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, 1999, 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, Waldorf, MD 20602
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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.
2,055,785 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, 1999 and
1998. (Unaudited) 3
Consolidate Balance Sheets as of March 31, 1999
(Unaudited) and December 31, 1998 (Audited). 4
Consolidated Statements of Cash Flow for the
Three Months Ended March 31, 1999 and 1998.
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Three
Months Ended March 31, 1999 and 1998. 13
Item 3. Qualitative and Quantitative Disclosures About
Market Risk 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security
Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
FOR THE THREE MONTHS ENDED MARCH 31,
(In thousands, except per Unit amounts)
(Unaudited)
1999 1998
-------- ---------
REVENUES
Community development-land sales $ 261 $ 5,992
Homebuilding-home sales 2,393 2,030
Rental property revenues -- 2,209
Equity in (losses)/earnings from partnerships
and developer fees 45 505
Management and other fees, substantially
all from related entities 2 976
Interest and other income 245 246
-------- --------
Total revenues 2,946 11,958
-------- --------
EXPENSES
Cost of land sales 264 3,504
Cost of home sales 2,067 1,834
Selling and marketing 303 333
General and administrative 714 1,695
Interest expense 74 866
Rental properties operating expense -- 896
Depreciation and amortization 35 493
Spin-off costs 38 757
-------- --------
Total expenses 3,495 10,378
-------- --------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST (549) 1,580
PROVISION FOR INCOME TAXES -- 335
-------- --------
(LOSS) INCOME BEFORE MINORITY INTEREST (549) 1,245
MINORITY INTEREST -- (198)
-------- --------
NET (LOSS) INCOME $ (549) $ 1,047
======== ========
BASIC NET (LOSS) INCOME PER UNIT $ (.27) $ .51
======== ========
NET (LOSS) INCOME
General Partners $ (6) $ 10
Limited Partners (543) 1,037
-------- --------
$ (549) $ 1,047
======== ========
WEIGHTED AVERAGE UNITS OUTSTANDING 2,056 2,066
======== ========
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,
1999 1998
----------- ------------
(Unaudited) (Audited)
CASH AND CASH EQUIVALENTS
Unrestricted $ 165 $ 33
Restricted 129 125
-------- --------
294 158
-------- --------
ASSETS RELATED TO COMMUNITY DEVELOPMENT
Land and development costs
St. Charles, Maryland 6,398 6,387
Other United States locations 16,599 16,573
Notes receivable on lot sales and other 642 709
-------- --------
23,639 23,669
-------- --------
ASSETS RELATED TO RENTAL PROPERTIES
Other receivables 32 46
-------- --------
32 46
-------- --------
ASSETS RELATED TO HOMEBUILDING
Homebuilding construction and land 2,395 2,597
Receivables and other 110 122
-------- --------
2,505 2,719
-------- --------
RECEIVABLES & OTHER ASSETS
Receivables 9,879 9,593
Deferred costs regarding waste technology
and other projects, receivables and other assets 3,755 3,470
Property, plant and equipment, less accumulated
depreciation of $741 and $717 as of
March 31, 1998 and December 31, 1998,
respectively 602 609
-------- --------
14,236 13,672
-------- --------
Total assets $ 40,706 $ 40,264
======== ========
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,
1999 1998
------------ -----------
(Unaudited) (Audited)
LIABILITIES RELATED TO COMMUNITY DEVELOPMENT
Recourse debt $ 2,614 $ 2,633
Accounts payable, accrued liabilities
and deferred income 226 386
-------- --------
2,840 3,019
-------- --------
LIABILITIES RELATED TO RENTAL PROPERTIES
Accounts payable and accrued liabilities 814 888
-------- --------
814 888
-------- --------
LIABILITIES RELATED TO HOMEBUILDING
Recourse debt 897 740
Accounts payable and accrued liabilities 2,663 2,709
-------- --------
3,560 3,449
-------- --------
OTHER LIABILITIES
Accounts payable and accrued liabilities 3,055 2,607
Notes payable and capital leases 1,431 722
Accrued income tax liability - current 2,188 2,188
-------- --------
6,674 5,517
-------- --------
Total liabilities 13,888 12,873
-------- --------
PARTNERS' CAPITAL
General partners' capital 4,160 4,166
Limited partners' capital-2,056 and 2,044
Units issued and outstanding as of
March 31, 1999 and December 31, 1998,
respectively 22,658 23,225
-------- --------
Total partners' capital 26,818 27,391
-------- --------
Total liabilities and partners' capital $ 40,706 $ 40,264
======== ========
The accompanying notes are an integral part
of these consolidated balance sheets.
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(In thousands)
(Unaudited)
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (549) $ 1,047
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization 35 493
Benefit for deferred income taxes -- (578)
Equity in (losses)/earnings from unconsolidated
partnerships and developer fees (45) (243)
Distributions from unconsolidated partnerships -- 1,750
Cost of sales-community development
and homebuilding 2,331 5,338
Homebuilding construction expenditures (1,864) (1,518)
Equity in loss from homebuilding joint venture -- (262)
Collection of fines -- 3,212
Changes in other accounts receivable, and
accounts payable (53) 2,191
------- -------
Net cash (used in) provided by operating activities (145) 11,430
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in land improvements for future sales (300) (2,669)
Change in assets related to unconsolidated
rental property partnerships 45 135
Change in restricted cash (4) (1,628)
Additions to rental operating properties, net -- (458)
Acquisitions of other assets (313) (121)
------- -------
Net cash used in investing activities (572) (4,741)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash proceeds from debt financing 1,849 1,705
Payment of debt (1,000) (7,433)
------- -------
Net cash provided by (used in) financing activities 849 (5,728)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 132 961
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 33 2,273
------- -------
CASH AND CASH EQUIVALENTS, MARCH 31 $ 165 $ 3,234
======= =======
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
On September 26, 1986, Interstate General Company L.P. ("IGC" or "the
Company"), a Delaware limited partnership, was formed, and on December 31,
1986, acquired substantially all of the community development,
homebuilding, investment properties and management services businesses of
Interstate General Business Corporation, Interstate St. Charles, Inc. and a
trust for the benefit of the stockholders of Interstate General Business
Corporation. The Company's 1% general partner interest is shared by the
managing general partner, Interstate General Management Corporation, and
Interstate Business Corporation ("IGMC" and "IBC", respectively, referred
to collectively as the "General Partner").
On October 5, 1998, IGC transferred its principal real estate
operations to American Community Properties Trust ("ACPT"), and
subsequently distributed all of the common shares of ACPT to the partners
and unitholders of IGC (the "Distribution"). The purpose of the
restructuring was to create an attractive investment vehicle for the
principal real estate assets and operations held by IGC that would not be
burdened with the operating losses of American Family Homes, LLC ("AFH")
and the capital needs of Interstate Waste Technologies, Inc. ("IWT"), and
Caribe Waste Technologies ("CWT"), or with the Wetlands litigation
discussed below.
After the restructuring, IGC continues to own certain assets that, in
management's view, do not fit ACPT's business plan. These assets include
the Towne Center land in St. Charles, Maryland, which has been the subject
of Wetlands litigation, certain single family home lots in the Dorchester
neighborhood, also in St. Charles, Maryland, certain land in Pomfret,
Maryland and in St. Mary's County, Maryland, a 50% interest in a
partnership that owns land in Brandywine, Maryland, all of the shares of
AFH (excluding shares issued as incentive compensation for employees),
rights to collect the principal balance of a note in the amount of $7.38
million payable by a subsidiary of ACPT, as well as fractional interests in
Chastleton Apartment Associates, Coachman's Limited Partnership, Headen
House Associates Limited Partnerhsip, Palmer Apartments Associates Limited
Partnership, Wakefield Terrace Associates Limited Partnership and Wakefield
Third Age Associates Limited Partnerhsip. IGC retained a portion of the
general partner interests in the latter four apartment partnerships because
a complete transfer would have terminated each respective partnership
agreement. IGC intends to transfer the remaining interest in these
partnerships to ACPT in 1999. Until such time as the partnership interest
have been transferred, all beneficial interest related to these
partnerships have been assigned to ACPT.
All of the common stock of IWT and CWT (excluding shares issued as
incentive compensation for employees) is held in a trust (the "CWT Trust")
for the benefit of the IGC Unitholders.
On October 19, 1998, IGC implemented a one-for-five reverse unit split
with respect to the IGC Units (the "Reverse Split"). The purpose of the
Reverse Split was to increase the post-Distribution trading price of IGC
units.
(2) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," was
issued. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial postition and
measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liabiltiy or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure to a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-
denominated forecasted transaction. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Although
currently IGC has no derivative instruments, this statement would apply to
derivative instruments acquired in future periods.
(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,
1999 1998
--------- ------------
Total assets $ 33,471 $ 33,695
Total non-recourse debt 42,248 42,373
Total other liabilities 17,558 17,423
Total equity (26,335) (26,101)
Company's investment (814) (874)
SUMMARY OF OPERATIONS: FOR THE THREE MONTHS ENDED
---------------------------
March 31, March 31,
1999 1998
------------ ------------
Total revenue $ 2,066 $ 8,002
Net loss (134) (324)
Company's recognition of equity
in earnings and developer fees 45 243
SUMMARY OF OPERATING CASH FLOWS: FOR THE THREE MONTHS ENDED
---------------------------
March 31, March 31,
1999 1998
------------- ----------
Cash flows from operating activities $ 436 $ 2,987
Operating cash distributions 101 4,451
Company's share of operating cash
distributions -- 1,750
Prior to the distribution of ACPT, the company had interests in 19
partnerships owning 4,563 rental units in 22 apartment complexes. At March
31, 1999, IGC had interests in 6 partnerships owning 1,000 rental units in
6 apartment complexes. 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
receive cash distributions equal to their capital contributions. Pursuant
to the partnership agreements, the general partners 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.
The properties that the Company held interests in at March 31, 1999,
Chastleton Apartments Associates, Coachman's Limited Partnership, Headen
House Associates Limited Partnership, Palmer Apartments Associates Limited
Partnership, Wakefield Terrace Associates Limited Partnership and Wakefield
Third Age Associates Limited Partnership, were placed in service prior to
1995. As part of the prior reorganization, the Company will transfer its
interest in all of the partnerships except Chastleton Apartments Associates
and a 1% general partner interest in Coachman's Limited Partnership to ACPT
during 1999.
Homebuilding Joint Venture
The Company held a 50% joint venture interest in Escorial Builders
S.E. until October 5, 1998 at which time it was transferred to ACPT.
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. Although IGC
currently holds no interest in Escorial Builders, the Company has continued
to disclose this information for comparative purposes and because of its
share of earnings and cash flows during 1998 prior to the Distribution.
The following tables summarize Escorial Builders' financial information (in
thousands):
SUMMARY OF FINANCIAL POSITION: AS OF
------------------------
March 31, December 31,
1999 1998
--------- ------------
Total assets $ 4,908 $ 9,396
Total liabilities 2,897 7,107
Total equity 2,011 2,289
Company's investment -- --
SUMMARY OF OPERATIONS: FOR THE THREE MONTHS ENDED
--------------------------
March 31, March 31
1999 1998
---------- -----------
Total revenue $ 5,269 $ 2,185
Net income 321 524
Company's recognition of equity
in earnings -- 262
SUMMARY OF OPERATING CASH FLOWS: FOR THE THREE MONTHS ENDED
---------------------------
March 31, March 31,
1999 1998
---------- -------------
Cash flows from operating activities $ 4,226 $ 633
Operating cash distributions 600 --
Company's share of operating cash
distributions -- --
(4) DEBT
The Company's outstanding debt is collateralized primarily by land,
land improvements, housing, receivables and investments in partnerships.
The following table summarizes the indebtedness of IGC at March 31, 1999
and December 31, 1998 (in thousands):
Outstanding
Maturity Interest -----------------------
Dates Rates* March 31, December 31,
From/To From/To 1999 1998
-------- -------- --------- ------------
Related to community
development:
Recourse debt 04-01-00/ P+1%/ $ 2,614 $ 2,633
03-21-00 10.0%
Related to homebuilding
projects:
Recourse debt Demand/ P+1%/ 897 740
08-03-99 P+1.5%
General:
Recourse debt 10-26-99/ P+1.25%/ 1,431 722
03-05-02 10.99% ------- -------
Total debt $4,942 $ 4,095
======= =======
*P = Prime lending interest rate.
As of March 31, 1999, the $2,614,000 of recourse debt related to
community development assets is collateralized by $13,326,000 of the
community development assets.
The homebuilding debt is secured by substantially all of the
homebuilding assets.
The Company's loans contain various financial, cross-default and
technical provisions of which the Company is currently in compliance.
(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 three years. The financial impact of the related party
transactions on the accompanying financial statements are reflected below:
(in thousands)
Three Months Ended
March 31,
1999 1998
-------------------
INCOME STATEMENT IMPACT
Management and Other Fees
Unconsolidated subsidiaries $ -- $ 639
Affiliate of IBC, general partner of IGC (A) -- 58
Affiliate of James Michael Wilson, director,
Thomas B. Wilson, director, and James
J. Wilson, director -- 38
Affiliate of James Michael Wilson, director,
Thomas B. Wilson, director, James J. Wilson,
director, and an Affiliate of IBC, general
partner of IGC -- 17
------ ------
$ -- $ 752
====== ======
Interest and Other Income
Unconsolidated subsidiaries $ -- $ 12
Affiliate of a former director -- 43
Affiliate of IBC, general partner of IGC -- 39
LDA, Affiliate of ACPT 165 --
------ ------
$ 165 $ 94
====== ======
General and Administrative Expense
Affiliate of IBC, general partner of IGC (B1) $ 45 $ 89
Reserve additions and other write-offs-
Affiliate of IBC, general partner of IGC -- 32
Unconsolidated subsidiaries -- 74
------ ------
$ 45 $ 195
====== ======
Balance Balance
March 31, December 31,
1999 1998
---------- -------------
BALANCE SHEET IMPACT:
Assets Related to Rental Properties
Receivables, all unsecured and due on demand-
Unconsolidated subsidiaries $ -- $ 9
------ ------
$ -- $ 9
====== ======
Other Assets
Receivables - All unsecured IBC, general partner of IGC $ -- $ 5
------ ------
$ -- $ 5
====== ======
Liabilities Related to Community Development
Accounts payable, Whitman, Requardt (B2) $ 7 $ 7
====== ======
Other Liabilities
Advances, IBC, General partner of IGC (B3) $ 577 $ 383
Accounts payable to ACPT for accounting support services (B4) 24 57
------ ------
$ 601 $ 440
====== ======
(A) Management and Other Services
In 1998 IGC provided 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.
(B) 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 at various times through 2005. In management's opinion, all
leases with affiliated persons are on terms generally available
from unaffiliated persons for comparable property. In addition,
affiliates provide general office support which is reimbursed by
the Company.
(2) 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 the same terms
provided to other clients.
(3) During the fourth quarter of 1998 and the first quarter of 1999,
the Company received working capital advances from its General
Partner, Interstate Business Corporation ("IBC"). These advances
totaled approximately $775,000 during that period and were non-
interest bearing. Beginning April 1, 1999, interest will accrue at
1% over the prime rate. The Company does not currently have a
repayment plan and expects funding to continue through the
remainder of 1999. At March 31, 1999, the outstanding balance of
working capital loans payable to IBC was $577,000.
(4) During the transition period after the Distribution, the Company
received land development, accounting, tax, human resources,
payroll processing, and other miscellaneous administrative support
services from ACPT. After the transition period, ACPT has agreed
to provide human resources, payroll processing and tax services to
IGC on a cost reimbursement basis.
(6) SEGMENT INFORMATION
IGC has four reportable segments: AFH, IWT/CWT, U.S. land and other,
and Puerto Rico. U.S. land and other operations include investment in
rental properties, community development, and management services. The
Puerto Rico operations include investment in rental properties, investment
in commercial properties, community development, management services, and
homebuilding through a joint venture.
The accounting policies of the segments are the same as those
described in the December 31, 1998 financial statements. The following
present the segment information for the three months ended March 31, 1999,
and 1998 (in thousands):
Land and Inter-
AFH IWT/CWT Other Puerto Rico Segment Total
---- ------- --------- ----------- ------- -----
1999:
Total Revenues 2,393 -- 553 -- -- 2,946
Interest income -- -- 292 -- -- 292
Interest expense 13 -- 61 -- -- 74
Depreciation and amortization 23 -- 12 -- -- 35
Income taxes -- -- -- -- -- --
(Loss) Income before income
taxes and minority interest (159) (1) (389) -- -- (549)
Net (loss) income (159) (1) (389) -- -- (549)
Total assets 6,475 4,920 52,948 -- (23,637) 40,706
Additions to long lived assets -- -- 300 -- -- 300
1998:
Total revenue 2,120 -- 4,931 5,556 (649) 11,958
Interest income 41 -- 104 133 (364) (86)
Interest expense 8 5 746 262 (155) 866
Depreciation and amortization -- 2 454 37 -- 493
Income taxes -- -- 335 -- -- 335
(Loss) income before income
taxes and minority interest (137) (7) 591 1,253 (120) 1,580
Net (loss) income (137) (7) 282 1,072 (163) 1,047
Total assets 6,272 3,641 102,533 45,151 (17,978) 139,619
Additions to long lived assets -- -- 1,604 1,065 -- 2,669
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
Certain matters discussed and statements made within this Annual
Report on Form 10-K 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.
Effective October 5, 1998, the Company distributed the majority of its
real estate development business to ACPT. As a result, the Company's
historical results of operations for March 31, 1999 are not readily
comparable with the results of operations for March 31, 1998. Accordingly,
the unaudited results for March 31, 1999 and unaudited pro forma results
for March 31, 1998 have also been presented as if the Distribution had been
completed on January 1, 1998. This information is provided for purposes of
completing the Management's Discussion and Analysis and should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included in Part I, Item 1 which show the historical operations of
the Company.
INTERSTATE GENERAL COMPANY L.P.
PRO FORMA CONSOLIDATED STATEMENTS OF (LOSS) INCOME
FOR THE THREE MONTHS ENDED MARCH 31,
(In thousands, except per Unit amounts)
(Unaudited)
Pro Forma
1999 1998
-------- ---------
REVENUES
Community development-land sales $ 261 $ 31
Homebuilding-home sales 2,393 2,030
Equity in (losses)/earnings from
partnerships and developer fees 45 43
Management and other fees, substantially
all from related entities 2 --
Interest and other income 245 293
-------- --------
Total revenues 2,946 2,397
-------- --------
EXPENSES
Cost of land sales 264 47
Cost of home sales 2,067 1,834
Selling and marketing 303 312
General and administrative 714 95
Interest expense 74 13
Depreciation and amortization 35 22
Spin-off costs 38 --
-------- --------
Total expenses 3,495 2,323
-------- --------
(LOSS) INCOME BEFORE PROVISION
FOR INCOME TAXES (549) 74
PROVISION FOR INCOME TAXES -- 52
-------- --------
NET (LOSS) INCOME $ (549) $ 22
======== ========
For the Three Months Ended March 31, 1999 versus Pro Forma 1998
Community Development Operations
Community development land sales revenue increased to $261,000 during
the three months ended March 31, 1999, compared to sales of $31,000 during
the pro forma three months ended March 31, 1998. The 1999 period reflects
sales of approximately 7 single family home lots as well as 5 townhome lots
with a sales price of $70,000, while the 1998 pro forma period reflects
only one sale of a single family home lot. Four of the 1999 single family
home lot sales occurred in the St. Mary's County, Maryland project of
Westbury. Gross profit margin for these sales was 23%. Gross profit
margin for the townhome lots was 4%. The remaining single family home lot
sales for 1999 as well as the 1998 single family home lot sale were for the
Montclair project in Prince William County, Virginia. Gross profit margins
for Montclair lots are zero.
Homebuilding Operations
Revenues from home sales increased 18% to $2,393,000 for the three
month period ending March 31, 1999, as compared to $2,030,000 during the
pro forma three month period ending March 31, 1998. The 1999 revenues were
a result of 22 scatter-site sales, while the 1998 revenues were a result of
only 17 scatter-site sales. The gross profit margin increased to 14% in
1999, as compared to 10% for the same period of 1998 due to better
management of sales prices and costs.
Interest and Other Income
Interest and other income decreased 16% to $245,000 for the three
month period ending March 31, 1999 as compared to $293,000 during the pro
forma three month period ending March 31, 1998. The decrease is due to the
1998 collection of bad debt written off in a prior year.
General and Administrative Expense
General and administrative expenses increased $619,000 from $95,000
during the pro forma three months ending March 31, 1998 to $714,000 during
the same period for 1999. This increase is a result of additional salaries
and office expenses incurred upon opening the new company headquarters in
Chantilly, Virginia.
Interest Expense
Interest expense increased $61,000 to $74,000 in the three months
ending March 31, 1999, as compared to $13,000 for the same pro forma period
in 1998. The increase is primarily due to an increase in the debt
outstanding during 1999.
Liquidity and Capital Resources
Cash and Cash equivalents were $165,000 and $33,000 respectively at
March 31, 1999 and December 31, 1998. This increase was attributable to
$849,000 provided by financing activities, offset by $145,000 and $572,000
used in operating and investing activities, respectively. The cash
outflows from operating activities was primarily attributable to an
increase in general and administrative expenses related to additional
salaries and office expenses incurred upon opening the new company
headquarters in Chantilly, Virginia. The cash outflow for investing
activities was attributable to land improvements put in place for future
land sales and an increase in deferred costs of future waste technology
projects.
IGC historically has met its liquidity requirements principally from
cashflow 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. As a result of the
distribution and the development status of the land assets that the company
retained, IGC expects to meet its liquidity requirements principally from
land sales as well as bank and other financing facilities. The Company's
principal demands for liquidity are expected to be the continued funding of
development costs for IWT, ongoing debt service for existing bank loans,
land development costs for the Company's land assets, operating cash needs
for AFH, payables and normal operating costs. AFH historically has had
cash needs in excess of those generated through operations and has
substantial vendor payables. Management is currently engaged in a
reorganization to minimize the cash needs of the business in order to make
it profitable and cash flow positive. The liability to pay income taxes by
IGC for liabilities incurred prior to the distribution to ACPT were assumed
by ACPT. Accordingly, IGC recorded a provision for income taxes through
the distribution date for all taxable income prior to October 5, 1998 and
has recorded a receivable from ACPT to reflect the obligation of ACPT to
pay those taxes.
Management believes the Company's real estate assets have substantial
value and their development will be financed on a conventional project
finance basis. Currently Mercantile-Safe Deposit & Trust Company has
provided a loan proposal for the Brandywine project. The loan would
reimburse prior project costs incurred by IGC of $1,000,000 and fund the
development and construction of the first phase. The total loan is
$10,840,000 and final approval is expected by the end of May 1999 with
closing to occur by the end of June 1999. In addition, a Letter of Intent
was signed with Ryan Homes for the acquisition of 54 lots in the Prince
William County, Virginia development of Montclair. The company hopes to
finalize the contract by the end of May 1999. IGC will also look to the
payment in part of a $7.38 million note from Interstate General Properties
Limited Partnership S.E., now a subsidiary of ACPT. IGC intends to
refinance, as appropriate, certain debts as they become due in the normal
course of business. The Company's liquidity needs are dependent on
obtaining additional sources of capital and while management believes those
sources of capital are available there are no assurances that these funds
will be generated.
Debt Summary
As of March 31, 1999, assets with a book value of $17,287,000 were
encumbered by $4,942,000 of recourse debt. The significant terms of IGC's
recourse debt financing arrangements are shown below (dollars in
thousands):
Balance
Maximum Interest Maturity Outstanding
Description Borrowings Rate Date 03/31/99
------------ ---------- -------- -------- -----------
1st Nat'l Bank of St. Mary's (a) $ 460 P+1.5% 12/29/99 $ 119
1st Nat'l Bank of St. Mary's (a) 1,250 P+1.5% 3/21/00 927
1st Nat'l Bank of St. Mary's (b) 1,000 P+.5% 1/25/00 1,000
Washington Savings Bank (c) 850 9.25% 4/1/00 152
Winston Corp Bank & Trust (d) 1,000 10.00% 10/28/99 732
Chevy Chase (e) 500 P+1% 1/7/00 300
Other miscellaneous 3,304 Various Various 1,712
------- -------
$ 8,364 $ 4,942
======= =======
(a) The two notes require monthly interest payments. Principal
curtailments are made from sales of individual lots in the
amount of $13,500 and $23,000 respectively.
(b) Note is for operating use.
(c) The note requires monthly interest payments. Principal payments
are made by partial lot releases in the amount of $38,650.
(d) The note requires monthly interest payments of $6,103. The note
is currently held by Chevy Chase FSB.
(e) The note is divided into two parts, a letter of credit and a
promissory note in the amount of $200,000 and $300,000
respectively. The note requires monthly interest payments. The
note is collateralized by undeveloped land located in Prince
George's County, Maryland.
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.
IGC has assessed and continues to assess the impact of the Y2K issue on
its reporting systems and operations.
Current IGC State of Readiness. The systems and applications that can
critically affect IGC's operations due to the Y2K issue are its financial
reporting systems. These systems include one accounting application, one
time and attendance application and the computer network system which they
are installed on and the telephone, security, elevator, HVAC, and other like
systems installed at IGC. Of secondary importance are those administrative
systems and equipment not directly involved in revenue production but can
still minimally impact IGC operations.
The financial application employed by IGC is currently certified by the
respective publisher to be Y2K compliant. Active testing to verify the Y2K
compliance of the Company's financial system will be conducted in the second
quarter of 1999. "Dummy" companies will be setup in the critical systems
with dates forwarded to beyond 2000 for these tests.
The Company relies on a time and attendance system for payroll
processing. The payroll system utilizes the services of a third party
provider and is certified Y2K compliant.
The hardware component of IGC's financial system consists of industry
standard PC operating systems, servers, desktop computers, and networking
hardware. These systems have been evaluated and tested for Y2K compliance.
The administrative applications (word processing, spreadsheet,
messaging, etc) utilized by IGC have been certified by the various
publishers to be Y2K compliant.
Third Party Impact on Company Operations. Of the administrative
procedures, only the payroll processing is performed by a third party
vendor. A statement of Y2K compliance has been obtained from the vendor in
question and IGC considers Y2K exposure with payroll processing to be
minimal.
Costs to Achieve Y2K Compliance. Because of IGC'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 system has been included with standard system
updates as part of the normal maintenance procedures.
IGC does not separately track the internal costs incurred for the Y2K
project, these costs are principally related payroll costs for the Company's
information systems department. The cost for the financial departments to
perform the scheduled tests of the accounting system for Y2K compliance has
not been ascertained, though it is expected that these costs will be
nominal.
Risks of IGC's Y2K Issues. The failure of IGC's financial system for
more than a few days would create a hardship on Company's operations.
Failure of the accounting system will affect the companies general ledger,
accounts payable, accounts receivable and reporting functions.
IGC had not obtained insurance specific to Y2K liability issues.
However, after discussions with its insurance carrier, IGC has determined
that current policies will cover foreseeable material damages due to the
Company's systems Y2K non-compliance.
IGC's Contingency Plan. IGC is currently evaluating it's various Y2K
failure scenarios and developing contingency plans to ensure continued
Company operations.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain financial market risks, the most
predominant being fluctuations in interest rates. Interest rate
fluctuations are monitored by the Company's management as an integral part
of the Company's overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the potentially
adverse effect on the Company's results of operations.
As of March 31, 1999, there have been no material changes in the Company's
financial market risk since December 31, 1998 as reported in the Company's
Annual Report on Form 10-K.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Wetlands Litigation
On February 29, 1996, IGC, SCA and James J. Wilson were convicted on
four felony counts of violations of Section 404 of the U.S. Clean Water Act
relating to discharge without a permit of fill material into wetlands within
the U.S. Army Corps of Engineers' regulatory jurisdiction. The nine civil
violations of the U.S. Clean Water Act filed by the U.S. Attorney were
dismissed without prejudice. The Company was fined $3,000,000, placed on
probation for five years and ordered to implement a wetlands restoration and
mitigation plan proposed by the government. Mr. Wilson was fined $1,000,000
and sentenced to 21 months imprisonment and one year of supervised release.
Appeals were filed and Mr. Wilson's sentence was stayed pending appeal by
the Court of Appeals. On December 23, 1997, the United States Court of
Appeals for the Fourth Circuit reversed the lower court's decision and
remanded the matter back to the lower court for retrial.
IGC's counsel 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 IGC, a portion of which will be abated by
a contribution of approximately 2 acres of land in Towne Center South zoned
for commercial development, remediation of two parcels, totaling
approximately 73 acres, in St. Charles and IGC's undertaking an
environmental compliance program. IGC would also plead guilty to a single
felony count. All other criminal charges in the indictment against the
Company and its president, James J. Wilson, would be dropped. The foregoing
settlement proposal has not been agreed upon by either IGC or the U.S.
Government, and there are 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, not including cost
of remediation, 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.
Lead Based Paint Allegations
Subsequent to year end, American Rental Management Company ("ARMC"), a
subsidiary of ACPT, Chastleton Apartments Associates (a housing partnership
in which IGC is the general partner) and Capitol Park Apartments Associates
(an apartment project managed by ARMC) received notification from the U.S.
Department of Justice (the "Department") that they were alleged to be in
violation of the Residential Lead-Based Paint Housing Reduction Act of 1992
(the "Act"). These allegations were based on the finding by the Department
of Housing and Urban Development ("HUD") that the apartments had failed to
make disclosures of lead-based paint in the buildings, as required by the
Act. The Act also authorized HUD to assess administrative civil penalties,
the extent of which cannot be determined at this time. This original
notification was addressed to ARMC, the managing agent at the time.
However, the alleged violations occurred during IGC's tenure as management
agent. ARMC and IGC have requested that ARMC be released from any liability
and IGC substituted as the real party in interest. IGC has agreed with ACPT
to accept the responsibility for any potential penalties that might be
assessed against ARMC. As the general partner of Chastleton Apartments
Associates, IGC is liable for any obligations of Chastleton Apartment
Associates and in such capacity would be liable if Chastleton was unable to
pay any fines levied against it. The Company continues to contest HUD's
assessments of liability and any potential penalty. Currently, IGC is
actively trying to settle this matter, however there can be no assurance it
will be successful.
Other
In the normal course of business, the Company is involved in various
types of pending or unasserted claims. In the opinion of management, these
will not have a material impact on the financial condition or future
operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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
None.
SIGNATURES
----------
Pursuant to the requirements of 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.
By: Interstate General Management
Corporation
Managing General Partner
Dated: May 17, 1999 By: /s/ James J. Wilson
--------------------- -----------------------------
James J. Wilson
Chairman and Chief
Executive Officer
Dated: May 17, 1999 By: /s/ Mark Augenblick
--------------------- -----------------------------
Mark Augenblick
Vice Chairman, President
and Director
Dated: May 17, 1999 By: /s/ Benjamin L. Poole
--------------------- -----------------------------
Benjamin L. Poole
Vice President and Chief
Financial Officer
Dated: May 17, 1999 By: /s/ Paula S. Biggs
--------------------- -----------------------------
Paula S. Biggs
Treasurer