltd dated September 30, 1997
10(c) First Modification to Credit Facility and Filed herewith
Second Amendment to Master Loan Agreement
between Banc One Capital Partners IV, Ltd.,
Interstate General Company L.P., American
Community Properties Trust, St. Charles
Community, LLC, James J. Wilson, J. Michael
Wilson, Edwin L. Kelly, American Rental
Properties Trust, American Rental Management
Company, American Land Development U.S.,
Inc., IGP Group Corp., and American Housing
Properties L.P. dated October 1, 1998
10(d) Release of Guaranty Agreement between Filed herewith
Equus Management Company and Interstate
General Company L.P. dated December 31, 1997
(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: November 16, 1998 By: /s/ James J. Wilson
----------------- -----------------------------
James J. Wilson
Chairman, Chief Executive
Officer and Chief Financial
Officer
Dated: November 16, 1998 By: /s/ Mark Augenblick
----------------- -----------------------------
Mark Augenblick
President and Chief Operating
Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- - ------- -------
10(a) Trust Agreement dated September 1, 1998 by and between
Interstate General Company L.P. and Mark Augenblick, Hans
Hertell, Thomas B. Wilson and J. Michael Wilson
10(b) First Amendment to Master Loan Agreement between Interstate
General Company L.P., American Community Properties Trust,
St. Charles Community, LLC and Banc One Capital Partners,
IV, Ltd dated September 30, 1997
10(c) First Modification to Credit Facility and Second Amendment
to Master Loan Agreement between Banc One Capital Partners
IV, Ltd., Interstate General Company L.P., American
Community Properties Trust, St. Charles Community, LLC,
James J. Wilson, J. Michael Wilson, Edwin L. Kelly, American
Rental Properties Trust, American Rental Management Company,
American Land Development U.S., Inc., IGP Group Corp., and
American Housing Properties L.P. dated October 1, 1998
10(d) Release of Guaranty Agreement between Equus Management
Company and Interstate General Company L.P. dated December
31, 1997
27. Financial Data Schedule