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, 1996, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
Commission file number 1-9393
Interstate General Company L.P.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1488756
------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Smallwood Village Center
St. Charles, Maryland 20602
----------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(301) 843-8600
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant 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.
10,256,785 Class A Units
------------------------
<PAGE>2
INTERSTATE GENERAL COMPANY L.P.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION Page
Number
Item 1. Consolidated Financial Statements ------
Consolidated Statements of Income for
the Three Months Ended March 31, 1996 and
1995. (Unaudited) 3
Consolidated Balance Sheets as of March 31, 1996
(Unaudited) and December 31, 1995. 4
Consolidated Statements of Changes in
Partners' Capital for the Three
Months Ended March 31, 1996.
(Unaudited) 6
Consolidated Statements of Cash Flow for the
Three Months Ended March 31, 1996 and 1995.
(Unaudited) 7
Notes to Consolidated Financial Statements. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Three
Months Ended March 31, 1996 and 1995. 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Material Modifications of Rights of Registrant's 32
Securities
Item 3. Default upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
<PAGE>
<PAGE>3
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31,
(In thousands, except per unit amounts)
(Unaudited)
1996 1995
----------- ------------
REVENUES:
Community development - land sales $ 3,306 $ 4,700
Homebuilding - home sales 2,724 2,935
Revenues from investment properties
Equity in earnings from partnerships
and development fees 15,352 694
Apartment rental income 1,120 1,147
Management and other fees, substantially
all from related entities 2,209 1,287
Interest and other income 173 97
---------- ----------
Total revenues 24,884 10,860
---------- ----------
EXPENSES:
Cost of land sales 2,695 2,734
Cost of home sales 2,693 2,745
Selling and marketing 356 378
General and administrative 2,758 2,310
Rental apartment expenses 1,123 1,095
Depreciation and amortization 85 92
Interest expense 1,217 530
---------- ----------
Total expenses 10,927 9,884
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST 13,957 976
PROVISION FOR INCOME TAXES 4,823 407
---------- ----------
INCOME BEFORE MINORITY INTEREST 9,134 569
Minority Interest 72 249
---------- ----------
NET INCOME $ 9,062 $ 320
========== ==========
NET INCOME
GENERAL PARTNERS $ 91 $ 3
LIMITED PARTNERS 8,971 317
---------- ----------
$ 9,062 $ 320
========== ==========
NET INCOME PER UNIT $ .88 $ .03
========== ==========
WEIGHTED AVERAGE UNITS OUTSTANDING 10,257 10,249
========== ==========
The accompanying notes are an integral part
of these consolidated statements.
<PAGE>4
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
A S S E T S
March 31, December 31,
1996 1995
----------- -----------
(Unaudited) (Audited)
CASH AND SHORT-TERM INVESTMENTS
Unrestricted $ 2,176 $ 3,476
Restricted 1,536 2,125
-------- --------
3,712 5,601
-------- --------
ASSETS RELATED TO COMMUNITY DEVELOPMENT
Land and development costs
Puerto Rico 32,238 33,088
St. Charles, Maryland 28,128 27,826
Other United States locations 14,890 15,522
Notes receivable on lot sales and other 3,085 3,122
-------- --------
78,341 79,558
-------- --------
ASSETS RELATED TO HOMEBUILDING PROJECTS
Homebuilding construction and land 2,767 3,254
Investment in joint venture 250 250
Receivables and other 355 315
-------- --------
3,372 3,819
-------- --------
ASSETS RELATED TO INVESTMENT PROPERTIES
Investment properties, net of accumulated
depreciation of $5,294 and $5,124, as of
March 31, 1996 and December 31, 1995,
respectively 23,280 23,348
Investment in residential rental partnerships 26,659 10,922
Other receivables, net of reserves of
$413 and $384 as of March 31, 1996
and December 31, 1995, respectively 2,819 2,452
-------- --------
52,758 36,722
-------- --------
OTHER ASSETS
Costs in excess of net assets acquired, less
accumulated amortization of $926 and $888
as of March 31, 1996 and December 31, 1995,
respectively 2,109 2,147
Deferred costs regarding waste technology and other 2,940 2,975
Property, plant and equipment, less accumulated
depreciation of $2,282 and $2,216 as of March
31, 1996 and December 31, 1995, respectively 1,238 1,271
-------- --------
6,287 6,393
-------- --------
Total assets $144,470 $132,093
======== ========
The accompanying notes are an integral part
of these consolidated balance sheets.
<PAGE>5
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
LIABILITIES AND PARTNERS' CAPITAL
March 31, December 31,
1996 1995
----------- ------------
(Unaudited) (Audited)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities $ 6,556 $ 5,719
Mortgages and notes payable 272 301
Accrued income tax liability - current 5,292 464
Accrued income tax liability - deferred 4,699 4,704
-------- --------
16,819 11,188
-------- --------
LIABILITIES RELATED TO COMMUNITY DEVELOPMENT
Recourse debt 45,323 47,841
Non-recourse debt 2,016 2,034
Accounts payable, accrued liabilities
and deferred income 4,392 3,752
-------- --------
51,731 53,627
-------- --------
LIABILITIES RELATED TO HOMEBUILDING
Recourse debt 590 981
Accounts payable and accrued liabilities 2,612 2,746
-------- --------
3,202 3,727
-------- --------
LIABILITIES RELATED TO INVESTMENT PROPERTIES
Recourse debt 1,281 1,322
Non-recourse debt 22,618 22,650
Accounts payable and accrued liabilities 1,848 1,670
-------- --------
25,747 25,642
-------- --------
Total liabilities 97,499 94,184
-------- --------
PARTNERS' CAPITAL
General partners' capital 4,383 4,292
Limited partners' capital-10,257 and
10,257 Units issued and outstanding as of
March 31, 1996 and December 31, 1995,
respectively 42,588 33,617
-------- --------
Total partners' capital 46,971 37,909
-------- --------
Total liabilities and partners' capital $144,470 $132,093
======== ========
The accompanying notes are an integral part
of these consolidated balance sheets.
<PAGE>6
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(In thousands)
(Unaudited)
General Limited
Partners' Partners'
Capital Capital Total
-------- --------- ---------
Three months ended March 31, 1996:
Balances, December 31, 1995 $ 4,292 $33,617 $37,909
Net income 91 8,971 9,062
------- ------- -------
Balances, March 31, 1996 $ 4,383 $42,588 $46,971
======= ======= =======
Three months ended March 31, 1995:
Balances, December 31, 1994 $ 4,322 $36,383 $40,705
Net income 3 317 320
Employee/Director Unit
options exercised -- 171 171
------- ------- -------
Balances, March 31, 1995 $ 4,325 $36,871 $41,196
======= ======= =======
The accompanying notes are an integral part
of these consolidated statements.
<PAGE>
<PAGE>7
INTERSTATE GENERAL COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31,
(In thousands)
(Unaudited)
1996 1995
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,062 $ 320
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization
Residential rental properties 170 166
Other 205 132
Provision for income taxes (5) 36
Equity in earnings of partnerships (15,182) (314)
Increase in sponsor and developer fees
from partnerships and other (104) (91)
Decrease (increase) in
Homebuilding assets 447 857
Community development assets 1,217 (1,167)
Restricted cash 589 128
Increase in accounts payable,
accrued liabilities and deferred income 6,171 277
------- -------
Net cash provided by operating activities 2,570 344
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in assets related to
investment properties (774) 391
Acquisitions of other assets (99) (44)
------- -------
Net cash (used in) provided by investing activities (873) 347
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash proceeds from debt financing 3,021 3,181
Payment of debt (6,018) (4,072)
Employee and director Unit options exercised -- 171
------- -------
Net cash used in financing activities (2,997) (720)
------- -------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS (1,300) (29)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF QUARTER 3,476 1,120
------- -------
CASH AND SHORT-TERM INVESTMENTS, END OF QUARTER $ 2,176 $ 1,091
======= =======
The accompanying notes are an integral part
of these consolidated statements.
<PAGE>
<PAGE>8
INTERSTATE GENERAL COMPANY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(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 1995
financial statements have been reclassified to conform to the 1996
presentation. The operating results for the three months ended March 31, 1996
are not necessarily indicative of the results that may be expected for the
year. Net income per Unit is calculated based on weighted average Units
outstanding. Outstanding options and warrants to purchase Units do not have a
material dilutive effect on the calculation of 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,
1995.
(2) GOING CONCERN AND RELATED MATTERS
In March 1990, the Company received a notice (the "Notice") from the U.S.
Army Corps of Engineers (the "Corps") asserting that unauthorized fill
materials had been placed in portions of an approximately five-acre parcel in
Charles County, Maryland (the "Site") owned by the Company and claimed by the
Corps to constitute wetlands subject to regulation pursuant to the Clean Water
Act. Following receipt of the Notice, the Company ceased development of the
Site and remediated a portion of the Site in accordance with instructions
issued by the Corps. The Company also commenced discussions with the Corps
regarding mitigation plans that would preserve some commercial value for the
Site and filed suit against the Corps claiming that a prohibition of
development on the entire Site would constitute a governmental taking for which
the Company would be entitled to compensation.
In November 1993, the Company believed that it had an agreement in
principle with the Corps that would settle the Company's claim and permit
commercial development of a portion of the Site. However, in early 1994, the
Company became aware that this matter had been referred to the U.S. Attorney
for the District of Maryland. After conducting a lengthy investigation of the
Company's wetlands practices in St. Charles, in October 1995 a grand jury
convened by the U.S. Attorney charged that certain of the Company's practices
with respect to four parcels, including the Site, constituted criminal
violations of Section 404 of the Clean Water Act. The indictment charged each
of IGC, its affiliate, St. Charles Associates, L.P. ("SCA"), and the Company's
Chairman, James J. Wilson. During the U.S. Attorney's investigation, the Corps
issued additional violation notices relating to filling portions of other
<PAGE>9
parcels claimed by the Corps to be protected wetlands. In October 1995 the
government filed a civil action in the U.S. District Court for the District of
Maryland charging the Company and Mr. Wilson with violations of the Clean Water
Act. Of the approximately 4,400 acres developed by the Company in St. Charles,
approximately 70 acres are the subject of the civil and criminal charges.
On February 29, 1996, each of IGC, SCA and Mr. Wilson were convicted on
four counts of felony violations of Section 404 of the Clean Water Act.
Sentencing is expected to occur in June 1996. On March 12, 1996, IGC and SCA
received service of process with respect to the civil action. Maximum
statutory penalties possible against each of IGC and SCA under the criminal
action are $50,000 per day for each of four felony violations or,
alternatively, twice the pecuniary gain realized by the Company from any
illegal action. The maximum statutory penalty possible under the civil action
is $25,000 per day for each of nine separate violations. Because the
investigation with regard to the sentencing is ongoing, the Company cannot
determine from what point in time these fines could be assessed. In the civil
action, the U.S. Attorney also seeks to enjoin the Company from engaging in
future illegal wetlands practices.
During 1994 and 1995, the Company recognized approximately $4.6 million in
legal and consulting expenses relating to these matters. Such expenses include
a reserve available to cover future anticipated costs of the criminal and civil
actions, including costs of appealing the criminal convictions. The amount of
any fine in the current case cannot be estimated with certainty and as such the
total costs incurred may exceed the amount reserved.
Management believes the Company and Mr. Wilson have many strong arguments
to present on appeal of the criminal convictions. Accordingly, the Company and
Mr. Wilson will appeal the criminal convictions and will continue to defend
vigorously against charges in the civil action.
The Company's loan agreements contain certain restrictive covenants, cross
default provisions and material adverse change in financial condition clauses.
As a result of the Company's conviction on four felony counts of the Clean
Water Act, Signet Bank issued a notice of default by the Company of certain
loan agreement covenants pertaining to $2.3 million of debt. Negotiations of
the terms and conditions of a forbearance agreement are in process. As a
result of this notice of default, and unless and until the criminal convictions
are reversed on appeal, $44.1 million of the Company's bank debt could be
called into default.
The uncertainty with respect to the amount of penalties has hindered the
Company's ability to secure financing necessary for the development of Fairway
Village, the third of five villages in the Planned Unit Development of St.
Charles, Maryland. The Company's current inventory of finished lots in St.
Charles is anticipated to be sold during 1996, therefore, the development of
additional lots is necessary to provide inventory for sales in 1997 and beyond.
As a result of the uncertainty regarding the magnitude of fines, the event
of default, multiple loan defaults and uncertainty regarding the ability to
obtain future financing, which may cause the Company to have negative cash flow
in 1996, there is substantial doubt about the Company's ability to continue as
a going concern.
The Company has historically met its liquidity requirements principally
from cash flow generated by land and home sales, property management fees,
distributions from Housing Development Associates S.E. ("HDA") and residential
<PAGE>10
rental partnerships and from bank financing providing funds for development and
working capital.
As discussed in Note 4, the Company no longer receives distributions from
HDA, as a result of the Company's distribution of Equus Units representing a
99% limited partnership interest in Equus to IGC Unitholders in February 1995.
In addition, under the terms of IGC's loans, most of the cash generated by U.S.
home and lot sales and distributions from partnerships, including distributions
from partnership refinancings, will be used to further reduce bank loans and
meet debt service requirements. As mentioned above, project financings have
been delayed by the inability to determine the penalties related to the
Company's felony convictions. Given these factors, the Company's ability to
generate cash for overhead, development and other uses is limited.
During the first quarter of 1996, four apartment projects in Puerto Rico
were sold under the 1990 Low Income Housing Preservation and Resident
Homeownership Act ("LIHPRHA"). This sale, after taxes, will generate
approximately $11.4 million of cash. Approximately $9.2 million of cash
proceeds is pledged to curtail bank debt and the remainder will be used to pay
legal fees related to the wetlands convictions and support operations. As a
result of the debt curtailments, the FDIC loan will be paid off and NationsBank
will have a first lien on commercial properties in St. Charles which will have
the effect of improving the Company's cash flow as the release prices under the
NationsBank agreement are less than that of the FDIC.
During 1995, the Company negotiated loan extensions with NationsBank and
Signet Bank. NationsBank has agreed to extend the maturity of its loans until
May 1998. Under the agreement, the extension of the maturity beyond November
30, 1995 was contingent upon a mandatory principal curtailment of $2.2 million
which will be made with the proceeds of the LIHPRHA sale. Signet Bank agreed
to extend the maturity of its loans until September 1996. The balance of the
Signet loans as of March 31, 1996 is $2.3 million. The Company anticipates it
will pay off these loans prior to their maturity with the proceeds from the
sale of commercial and residential land which secure the loans.
(3) INVESTMENT IN RESIDENTIAL RENTAL PARTNERSHIPS
As of March 31, 1996, IGC manages and is a general partner in 25 real
estate partnerships which own 28 apartment projects in Puerto Rico, Maryland,
Virginia and Washington, D.C. IGC is also a limited partner in many of these
partnerships. The apartment projects are financed by non-recourse mortgages.
Of the 5,641 rental units in the various partnerships, the Federal Housing
Administration ("FHA") provides subsidies for low and moderate income tenants
in 4,453 units. In addition, IGC is a general partner in four partnerships
that sold their apartment projects under LIHPRHA. The partnerships will be
dissolved once the legal and financial affairs related to the sale are
completed. IGC will continue to manage these properties.
<PAGE>
<PAGE>11
The following table summarizes IGC's investment in residential rental
partnerships:
March 31, December 31,
1996 1995
----------- -----------
(Unaudited) (Audited)
(In thousands)
Long-term receivables, net of deferred
income of $3,310 and $3,414 at
March 31, 1996 and December 31, 1995,
respectively $ 3,604 $ 3,331
Investment in partnerships 23,055 7,591
------- -------
$26,659 $10,922
======= =======
The combined condensed statements of income and the combined condensed
statements of cash flow for the three month periods ended March 31, 1996 and
1995, and the combined condensed balance sheets as of March 31, 1996 and
December 31, 1995 are shown below for the partnerships owning residential
rental properties:
HOUSING PARTNERSHIPS'
COMBINED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
----------------------------
1996 (1) 1995 (1)
----------- -----------
(In thousands)
Operating income $10,080 $10,174
------- -------
Operating expenses
Depreciation 1,590 1,601
Other 8,229 8,383
------- -------
9,819 9,984
------- -------
Net income - operations 261 190
Gain on sale of properties (2) 38,169 --
------- -------
Net income $38,430 $ 190
======= =======
(1) The income and expenses of Fox Chase Apartments General Partnership
("Fox Chase"), New Forest Apartments General Partnership ("New
Forest") and Lancaster Associates L.P. ("Lancaster") are excluded
from these statements. The operations of these partnerships are
consolidated in the Company's consolidated statements of income for
the three month periods ended March 31, 1996 and 1995.
(2) Four properties housing 918 apartments in Puerto Rico were sold under
LIHPRHA.
<PAGE>12
HOUSING PARTNERSHIPS'
COMBINED CONDENSED BALANCE SHEETS
(Unaudited)
A S S E T S
March 31, December 31,
1996 (1) 1995 (1)
----------- -----------
(In thousands)
Rental apartments, at cost $216,671 $239,911
Accumulated depreciation (90,135) (100,861)
-------- --------
126,536 139,050
-------- --------
Restricted cash and marketable securities:
Residual receipt accounts 7,179 6,783
Replacement reserves and escrows 9,362 9,258
-------- --------
Total restricted cash and marketable securities 16,541 16,041
Cash and certificates of deposit 25,456 5,766
-------- --------
Total cash and marketable securities 41,997 21,807
-------- --------
Other assets 5,629 4,583
-------- --------
Total assets $174,162 $165,440
======== ========
LIABILITIES AND PARTNERS' CAPITAL
March 31, December 31,
1996 (1) 1995 (1)
----------- -----------
(In thousands)
Non-recourse mortgage notes and accrued interest $153,642 $169,161
Loans and interest payable to the Company 8,436 8,667
Other liabilities 19,602 15,080
-------- --------
Total liabilities 181,680 192,908
-------- --------
Partners' capital
Capital contributions, net of distributions (21,325) (2,839)
Retained earnings 13,807 (24,629)
-------- --------
Total partners' capital (7,518) (27,468)
-------- --------
Total liabilities and partners' capital $174,162 $165,440
======== ========
(1) The assets, liabilities and partners' capital of Fox Chase, New
Forest and Lancaster are excluded as they are consolidated in the
Company's March 31, 1996 and December 31, 1995 financial statements.
<PAGE>13
The FHA, Puerto Rico Housing Finance Corporation ("PRHFC"), State and
District of Columbia housing agencies and the partnership agreements require
that the accumulation of cash in the partnerships be sufficient to liquidate
all current liabilities before distributions to partners are permitted. Most
of the partnership agreements provide that IGC, as general partner, receive a
zero to 5% interest in profits, losses and cash flow from operations until such
time as the limited partners have received cash distributions equal to their
capital contributions. Thereafter, IGC generally shares in 50% of cash
distributions from operations.
(4) OPERATIONS DISTRIBUTED TO UNITHOLDERS
On February 6, 1995, IGC distributed to its unitholders its 99% limited
partnership interest in Equus (the "Equus Distribution"). IGC and its wholly
owned subsidiary, Equus Management Company ("EMC"), retained the 1% general
partner interest and will continue to manage Equus. For a transitional period
following completion of the Equus Distribution, IGC will provide certain
administrative services and support to Equus pursuant to a Master Support and
Services Agreement (the "Support Agreement"). Equus will reimburse IGC for
costs incurred in providing these services. IGC accounts for its investment on
the equity method of accounting.
Originally formed in September 1993, Equus was restructured in 1994 as a
limited partnership between IGC and EMC for the purpose of succeeding to
substantially all of IGC's ownership interest in real estate assets employed in
thoroughbred racing and related wagering businesses. Through a series of
transactions during 1994, 1995 and 1996, Equus holds an 82% interest in HDA.
HDA owns El Comandante Race Track ("El Comandante"), the only licensed
thoroughbred racing facility in Puerto Rico, which it leases to El Comandante
Operating Company, Inc. ("ECOC"), an unaffiliated Puerto Rico nonstock
corporation. ECOC operates El Comandante at its expense and pays rent to HDA
based primarily upon the greater of $7,500,000 or 25% of ECOC's share of
wagering revenues.
<PAGE>
<PAGE>14
(5) DEBT
The Company's outstanding debt is collateralized primarily by land,
housing and other land improvements, receivables, and investments in
partnerships. The following table summarizes the indebtedness of IGC:
Stated Outstanding Balance at:
Maturity Interest March 31, December 31,
Description by Lender Date Rate* 1996 1995
- ------------------------- -------------- -------- ------------- ------------
(In thousands)
Non-recourse debt:
Community Development 12-29-24 to 6.85%-9.875% $22,618 $22,650
Administration (1) 10-01-28
Supra & Co. (8) 08-02-09 P + 1.5% 2,016 2,034
------- -------
Total non-recourse 24,634 24,684
------- -------
Recourse debt:
Citibank (6,12) Demand (9) 1,281 1,334
NationsBank 03-31-96 P + 1%-1.5% 10,591 10,725
(2,4,11,12)
Washington Savings From 11-29-96 8%-10% 215 682
(2,3,11) to 12-27-96
Riggs National Bank (2) 06-15-96 P + 1.5% 1,216 1,205
1st National Bank of 09-14-96 to P + 1.5%-10.25% 813 765
St. Mary's (2,3,13) 12-29-97
Signet Bank (2,3,10) 09-01-96 P + 1.5% 2,319 3,325
FDIC (2,4,14) 09-30-96 P + 1% 6,546 6,546
Virginia First 11-16-96 P + 1.5% 604 339
Savings (3)
Wachovia Bank & Trust 11-30-96 to P + .5%-1% 183 227
(2,3,11) 04-26-00
Purchase money 10-28-97 10% 1,000 1,000
mortgage (2)
FirstBank (2,12) 12-31-97 P + 1.5% 15,832 17,370
Banco Popular (2,7,12) 12-05-98 P + 1.5% 4,000 4,000
General (5) From 10-26-96 7.4%-11.5% 538 566
to 05-16-00
Citibank (2,12) 05-05-96 Eurodollar 2,328 2,361
+ 2.5%
------- -------
Total recourse 47,466 50,445
------- -------
Total debt 72,100 $75,129
======= =======
*P = Prime
<PAGE>
<PAGE>15
Balance Sheet Classification
- ----------------------------
Outstanding Balance at:
March 31, December 31,
1996 1995
------------ ------------
Mortgages and notes payable - Recourse debt $ 272 $ 301
Related to community development -
Recourse debt 45,323 47,841
Non-recourse debt 2,016 2,034
Related to homebuilding projects - Recourse debt 590 981
Related to investment properties -
Recourse debt 1,281 1,322
Non-recourse debt 22,618 22,650
------- -------
Total debt $72,100 $75,129
======= =======
(1) Collateralized by apartment projects and secured by FHA or the Maryland
Housing Fund.
(2) Collateralized by community development assets.
(3) Collateralized by homebuilding assets.
(4) Collateralized by investment in residential rental partnerships.
(5) Collateralized by other assets.
(6) Collateralized by letter of credit.
(7) Collateralized by a secondary interest in Equus Units owned by Interstate
Business Corporation ("IBC").
(8) Minority partner in Puerto Rico land development subsidiary.
(9) The interest rate is not fixed to maturity and is renegotiated on a
periodic basis. The interest rate was 6.6% and 7.05% at March 31, 1996
and December 31, 1995, respectively.
(10) As a result of the wetlands litigation verdict, the financial institution
issued a notice of default.
(11) These loans contain certain covenants requiring the Company to remain in
compliance with applicable laws. Unless reversed on appeal, the wetlands
litigation verdict would result in a default of these covenants.
(12) These loans contain cross default provisions that could be triggered by
the events of default resulting from the wetlands litigation verdict.
(13) These loans contain a provision allowing the financial institution to
call the loan if there has been a material adverse change in the
Company's financial condition.
(14) Paid subsequent to year end.
<PAGE>
<PAGE>16
(6) RELATED PARTY TRANSACTIONS
James J. Wilson, Chief Executive Officer of the Company has an ownership
interest in various entities to which IGC provides management services. These
entities and their relationships to IGC are as follows:
IBC or Affiliate IGC
-------------------- --------------------
Limited Limited
and Limited and Limited
General Liability General Liability
Partner Partner Partner Partner
------- ----------- ------- -----------
Chastleton .99% -- .01% --
Coachman's Limited Partnership
("Coachman's") 1% 49% 1% 49%
Santa Maria Associates,
S.E. ("Santa Maria") -- 99% -- 1%
El Monte Properties, S.E.
("El Monte") -- 99% -- 1%
G.L. Limited Partnership
("Rolling Hills") 1% 49% -- --
Village Lake Associates
Limited Partnership
("Village Lake") 99% 1% -- --
Capital Park Associates
("Capital Park") (a) -- -- --
Smallwood Village Associates,
Limited Partnership ("SVA") 1% 51% -- --
Smallwood Village Office
Building Associates Limited
Partnership ("SVOBA") 25% -- -- --
IBC, General Partner of IGC (b) -- -- -- --
Equus (c) -- 32% 1% --
(a) An affiliate of IBC holds notes receivable that are secured by the
existing general partners' interest in the partnership.
(b) IBC, controlled by James J. Wilson, is entitled to representation on
Interstate General Management Corporation's ("IGMC") board of
directors. James J. Wilson and two members of his immediate family
are currently providing this representation.
(c) EMC is the managing general partner of Equus. James J. Wilson
resigned from EMC's board of directors and as Chief Executive Officer
of Equus during March 1996.
<PAGE>
<PAGE>17
Transactions between the above entities and IGC are described in the
following tables.
REVENUE FOR THE QUARTER ENDED MARCH 31, 1996
(In thousands)
---------------------------------------------
Income Earned
-------------------------
Management Adjustment
Fees Interest Total to Reserve Recognized
---------- -------- ----- ---------- ----------
Chastleton (b,d) $ 18 $ -- $ 18 $(18) $--
Coachman's (b) 6 6 12 (12) --
Santa Maria 13 -- 13 -- 13
El Monte 26 -- 26 -- 26
Rolling Hills (c,j) 23 -- 23 -- 23
Village Lake (b) 6 -- 6 -- 6
Capital Park 67 -- 67 -- 67
SVA 12 -- 12 -- 12
SVOBA 2 -- 2 -- 2
IBC 7 8 15 -- 15
---- ---- ---- ----- ----
$180 $ 14 $194 $ (30) $164
==== ==== ==== ===== ====
RECEIVABLES AT MARCH 31, 1996
(In thousands)
--------------------------------------------------------
Outstanding Balance
---------------------------------------
Working
Capital Land/
Management Loans Asset Book
Fees (d) Sales Interest Total Reserved Balance
---------- ------- ----- -------- ----- -------- -------
Chastleton (g,l) $364 $ 32 $ -- $ -- $ 396 $(364) $ 32
Coachman's (f,l) 26 116 -- 23 165 (49) 116
Santa Maria 1 -- -- -- 1 -- 1
El Monte 5 -- -- -- 5 -- 5
Rolling Hills (j,l) 152 4 -- -- 156 -- 156
Village Lake (l) 55 2 -- -- 57 -- 57
Capital Park 27 1 -- -- 28 -- 28
SVA 4 1 -- -- 5 -- 5
SVOBA -- -- -- -- -- -- --
IBC (h,i,l) 2 200 302 41 545 -- 545
Equus (k) -- 419 -- -- 419 -- 419
---- ---- ---- ---- ------ ----- ------
$636 $775 $302 $ 64 $1,777 $(413) $1,364
==== ==== ==== ==== ====== ===== ======
<PAGE>18
REVENUE FOR THE QUARTER ENDED MARCH 31, 1995
(In thousands)
---------------------------------------------
Income Earned
-------------------------
Management Adjustment
Fees Interest Total to Reserve Recognized
---------- -------- ----- ---------- ----------
Chastleton (b,d) $ 16 $ -- $16 $(16) $ --
Coachman's (b,i) 6 6 12 316 328
Santa Maria 20 -- 20 -- 20
El Monte 24 -- 24 -- 24
Rolling Hills (c,j) 13 -- 13 352 365
Village Lake (b) 6 -- 6 26 32
Capital Park 59 -- 59 -- 59
SVA 14 -- 14 3 17
SVOBA 3 -- 3 -- 3
IBC 8 8 16 -- 16
---- ---- ---- ----- ----
$169 $ 14 $183 $ 681 $864
==== ==== ==== ===== ====
RECEIVABLES AT DECEMBER 31, 1995
(In thousands)
--------------------------------------------------------
Outstanding Balance
---------------------------------------
Working
Capital Land/
Management Loans Asset Book
Fees (d) Sales Interest Total Reserved Balance
---------- ------- ----- -------- ----- -------- -------
Chastleton (g,l) $347 $ 33 $ -- $ -- $ 380 $(347) $ 33
Coachman's (f,l) 19 117 -- 18 154 (37) 117
Santa Maria -- -- -- -- -- -- --
El Monte 28 -- -- -- 28 -- 28
Rolling Hills (j,l) 280 3 -- -- 283 -- 283
Village Lake (l) 49 2 -- -- 51 -- 51
Capital Park 24 4 -- -- 28 -- 28
SVA 4 1 -- -- 5 -- 5
SVOBA -- -- -- -- -- -- --
IBC (h,i,l) 3 8 302 33 346 -- 346
Equus (k) -- 225 -- -- 225 -- 225
---- ---- ---- ---- ------ ----- ------
$754 $393 $302 $ 51 $1,500 $(384) $1,116
==== ==== ==== ==== ====== ===== ======
(a) Includes developer and refinancing fees.
(b) The management fee was reduced from 5% to 2.5% until the project has
positive cash flow and has paid all previously accrued management fees.
(c) The management fee was reduced from 4.5% to 2.5% until the project has
positive operating cash flow and has paid all previously accrued
management fees.
<PAGE>19
(d) Management agreed that it would defer all management fees until Chastleton
had sufficient cash flow to fund operations and to subordinate 50% of its
management fee until IBC has recovered its operating advances.
(e) Working capital loans include operating advances and reimbursements due
for common expenses.
(f) IBC has the funding obligation for operating deficits. Since IGC equally
shares the general and limited partnership interest with IBC, IGC funded a
portion of the deficits.
(g) IBC has the funding obligation for operating deficits. In early 1996,
IGC, as general partner, funded $184,000 of cash deficits that were
satisfied in April 1996.
(h) IGC is contingently liable under $4.6 million of letters of credit issued
by NationsBank collateralized by land, which secure additional bonds
issued for Chastleton.
(i) During 1989, IBC purchased 5.01 acres of commercial land. IGC accepted a
note receivable for 80% of the $1,092,000 purchase price. The note was
collateralized by IBC's ownership interest in Santa Maria and Village
Lake. On December 23, 1994, Lakeside, a subsidiary of the Company,
purchased the remaining 1.23 acres of this land from IBC for the
development of rental units for senior citizens, for its appraised value
of $440,000. Lakeside paid $88,000 to IBC and issued a note payable for
the remaining $352,000. During the first quarter of 1995, IBC assigned
the note receivable due from Lakeside to IGC in satisfaction of past due
receivables from Coachman's. The collection of the majority of the
Coachman's receivables had previously been questionable and $328,000 had
been reserved. This transaction resulted in income recognition of these
reserves during the first quarter of 1995. The Company collected the
$352,000 receivable due from Lakeside during 1995.
(j) The performance of this project has improved and the project produced
positive cash flow during 1995 and 1996. The collection of the remaining
receivable balance is considered probable and reserves related to this
receivable aggregating $335,000 were recognized as income during the first
quarter of 1995.
(k) IGC provides certain administrative and operational support for Equus
pursuant to the Support Agreement. The Company also is reimbursed for
administrative support provided to Equus' subsidiaries. In addition, as
general partner, IGC advanced funds as needed for working capital
deficits.
(l) During April 1996, an IBC affiliate purchased these receivables.
IGC and affiliates lease office space from Smallwood Village Associates
Limited Partnership ("SVA"), one of IBC's commercial properties in which IGC's
executive offices are located. A total of 17,255 square feet of office space
is leased by IGC and affiliates at approximately $205,000 per year (subject to
adjustment for inflation). The lease expires in the year 2001 and at IGC's
request, IBC has the obligation to sublease the space for the remainder of the
lease. During the three months ended March 31, 1996 and 1995, IGC's rent for
its share of the leases was $34,000 and $48,000, respectively.
IGC's Puerto Rico executive office has been located in the Doral Building
since November 1991 under a five-year lease providing for a first-year payment
of rent of approximately $187,000 and certain escalations for increases in the
CPI and pro-rata share of operating expenses in years two through five. Rental
expense for the executive office and certain other property in Puerto Rico
leased from affiliates was $58,000 and $66,000 for the three months ended March
31, 1996 and 1995, respectively.
<PAGE>20
American Family Homes, a wholly owned subsidiary of IGC, leased 3000
square feet of commercial space from IBC which was used for one of its sales
centers. The lease expired December 31, 1995. Rent expense associated with
this lease during the first quarter of 1995 was approximately $10,000.
IGC provides administrative support services to Equus Gaming Company L.P.
pursuant to a Master Support and Services Agreement. During the first quarter
of 1996 and 1995, IGC received $50,000 and $50,000, respectively, in connection
with such services.
In addition to the support provided Equus pursuant to the Support
Agreement, the Company provides management services and administrative support
to Equus' subsidiaries, HDA, Galapagos and S & E, and its major tenant, ECOC.
The administrative support is reimbursed as the services are rendered. The
management agreement with HDA continues into December 2004. Upon closing of an
HDA refinancing in December 1993, the management agreement was amended to
reduce the management fee to an annual fee of $250,000, adjusted annually
beginning in 1994 by the percentage increase in the Consumer Price Index
("CPI"). Prior to such amendment, IGC received a management fee equal to 5% of
the HDA's rental income. The HDA management fees earned during the first three
months of 1996 and 1995 were $68,000 and $66,000, respectively.
Pursuant to a consulting agreement effective December 15, 1993, ECOC has
retained as executive management three racing consultants employed by IGC.
ECOC reimburses all of IGC's payroll, bonus, fringe benefits and out-of-pocket
expenses associated with the employment of the consultants, and reimburses IGC
for other personnel who from time to time provide services to ECOC. Such
reimbursements are subject to certain limitations on increases in reimbursable
costs during the term of the consulting agreement. ECOC uses certain land
owned by Land Development Associates, S.E. ("LDA") for a sanitary landfill in
connection with its operation of the El Comandante Race Track. LDA has
authorized this use, but has reserved the right to terminate such use if it
conflicts with future development by LDA. Jorge Colon Nevares, a director of
IGMC, also serves as a director of ECOC and Thomas B. Wilson, one of the IBC
representatives on IGMC's board of directors, serves as ECOC's president.
James J. Wilson, as a general partner of Interstate General Properties
S.E. ("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.
On March 31, 1995, IGC sold two parcels in the Parque Escorial development
in Puerto Rico to Compri Caribe Development Corp. ("Compri"), a corporation
wholly owned by Jorge Colon Nevares, a director of the Company's managing
general partner for use in its operations. The terms of sale provided for a
sales price of $3,453,000, of which $693,000 was paid in cash, and the
remainder of which was satisfied by a note in the amount of $2,760,000. The
note is collateralized by the land parcels and bears interest at a rate of 10%
per annum commencing upon the completion of certain infrastructure
improvements. Monthly payments of principal and interest totalling $27,000 are
due monthly commencing May 1, 1996 with a balloon payment due at maturity on
April 1, 1998.
Concurrent with the transaction described above, the Company executed a
$3,397,000 contract of sale with Compri for three other land parcels in the
<PAGE>21
Parque Escorial development. On April 1, 1996, Compri made a 20% cash payment
and the remainder was satisfied by an interest bearing note collateralized by
the land parcels. The note bears interest at a rate of 10% per annum
commencing upon the completion of certain infrastructure improvements, and is
payable in thirty-five monthly installments of principal and interest of
$27,000, with a balloon payment due at maturity on April 1, 1999.
On September 8, 1995, the Company executed a Contract of Sale with Twenty
First Century Homes S.E. ("Twenty First Century") for two parcels of land in
the Parque Escorial Development for $3,520,000. Jorge Colon Nevares holds a
50% ownership interest in Twenty First Century. Closing is expected to occur
during the second quarter of 1996.
<PAGE>
<PAGE>22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion contains statements that may be considered
forward looking that involve a number of risk and uncertainties as discussed
herein and in the Company's SEC reports. Therefore, actual results could
differ materially.
The real estate industry is cyclical, and is especially sensitive to
fluctuations in economic activity and movements in interest rates. Residential
lot sales and sales of new homes are affected by market conditions for rental
properties and by the condition of the resale market for used homes, including
foreclosed homes in certain cities as well as the competitive supply of other
new homes for sale. An oversupply of rental real estate depresses rents and
reduces incentives for renters to purchase homes. An oversupply of resale
units depresses prices and reduces the margins available to builders on sales
of new homes. In addition, the slowing of the economy and its impact on
consumer spending, particularly in over built markets, can adversely impact
both commercial and residential development activity, including the demand for
housing.
The Company's homebuilding and community development sales continue to be
greatly influenced by consumer confidence, housing demand, prevailing market
interest rates, movements in such rates and expectations about future rates.
Even though the rates have remained fairly stable and an adequate supply is
available to the entry-level homebuyer, the economic uncertainties associated
with the federal budget and government furloughs during 1995 and 1996 came at a
time when supplies and competition were high in the Washington, D.C. market.
As a result, the profit margins in the region have continued to decline.
Management anticipates the growth of the Washington, D.C. metropolitan real
estate market to be adversely impacted by any future federal government
closings and cutbacks. The Company has seen a significant increased interest
in its U.S. commercial land. The Puerto Rico residential and business market
is stable.
The following discussion and analysis covers changes in the results of
operations for the three months ended March 31, 1996 as compared to the results
for the three months ended March 31, 1995.
<PAGE>
<PAGE>23
The Company's net income for the three months ended March 31, 1996
totalled $9,062,000 versus net income of $320,000 for the three months ended
March 31, 1995. A summary of the Company's operating results is as follows:
For the Three Months
Ended March 31,
--------------------
1996 1995
---- ----
(In thousands)
Community development $ 488 $ 1,669
Homebuilding (274) (140)
Investment properties and asset management 17,558 2,033
Operations distributed to unitholders -- --
Other income and expenses (3,887) (2,835)
-------- --------
Net income before provision for income tax 13,885 727
Provision for income tax (4,823) (407)
-------- --------
Net income $ 9,062 $ 320
======== ========
<PAGE>
<PAGE>24
Community Development Operations
The following table presents selected community development financial
data:
For the Three Months
Ended March 31,
----------------------
1996 1995
---- ----
(In thousands, except
units and percentages)
Lots Sold:
Commercial and business parks (acres)
St. Charles, Maryland 1 1
Parque Escorial, Puerto Rico -- 3
Residential lots (units)
St. Charles, Maryland
Developed single-family lots -- 31
Montclair, Virginia
Semi-developed parcel (acres) 14 --
Parque Escorial, Puerto Rico 140 --
Average Sales Price:
Commercial and business parks (per acre)
St. Charles, Maryland $126 $128
Parque Escorial, Puerto Rico -- $992
Residential (per unit)
St. Charles, Maryland
Developed single-family lots -- $ 42
Montclair, Virginia
Semi-developed parcel (per acre) $ 57 --
Parque Escorial, Puerto Rico $ 17 --
Average Gross Profit Margin:
Commercial and business parks
St. Charles, Maryland 58% 66%
Parque Escorial, Puerto Rico -- 47%
Residential lots
St. Charles, Maryland
Developed single-family lots -- 37%
Montclair, Virginia
Semi-developed parcel (per acre) 0% --
Parque Escorial, Puerto Rico 29% --
Sales revenue $ 3,306 $4,700
Cost of sales 2,695 2,734
------- ------
Gross profit $ 611 19% $1,966 42%
------- ------
Selling and marketing 51 48
Minority interest 72 249
------- ------
Operating profit $ 488 $1,669
======= ======
Interest expense included in cost of sales $ 7 $ 134
======= ======
<PAGE>25
In the first quarter of 1996, land sales revenues decreased by $1.4
million or 30% compared to the first quarter 1995. The decrease is due
primarily to the sale of three acres of higher priced commercial parcels in
Parque Escorial and 31 lots in St. Charles during the first three months of
1995 and no similar sales during the comparable 1996 period. This decrease was
partially offset by the introduction of residential lot sales in the Puerto
Rico planned community, Parque Escorial, and the sale of a semi-developed
parcel in Montclair. U.S. residential land sales remained slow resulting from
the close out of Westlake Village and a delay in the opening of Fairway
Village, increased competition and slow home sales. An additional 142 lots in
Parque Escorial were sold to a homebuilder that the Company owns a 50%
interest. The revenue and cost of these lots are deferred until sold to a
third party.
The decrease in Community Development gross profit margins to 19% in 1996
versus 42% in 1995 is a result of the mix of sales and the semi-developed
parcel in Montclair which was sold at book value. Land sales during the 1996
period consisted primarily of residential lots whereas the 1995 period
reflected a heavier percentage of commercial sales. Residential lots result in
lower gross margins than commercial parcels since commercial land sales produce
the highest prices and require less on-site development than business park and
residential land.
Minority interest expense decreased $177,000 to $72,000 in 1996 compared
to $249,000 in 1995. This fluctuation is attributable to the decrease or
increase in profits generated from the land sales in Puerto Rico in which a
majority partner holds a 20% interest.
<PAGE>
<PAGE>26
Homebuilding Operations
The following table presents selected homebuilding data:
For the Three Months
Ended March 31,
--------------------
1996 1995
---- ----
(In thousands, except
units and percentages)
Units Settled:
Semi-Custom
North and South Carolina 8 9
Virginia, Maryland and Other 6 13
Tract 13 6
---- ----
27 28
==== ====
Net New Orders:
Semi-Custom
North and South Carolina 8 4
Virginia, Maryland and Other (9) 26
Tract 24 9
---- ----
23 39
==== ====
Units Backlog:
Semi-Custom
North and South Carolina 34 31
Virginia, Maryland and Other 39 58
Tract 15 8
---- ----
88 97
==== ====
Unit backlog under construction:
Semi-custom
North and South Carolina 16 10
Maryland, Virginia & Other 19 13
Tract 11 17
---- ----
46 40
==== ====
Average Sales Price:
Semi-Custom (excludes lots) $ 100 $ 89
Tract $ 127 $ 154
Backlog $10,385 $11,399
Backlog average sales price $ 118 $ 117
Home sales $ 2,724 $ 2,935
Cost of sales 2,693 2,745
------- -------
Gross profit 31 190
------- -------
Selling and marketing 305 330
------- -------
Operating loss $ (274) (10%) $ (140) (5%)
======= =======
<PAGE>27
Revenues from home sales decreased 7% to $2.7 million for the 1996 first
quarter from $2.9 million for 1995 comparable period. The primary reason for
the decrease is the reduced sales prices of the tract homes in an effort to
close out these projects. As a result, the number of tract homes sold during
the first quarter of 1996 as compared to the first quarter 1995 increased to
counter act the reduction in semi-custom homes sales volume. After careful
review of the backlog, 36 marginal sales contracts were cancelled. Management
has focused its attention on its more profitable markets.
Gross profits as a percentage of homebuilding revenues for a particular
period are a function of various factors including volume, pricing, efficiency
of homebuilding operations and financing cost (including costs of subsidizing
customer financing, if any). The gross profit margins earned during 1996
decreased to (10%) from (5%) in 1995. The primary reason for the decrease
stems from the close out sale of tract homes at book value as part of
management's plans to curtail tract homebuilding operations.
Investment Properties and Asset Management
Three Months Ended
March 31,
-----------------------------
1996 1995
---- ----
(In thousands)
Apartment rental revenues $1,120 $1,147
Apartment operating expenses 1,123 1,095
------- ------
Apartment operating (loss) income (3) 52
Equity in earnings from partnerships
and development fees 15,352 694
Management and other fees 2,209 1,287
------- ------
Total operating profit $17,558 $2,033
======= ======
Apartment rental revenues decreased $27,000 or 3% during the first quarter
of 1996 as compared to this same period during the prior year. This was due to
a 6% increase in vacancies resulting from a 4% increase in rental rates and
increased competition. Rental apartment expenses increased $28,000 or 3%
during the first quarter of 1996 as compared to the same period in 1995. This
increase was due primarily to general inflation in the Washington, D.C.
metropolitan area.
Equity in earnings from partnerships and development fees increased $14.7
million during the first quarter of 1996 as compared to this same period in
1995 due primarily to the $14.6 million earned on the LIHPRHA sale.
Management and other fee revenues increased $922,000 or 72% during the
first three months of 1996 as compared to this same period in 1995. This was
due primarily to special management fees earned from the LIHPRHA transaction in
1996 offset in part by the 1995 recognition of $477,000 of reserved management
fees.
<PAGE>
<PAGE>28
Other Income and Expenses
For the Three Months
Ended March 31,
---------------------------
1996 1995
---------- ----------
(In thousands)
Interest and other income $ 173 $ 97
General and administrative (2,758) (2,310)
Depreciation and amortization (85) (92)
Interest expense (1,217) (530)
------- -------
$(3,887) $(2,835)
======= =======
Interest and other income increased $76,000 or 79% during the first
quarter of 1996 as compared to this same period in 1995. This increase was
attributable to the recognition of interest earned during the first quarter
1996 on a note receivable from a land sale that occurred late in the first
quarter 1995.
General and administrative expenses increased $448,000 or 19% during the
first three months of 1996 as compared to the first three months of 1995. This
increase was attributable to $325,000 of non recurring costs pursuant to an
employment agreement, the net change in allowance for doubtful accounts, and
accrual of incentive compensation as a result of the increase in IGC's Units
market price.
Depreciation and amortization expense declined $7,000 or 8% during the
first quarter of 1996 as compared to the first quarter of 1995, due to certain
fixed assets, financing fees and similar assets becoming fully depreciated or
amortized during 1995 and the first quarter of 1996.
Interest expense increased $687,000 or 129% during the first quarter of
1996 compared to the same period in 1995. This increase is primarily a result
of accrued loan fees of $500,000 and the 9% increase in the Company's average
debt during the first quarter 1996 as compared to the same period in 1995. In
addition, certain events of default triggered a 2% increase in the interest
rate on approximately $10 million of debt.
Provision for Income Tax. The provision for Puerto Rico income taxes
increased to $4,823,000 for the first quarter of 1996 as compared to $407,000
in the first quarter of 1995. In the first quarter of 1996, the Company had
higher taxable income resulting from the LIHPRHA transaction.
FINANCING, LIQUIDITY AND CAPITAL RESOURCES
In March 1990, the Company received a notice (the "Notice") from the U.S.
Army Corps of Engineers (the "Corps") asserting that unauthorized fill
materials had been placed in portions of an approximately five-acre parcel in
Charles County, Maryland (the "Site") owned by the Company and claimed by the
Corps to constitute wetlands subject to regulation pursuant to the Clean Water
Act. Following receipt of the Notice, the Company ceased development of the
Site and remediated a portion of the Site in accordance with instructions
<PAGE>29
issued by the Corps. The Company also commenced discussions with the Corps
regarding mitigation plans that would preserve some commercial value for the
Site and filed suit against the Corps claiming that a prohibition of
development on the entire Site would constitute a governmental taking for which
the Company would be entitled to compensation.
In November 1993, the Company believed that it had an agreement in
principle with the Corps that would settle the Company's claim and permit
commercial development of a portion of the Site. However, in early 1994, the
Company became aware that this matter had been referred to the U.S. Attorney
for the District of Maryland. After conducting a lengthy investigation of the
Company's wetlands practices in St. Charles, in October 1995 a grand jury
convened by the U.S. Attorney charged that certain of the Company's practices
with respect to four parcels, including the Site, constituted criminal
violations of Section 404 of the Clean Water Act. The indictment charged each
of IGC, its affiliate, St. Charles Associates, L.P. ("SCA"), and the Company's
Chairman, James J. Wilson. During the U.S. Attorney's investigation, the Corps
issued additional violation notices relating to filling portions of other
parcels claimed by the Corps to be protected wetlands. In October 1995 the
government filed a civil action in the U.S. District Court for the District of
Maryland charging the Company and Mr. Wilson with violations of the Clean Water
Act. Of the approximately 4,400 acres developed by the Company in St. Charles,
approximately 70 acres are the subject of the civil and criminal charges.
On February 29, 1996, each of IGC, SCA and Mr. Wilson were convicted on
four counts of felony violations of Section 404 of the Clean Water Act.
Sentencing is expected to occur in June 1996. On March 12, 1996, IGC and SCA
received service of process with respect to the civil action. Maximum
statutory penalties possible against each of IGC and SCA under the criminal
action are $50,000 per day for each of four felony violations or,
alternatively, twice the pecuniary gain realized by the Company from any
illegal action. The maximum statutory penalty possible under the civil action
is $25,000 per day for each of nine separate violations. Because the
investigation with regard to the sentencing is ongoing, the Company cannot
determine from what point in time these fines could be assessed. In the civil
action, the U.S. Attorney also seeks to enjoin the Company from engaging in
future illegal wetlands practices.
During 1994 and 1995, the Company recognized approximately $4.6 million in
legal and consulting expenses relating to these matters. Such expenses include
a reserve available to cover future anticipated costs of the criminal and civil
actions, including costs of appealing the criminal convictions. The amount of
any fine in the current case cannot be estimated with certainty and as such the
total costs incurred may exceed the amount reserved.
Management believes the Company and Mr. Wilson have many strong arguments
to present on appeal of the criminal convictions. Accordingly, the Company and
Mr. Wilson will appeal the criminal convictions and will continue to defend
vigorously against charges in the civil action.
The Company's loan agreements contain certain restrictive covenants, cross
default provisions and material adverse change in financial condition clauses.
As a result of the Company's conviction on four felony counts of the Clean
Water Act, Signet Bank issued a notice of default by the Company of certain
loan agreement covenants pertaining to $2.3 million of debt. Negotiations of
the terms and conditions of a forbearance agreement are in process. As a
result of this notice of default, and unless and until the criminal convictions
are reversed on appeal, $44.1 million of the Company's bank debt could be
called into default.
<PAGE>30
The uncertainty with respect to the amount of penalties has hindered the
Company's ability to secure financing necessary for the development of Fairway
Village, the third of five villages in the Planned Unit Development of St.
Charles, Maryland. The Company's current inventory of finished lots in St.
Charles is anticipated to be sold during 1996, therefore, the development of
additional lots is necessary to provide inventory for sales in 1997 and beyond.
As a result of the uncertainty regarding the magnitude of fines, the event
of default, multiple loan defaults and uncertainty regarding the ability to
obtain future financing, which may cause the Company to have negative cash flow
in 1996, there is substantial doubt about the Company's ability to continue as
a going concern.
The Company has historically met its liquidity requirements principally
from cash flow generated by land and home sales, property management fees,
distributions from Housing Development Associates S.E. ("HDA") and residential
rental partnerships and from bank financing providing funds for development and
working capital.
As discussed in Note 4, the Company no longer receives distributions from
HDA, as a result of the Company's distribution of Equus Units representing a
99% limited partnership interest in Equus to IGC Unitholders in February 1995.
In addition, under the terms of IGC's loans, most of the cash generated by U.S.
home and lot sales and distributions from partnerships, including distributions
from partnership refinancings, will be used to further reduce bank loans and
meet debt service requirements. As mentioned above, project financings have
been delayed by the inability to determine the penalties related to the
Company's felony convictions. Given these factors, the Company's ability to
generate cash for overhead, development and other uses is limited.
During the first quarter of 1996, four apartment projects in Puerto Rico
were sold under the 1990 Low Income Housing Preservation and Resident
Homeownership Act ("LIHPRHA"). This sale, after taxes, will generate
approximately $11.4 million of cash. Approximately $9.2 million of cash
proceeds is pledged to curtail bank debt and the remainder will be used to pay
legal fees related to the wetlands convictions and support operations. As a
result of the debt curtailments, the FDIC loan will be paid off and NationsBank
will have a first lien on commercial properties in St. Charles which will have
the effect of improving the Company's cash flow as the release prices under the
NationsBank agreement are less than that of the FDIC.
During 1995, the Company negotiated loan extensions with NationsBank and
Signet Bank. NationsBank has agreed to extend the maturity of its loans until
May 1998. Under the agreement, the extension of the maturity beyond November
30, 1995 was contingent upon a mandatory principal curtailment of $2.2 million
which will be made with the proceeds of the LIHPRHA sale. Signet Bank agreed
to extend the maturity of its loans until September 1996. The balance of the
Signet loans as of March 31, 1996 is $2.3 million. The Company anticipates it
will pay off these loans prior to their maturity with the proceeds from the
sale of commercial and residential land which secure the loans.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1994, the Company filed two claims against Charles County, Maryland and
its County Commissioners in the Maryland Tax Court, a state administrative
agency, seeking compensation for school sites that it previously had deeded to
<PAGE>31
the County. The actions seek to enforce an agreement settling litigation
between the parties that was entered into in 1989 and also rights pursuant to
Charles County law. Under the terms of the settlement agreement, the County
agreed to credit the Company for school sites contributed and also agreed to
repay to the Company any excess school impact fees paid. The Company seeks
$5.5 million, equal to the fair market value of the school sites. The
Company's claims have not yet been decided by the Tax Court.
In a separate proceeding, the Company filed suit in 1990 against Charles
County and the County Commissioners in the Circuit Court for Charles County to
enforce a provision of the same settlement agreement that required the County
to conduct an appropriate water and sewer connection fee study as the basis on
which to set such fees for the St. Charles Communities. On June 22, 1992,
judgment was rendered in favor of the Company. The judgment requires the
County to conduct the appropriate water and sewer connection fee study. In
1995, the Court of Special Appeals of Maryland affirmed the judgment. The
County has indicated that it is now in the course of conducting a water and
sewer connection fee study. The adequacy of the study will be subject to
review by the Company and, if necessary, the courts.
In March 1990, the Company received a notice (the "Notice") from the U.S.
Army Corps of Engineers (the "Corps") asserting that unauthorized fill
materials had been placed in portions of an approximately five acre parcel in
Charles County, Maryland (the "Site") owned by the Company and claimed by the
Corps to constitute wetlands subject to regulation pursuant to the Clean Water
Act. Following receipt of the Notice, the Company ceased development of the
Site and remediated a portion of the Site in accordance with instructions
issued by the Corps. The Company also commenced discussions with the Corps
regarding mitigation plans that would preserve some commercial value for the
Site and filed suit against the Corps claiming that a prohibition of
development on the entire Site would constitute a governmental taking for which
the Company would be entitled to compensation.
In November 1993, the Company believed that it had an agreement in
principle with the Corps that would settle the Company's claim and permit
commercial development of a portion of the Site. However, in early 1994, the
Company became aware that this matter had been referred to the U.S. Attorney
for the District of Maryland. After conducting a lengthy investigation of the
Company's wetlands practices in St. Charles, in October 1995 a grand jury
convened by the U.S. Attorney charged that certain of the Company's practices
with respect to four parcels, including the Site, constituted criminal
violations of Section 404 of the Clean Water Act. The indictment charged each
of IGC, its affiliate, St. Charles Associates, L.P. ("SCA"), and the Company's
Chairman, James J. Wilson. During the U.S. Attorney's investigation, the Corps
issued additional violation notices relating to filling portions of other
parcels claimed by the Corps to be protected wetlands. In October 1995 the
government filed a civil action in the U.S. District Court for the District of
Maryland charging the Company and Mr. Wilson with violations of the Clean Water
Act. Of the approximately 4,400 acres developed by the Company in St. Charles,
approximately 70 acres are the subject of the civil and criminal charges.
On February 29, 1996, each of IGC, SCA and Mr. Wilson were convicted on
four counts of felony violations of Section 404 of the Clean Water Act.
Sentencing is expected to occur in June 1996. On March 12, 1996, IGC and SCA
received service of process with respect to the civil action. Maximum
statutory penalties possible against each of IGC and SCA under the criminal
action are $50,000 per day for each of four felony violations or,
alternatively, twice the pecuniary gain realized by the Company from any
<PAGE>32
illegal action. The maximum statutory penalty possible under the civil action
is $25,000 per day for each of nine separate violations. In the civil action
the U.S. Attorney also seeks to enjoin the Company from engaging in future
illegal wetlands practices. As a result of the conviction, the U.S.
Environmental Protection Agency has issued a notice of suspension temporarily
excluding IGC and SCA from participation in federal government assistance, loan
and benefit programs and federal procurement activities. IGC and SCA are
contesting the suspension.
Management believes the Company and Mr. Wilson have many strong arguments
to present on appeal of the criminal convictions. Accordingly, the Company and
Mr. Wilson will appeal the criminal convictions and will continue to defend
vigorously against charges in the civil action.
ITEM 2. MATERIAL MODIFICATIONS OF RIGHTS OF REGISTRANT'S SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As a result of the wetlands litigation verdict, Signet Bank issued a
notice of default on its loan. The outstanding balance of this loan at March
31, 1996 is $2,319,000.
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) Modification to employment agreement Filed herewith
between Interstate General Company L.P.
and John E. Hans dated April 16, 1996
(b) Reports on Form 8-K.
None
<PAGE>
<PAGE>33
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERSTATE GENERAL COMPANY L.P.
-------------------------------
(Registrant)
By: Interstate General Management
Corporation
Managing General Partner
Dated: May 15, 1996 By: /s/ James J. Wilson
----------------- -----------------------------
James J. Wilson
Chairman and Chief
Executive Officer
Dated: May 15, 1996 By: /s/ John E. Hans
----------------- -----------------------------
John E. Hans
Senior Vice President and
Chief Financial Officer
<PAGE>
<PAGE>34
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10(a) Modification to employment agreement between Interstate General
Company L.P. and John E. Hans dated April 16, 1996.
<PAGE>1
Exhibit 10(a)
MODIFICATION AGREEMENT
This Modification Agreement dated as of April 16, 1996, by and
between John E. Hans ("Executive") and Interstate General Company L.P., a
Delaware limited partnership (the "Company");
W I T N E S E T H:
WHEREAS, the Company and the Executive entered into an Employment
Agreement dated as of September 1, 1994 (the "Employment Agreement") and a
Rights Agreement dated as of September 1, 1994 (the "Rights Agreement"); and
WHEREAS, in recognition of the Executive's performance and increase
in responsibilities, the Company and the Executive wish to modify the
Employment Agreement and the Rights Agreement, and to provide the Executive
additional incentive compensation;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto, intending to be legally bound, hereby agree as
follows:
1. Amendments to Employment Agreement. The Employment Agreement is
hereby amended as follows:
(a) Section 4(f) of the Employment Agreement is hereby amended
and restated in its entirety as follows:
(f) Specified Benefits. In addition to benefits to which the
Executive is eligible under subsection (c) of this section, during
the term of his employment hereunder, the Company shall (i) provide
for the Executive's use an automobile approved by the Company's
President, and (ii) pay all of the Executive's membership initiation
fees and dues to a country club selected by the Executive and not
disapproved by the Board up to a maximum of $3,000 for initiation
fees and $300 per month for dues (collectively, the "Specified
Benefits").
(b) Section 9 of the Employment Agreement is hereby amended
and restated in its entirety as follows:
9. Severance. Upon termination of the Executive's
employment hereunder, all payment and benefit obligations of
the Company hereunder shall immediately terminate except as
follows:
(a) In the event of a termination of the Executive's
employment due to the Executive's death or disability, the
Executive, or his estate, shall continue to receive his Base
Salary and benefits (excluding the Specified Benefits) for
which the Executive remains eligible under the terms of the
Company's benefit plans (collectively, "Severance
Compensation") for a period commencing on the effective date of
the Executive's termination determined by the Board (the
"Termination Date") and ending six (6) months following the
Termination Date; and
<PAGE>2
(b) In the event of a Qualifying Termination (defined
below) by the Company, the Executive shall receive Severance
Compensation for a period commencing on the Termination Date
and ending one year following the Termination Date.
For purposes of this Agreement, "Qualifying Termination" shall
mean any termination of the Executive by the Company other than
for "cause" or any termination by the Executive for
"Good Reason." For purposes hereof, "cause" shall be defined as
(1) conviction of a felony, other crime involving theft or
fraud, or other crime of moral turpitude involving the Company,
and/or (2) engaging in fraud or conduct with the intent of
causing substantial harm to the Company. In the event the
Company elects to terminate the Executive's employment for
cause, such termination may be made effective immediately, and
no advance notice shall be required. The decision to terminate
the Executive's employment for cause must be approved by the
Board of Directors.
For purposes of this section 9, Executive shall have
terminated the employment for a Good Reason if:
(a) the Executive terminates the employment relationship
within 2 years following the occurrence of (i) a
transaction or series of transactions which result in the
transfer of fifty percent (50%) or more of the current
voting control of the Company; or (ii) a transfer of all
or substantially all of the assets of the Company or the
merger of the Company into another entity other than an
entity the voting control of which is held by the Wilson
family; or
(b) the Executive terminates the employment relationship
within 6 months following the occurrence of (i) the
Company materially reducing, diminishing, terminating or
otherwise impairing the Executive's duties, titles and/or
responsibilities without the Executive's consent, or
without cause; (ii) the Company instructing the Executive
despite his written objection delivered to the Board of
Directors to take any action which is in violation of any
law, ordinance or regulation or would require any act of
dishonesty or moral turpitude; or (iii) the Company
committing a material breach of any of the provisions of
this Agreement.
2. Amendments to Rights Agreement. The Rights Agreement is hereby
amended as follows:
(a) In section 1.1 the number "40,000" shall be deleted
and the number "50,000" shall be inserted in lieu thereof.
<PAGE>
<PAGE>3
(b) In section 1.4 the table set forth therein shall be
amended and restated as follows:
Number of Rights
Initial Which Become
Exercisability Date Exercisable on Such Date
September 1, 1995 10,000
September 1, 1996 10,000
September 1, 1997 10,000
September 1, 1998 10,000
September 1, 1999 10,000
(c) In section 1.5 the number "8,000" shall be deleted
and the number "10,000" shall be inserted in lieu thereof.
3. Effect of Amendments. Except as expressly amended hereby, all
other terms of the Employment Agreement and the Rights Agreement shall remain
in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement on
the date and year first above written.
INTERSTATE GENERAL COMPANY L.P.
By: Interstate General Management
Corporation, its Managing General
Partner
By: /s/ Gregory G. Kreizenbeck
---------------------------------
Name: Gregory G. Kreizenbeck
Title: President & COO
EXECUTIVE
/s/ John E. Hans
--------------------------------------
John E. Hans
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,712<F1>
<SECURITIES> 0
<RECEIVABLES> 6,991
<ALLOWANCES> (809)
<INVENTORY> 78,023
<CURRENT-ASSETS> 0
<PP&E> 3,520
<DEPRECIATION> 2,282
<TOTAL-ASSETS> 144,470
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 46,971
<TOTAL-LIABILITY-AND-EQUITY> 144,470
<SALES> 6,030
<TOTAL-REVENUES> 24,884
<CGS> 5,388
<TOTAL-COSTS> 6,867
<OTHER-EXPENSES> 3,246
<LOSS-PROVISION> 97
<INTEREST-EXPENSE> 717
<INCOME-PRETAX> 13,957
<INCOME-TAX> 4,823
<INCOME-CONTINUING> 9,062
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,062
<EPS-PRIMARY> .88
<EPS-DILUTED> .88
<FN>
<F1>Balance includes $1,536 of restricted cash.
</FN>
</TABLE>
