-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NCtUTNWyjjAo+rF7rV1uqXVGNc5ajfizrHsiiTUOkX0ehrkUYEMLX/8kTEen6tay b4urWfUbFUfZJvzawt1NfQ== 0001065645-99-000015.txt : 19990409 0001065645-99-000015.hdr.sgml : 19990409 ACCESSION NUMBER: 0001065645-99-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990407 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN COMMUNITY PROPERTIES TRUST CENTRAL INDEX KEY: 0001065645 STANDARD INDUSTRIAL CLASSIFICATION: 6552 IRS NUMBER: 522058165 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14369 FILM NUMBER: 99583773 BUSINESS ADDRESS: STREET 1: 222 SMALLWOOD VILLAGE CENTER CITY: ST. CHARLES STATE: MD ZIP: 20602 BUSINESS PHONE: 3018438600 MAIL ADDRESS: STREET 1: 222 SMALLWOOD VILLAGE CENTER CITY: ST. CHARLES STATE: MD ZIP: 20602 10-K 1 1998 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ Commission file number 1-14369 American Community Properties Trust --------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 52-2058165 ------------------------------- -------------------- (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) Securities registered pursuant to Section 12(b) of the Act. TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Shares, $.01 par value American Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 15, 1999 the aggregate market value of the common shares held by non-affiliates of the registrant based on the closing price reported on the American Stock Exchange was $10,252,989. As of March 15, 1999, there were 5,191,554 common shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement to be filed with the Securities and Exchange Commission for Registrant's 1999 Annual Meeting of Shareholders to be held in June 1999 are incorporated by reference into Part III. AMERICAN COMMUNITY PROPERTIES TRUST 1998 Form 10-K ANNUAL REPORT TABLE OF CONTENTS PART I ------ Page ---- Item 1. Business 3 Item 2. Properties 13 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 15 PART II ------- Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 16 Item 6. Selected Financial Data 16 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Conditions 18 Item 7a. Quantitative and Qualitative Disclosure about Market Risk 25 Item 8. Financial Statements and Supplementary Data 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 66 PART III -------- Item 10. Trustees and Executive Officers of the Registrant 66 Item 11. Executive Compensation 66 Item 12. Security Ownership of Certain Beneficial Owners and Management 66 Item 13. Certain Relationships and Related Transactions 66 PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 67 PART I ITEM 1. BUSINESS On March 17, 1997, American Community Properties Trust ("ACPT"), a wholly owned subsidiary of Interstate General Company L.P. ("IGC" "Predecessor"), was formed as a real estate investment trust under Article 8 of the Maryland Corporation Associations Code (the "Maryland Trust Law"). ACPT was formed to succeed to most of IGC's real estate assets. On October 5, 1998, IGC transferred to ACPT the common shares of four subsidiaries that collectively comprised the principal real estate operations and assets of IGC. In exchange, ACPT issued to IGC 5,207,954 common shares of ACPT, all of which were distributed to the partners of IGC. ACPT is a self-managed holding company that owns all of the outstanding equity interests in American Rental Management Company ("American Management"), American Land Development U.S., Inc. ("American Land"), and IGP Group Corp. ("IGP Group") and all of the common stock of American Rental Properties Trust ("American Rental"). ACPT is engaged in four principal lines of business: (i) ownership of rental apartment properties in the United States and Puerto Rico, (ii) community development in the United States and Puerto Rico, (iii) property management services in the United States and Puerto Rico, and (iv) development of commercial rental properties and/or ground leases in Puerto Rico. In addition, ACPT is engaged in limited condominium building operations in Puerto Rico. Set forth below is a brief description of these businesses. RENTAL APARTMENT PROPERTIES. United States. ACPT, indirectly through its real estate investment trust ("REIT") subsidiary, American Rental, and American Rental's limited partnership subsidiary, American Housing, hold interests in 13 U.S. apartment partnerships that own and operate apartment facilities in Maryland and Virginia. The U.S. apartment partnerships own a total of 2,246 rental units. Each of the apartment properties is financed by a mortgage that is non-recourse to the apartment partnership. As non-recourse mortgages, the partners are not jointly and severally liable for the debt. HUD provides rent subsidies to residents of 993 of the apartment units and interest subsidies for 415 units. In addition, 110 units are leased pursuant to HUD's Low Income Housing Tax Credit program, and 200 other units are leased under income guidelines set by the Maryland Community Development Administration. The remaining units are leased at market rates. The partnership agreements of the U.S. apartment partnerships provide that American Housing will receive between 50% and 99.9% of distributable surplus cash from operations, refinancings or dispositions as general partner in seven of the partnerships. In two of these partnerships, American Housing also will receive 25.5% of the distributable surplus cash from operations as a limited partner. In five of the partnerships, American Housing will receive 0% to 5% of the distributable surplus cash from operations as general partner until the limited partners have received cash distributions equal to their contributed capital. Thereafter, American Housing as general partner will share in 50% of the distributable cash flow from operations, refinancings and dispositions. In two of these partnerships, American Housing also will receive 51% of the cash distributions as limited partner. Once the limited partners have received cash distributions equal to their contributions and American Housing's general partner's distributions increase to 50%, American Housing's limited partnership distributions will decrease to 25.5%. American Housing directly and indirectly will receive 100% of the distributable cash flow from operations in one of the partnerships. The table below sets forth the name of each U.S. apartment partnership; the number of rental units in the property owned by such partnership; the project cost; the percentage of such units under lease; and the expiration date for any subsidy contract: No. of 12/31/98 Occupancy Expiration Apt. Project Cost at of Subsidy Units (in thousands) 12/31/98 Contract ------ -------------- --------- -------------- Bannister Associates 1998 41 units Limited Partnership (1) 208 $ 5,145 95% 2017 167 units Brookside Gardens Limited Partnership (2) 56 2,690 84% N/A Crossland Associates Limited Partnership (3) 96 3,309 91% N/A Fox Chase Apartments General Partnership (4) 176 7,941 95% N/A Headen House Associates Limited Partnership (5) 136 6,073 95% 2000 Huntington Associates Limited Partnership (6) 204 10,451 94% 2000 Lakeside Apartments Limited Partnership (7) 54 4,164 87% N/A Lancaster Apartment Limited Partnership (8) 104 4,974 95% N/A New Forest Apartments General Partnership (4) 256 13,836 92% N/A Palmer Apartments Associates Limited Partnership (9) 152 5,758 86% 2000 Wakefield Terrace Associates Limited 1998 40 units Partnership (10) 204 6,449 87% 2020 164 units Wakefield Third Age Associates Limited 1998 20 units Partnership (11) 104 3,181 99% 2019 84 units Essex Apartments Associates Limited Partnership (12) 496 19,288 97% 2000 ----- ------- 2,246 $93,259 ===== ======= (1) Receives subsidies under the National Housing Act up to a maximum of $184,020 per year. (2) Not subsidized, but all units are set aside for low to moderate income tenants over 62 years of age under provisions set by the Low Income Housing Tax Credit ("LIHTC") program. (3) Not subsidized. (4) Not subsidized, but 20% of the units are subject to income guidelines set by Sections 4a and 103b of the Internal Revenue Code of 1954. (5) Receives subsidies under the National Housing Act up to a maximum of $1,369,008 per year. (6) Receives subsidies under the National Housing Act up to a maximum of $2,066,040 per year. (7) Not subsidized, but all units are set aside for low to moderate income tenants over 55 years of age under provisions set by the LIHTC program. (8) Not subsidized, but 51% of the units are subject to income guidelines set by the Maryland Community Development Administration ("MCDA"). (9) 56 units are subsidized and receive subsidies under the National Housing Act up to a maximum of $474,432 per year. 96 units are not subsidized, but 51% of these are subject to income guidelines set by MCDA. (10) Receives subsidies under the National Housing Act up to a maximum of $194,220 per year. (11) Receives subsidies under the National Housing Act up to a maximum of $90,480 per year. (12) Receives subsidies under the National Housing Act up to a maximum of $3,326,592 per year. Puerto Rico. In addition, ACPT, indirectly through its partnership subsidiary IGP Group, and IGP Group's partnership subsidiary IGP, holds interests in 9 Puerto Rico apartment partnerships that own and operate a total of 12 apartment facilities in Puerto Rico. The Puerto Rico apartment partnerships own a total of 2,653 rental units, all of which are subject to rent subsidies from HUD. The properties held by the Puerto Rico apartment partnerships are financed by mortgages that are non-recourse to the partners. Two of the partnership agreements of the Puerto Rico apartment partnerships provide that IGP currently receive 50% of the net cash flow from operations. In the remaining seven partnerships, IGP receives a 0% to 5% interest in profits, losses and net cash flow from operations until such time as the limited partners have received cash distributions equal to their capital contributions. Thereafter, IGP will share in 50% to 60% of cash distributions from operations, refinancing and disposition. As a result of loans made to six of the Puerto Rico apartment partnerships, IGP also holds notes payable by such partnerships that are required to be paid prior to the making of distributions from the partnerships from refinancing, sale or other capital events. ACPT intends to benefit from certain projected trends in Puerto Rico. Puerto Rico is estimated to have approximately 3.7 million inhabitants at present, and the Puerto Rico Planning Board projects its population to continue to grow. While the population has increased, the size of a typical Puerto Rican family has decreased, resulting in a need for additional housing. This trend is expected to continue. Construction activity in the residential sector has shifted from construction of single-family homes to multi-family construction such as walk-up condominiums. Per capita personal income increased to $7,882 in fiscal year 1996 from $7,374 in 1995 and $7,079 in 1994. The economy of Puerto Rico registered a real growth of 3.2% during fiscal year 1997 in its gross product, compared with increases of 3.3% in 1996, 3.4% in 1995 and 2.5% in 1994. The table below sets forth the name of each apartment property owned by the Puerto Rico apartment partnerships; the number of rental units in the property owned by such partnership; the project cost; the percentage of such units under lease; and the expiration date for any subsidy contract: No. of 12/31/98 Occupancy Expiration Apt. Project Cost at of Subsidy Units (in thousands) 12/31/98 Contract ------ -------------- --------- -------------- San Anton (1) 184 $ 4,642 99% 1999 Monserrate I (2) 304 11,570 99% 1999 Alturas del Senorial (3) 124 4,667 98% 1999 Jardines de Caparra (4) 198 7,372 100% 2000 Colinas de San Juan (5) 300 12,094 99% 2001 Bayamon Gardens (6) 280 13,660 100% 2011 Vistas del Turabo (7) 96 3,371 98% 2021 Monserrate II (8) (9) 304 12,339 99% 2020 Santa Juana (8) (10) 198 7,510 99% 2020 Torre De Las Cumbres (8) (11) 155 6,646 100% 2020 De Diego (8) (12) 198 7,556 99% 2020 Valle del Sol (13) 312 15,295 99% 2003 ----- -------- 2,653 $106,722 ===== ======== (1) Receives subsidies under the National Housing Act up to a maximum of $1,339,200 per year. (2) Receives subsidies under the National Housing Act up to a maximum of $1,916,464 per year. (3) Receives subsidies under the National Housing Act up to a maximum of $570,672 per year. (4) Receives subsidies under the National Housing Act up to a maximum of $891,048 per year. (5) Receives subsidies under the National Housing Act up to a maximum of $1,339,200 per year. (6) Receives subsidies under the National Housing Act up to a maximum of $1,512,144 per year. (7) Receives subsidies under the National Housing Act up to a maximum of $477,148 per year. (8) This property is owned by Carolina Associates L.P., a Maryland limited partnership in which IGP holds a 50% interest. (9) Receives subsidies under the National Housing Act up to a maximum of $1,541,280 per year. (10) Receives subsidies under the National Housing Act up to a maximum of $994,032 per year. (11) Receives subsidies under the National Housing Act up to a maximum of $813,444 per year. (12) Receives subsidies under the National Housing Act up to a maximum of $994,032 per year. (13) Receives subsidies under the National Housing Act up to a maximum of $2,196,792 per year. Government Regulation. HUD subsidies are provided principally under Sections 8 and 236 of the National Housing Act. Under Section 8, the government pays to the applicable apartment partnership the difference between market rental rates (determined in accordance with government procedures) and the amounts that the government deems the residents are able to afford. Under Section 236, the government provides interest subsidies directly to the applicable apartment partnership through a reduction in the property's mortgage interest rate which provides a corresponding reduction in resident rental rates. In order to comply with the requirements of Section 8 and Section 236, residents are screened by American Management or IGP for eligibility under HUD guidelines. Subsidies are provided according to the terms of long-term contracts between the federal government and the apartment partnerships. Cash flow from those projects whose mortgage loans are still insured by the Federal Housing Authority ("FHA"), or financed through the housing agencies in Maryland, Virginia or Puerto Rico (the "State Financing Agencies") are subject to guidelines and limits established by the apartment partnerships' regulatory agreements with HUD and the State Financing Agencies. The regulatory agreements also require that if the cash from operations generated by certain apartment properties has exceeded the allowable cash distributions, the surplus must be deposited into restricted escrow accounts held by the mortgagee of the property and controlled by HUD or the applicable State Financing Agency. Funds in these restricted escrow accounts may be used for maintenance and capital improvements with the approval of HUD and/or the State Finance Agency. The federal government has virtually eliminated subsidy programs for new construction of low and moderate income housing by profit-motivated developers such as ACPT. As a result, no new construction of apartment projects is expected in Puerto Rico and any new apartment properties developed by ACPT in the U.S. most likely will offer market rate rents. The subsidy contracts for ACPT's investment apartment properties are scheduled to expire between 1999 and 2020. In addition, the long term subsidy contracts for six Puerto Rico properties that are scheduled to expire in 2011, 2020 or 2021 may be cancelled by the applicable Puerto Rico apartment partnership in 2000 (for contracts to expire in 2020) or 2001 (for contracts to expire in 2011 or 2021) and thereafter every five years until expiration. Under a recently enacted law, HUD may renew expiring subsidy contracts on a year to year basis, and ACPT intends to seek the renewal of expiring subsidy contracts for its U.S. properties. Depending on market conditions, ACPT intends to convert to condominiums apartment properties in Puerto Rico that have subsidy contracts that expire over the next several years. Two such conversions are currently in progress. See "Condominium Conversion." HUD also is seeking Congressional authority to convert expired contracts to resident-based vouchers. This would allow residents to choose where they wish to live. This can potentially impact the income stream of certain properties. However, ACPT intends to actively maintain its properties in a manner designed to preserve their values and retain residents. HUD also is exploring a program known as "portfolio re-engineering" or "mark-to-market." This would assist owners of Section 8 and HUD-insured properties that could not meet loan obligations under the proposed resident-based voucher system. ACPT will monitor the progress of this proposal and its impact on the properties in which it holds interests through the apartment partnerships. Competition. ACPT's investment properties that receive rent subsidies are not subject to the market conditions that affect occupancy at properties with market rate rents. These subsidized properties average approximately 99% occupancy rates year round. ACPT's apartments in St. Charles that have market rate rents are impacted by the supply and demand for competing rental apartments in the area, as well as the local housing market. When for sale housing becomes more affordable due to lower mortgage interest rates or softening home prices, this can adversely impact the performance of rental apartments. Conversely, when mortgage interest rates rise or home prices increase, the market for rental units may benefit. CONDOMINIUM CONVERSION. Puerto Rico. Most of the apartment properties in Puerto Rico were designed, located and maintained with the expectation that they might be converted into condominiums upon the expiration of subsidy contracts 20 to 40 years after construction. The existing debt on most of the Puerto Rico apartment properties is low when compared to present values. In addition, the demand for centrally located residential units within the San Juan metropolitan area, coupled with the acceptance of the condominium concept in Puerto Rico, make condominium conversions of the Puerto Rico apartment units an attractive strategy. ACPT's indirect subsidiary IGP has a record of success in this conversion procedure, having previously converted 1,800 units in Puerto Rico owned by IGP and certain affiliates. These were properties which proved to be unsuccessful as market rent apartments. Their conversion to condominiums permitted IGP and the affiliates to profit from these properties despite a relatively high debt structure. Currently, IGP is in the process of converting two former apartment properties, Monte de Oro and New Center, into condominiums. Construction of the improvements to be made at the properties commenced in May 1998 and is expected to be completed by the end of the third quarter in 1999. All units at both properties are targeted to be sold by early 2000. The subsidy contracts for six of the properties owned by the Puerto Rico Apartment Partnerships expire no later than 2003, and the contracts for the remaining properties may be cancelled by the applicable partnership in either 2000 or 2001 and every five years thereafter. ACPT currently intends to convert some or all of such properties into condominiums upon the expiration or cancellation of the contracts. United States. Because of the risk that sales of condominium units by American Housing would constitute "prohibited transactions" under the rules governing REITs, which would subject the profits from such sales to a 100% tax, ACPT currently does not intend to convert any of the properties owned by the U.S. Apartment Partnerships into condominiums. COMMUNITY DEVELOPMENT. ACPT's community development assets consist of more than 4,700 acres of developed and undeveloped land located in the master planned communities of St. Charles, Maryland, and Parque Escorial, in Carolina, Puerto Rico. The land in both communities is being developed by ACPT and its affiliates for a variety of residential uses, including single-family homes, townhomes, condominiums and apartments, and commercial and industrial uses. ACPT may also develop for residential use certain land adjacent to the site of a planned commercial development in Canovanas, Puerto Rico. St. Charles. ACPT, indirectly through American Land, owns more than 4,500 acres for development in the planned community of St. Charles. St. Charles contains a total of approximately 9,100 acres (approximately 14 square miles) located in Charles County, Maryland, 23 miles southeast of Washington, D.C. Based on figures prepared by the Charles County Department of Planning and Growth Management ("DPGM"), the current population of Charles County is in excess of 115,000, up from 101,000 in 1990, and is projected to increase from 123,200 in 2000 to 166,500 in 2015. The real property tax base has increased from $547 million in 1980 to $2.3 billion in 1998, with the residential base accounting for 77% of the total. The 1996 median effective household buying income in Charles County is estimated at $49,371, ranking it third in Maryland. The DPGM has determined that the number of residential building permits have increased yearly from 1993, when 962 permits were issued, to 1998, when 1,454 permits were issued. St. Charles is comprised of five separate villages: Smallwood Village, completed, Westlake Village, which has been substantially completed, Fairway Village, currently under development, and Piney Reach and Wooded Glen. Each village consists of individually planned neighborhoods, and includes schools, churches, recreation centers, sports facilities, and a shopping center. Other amenities include parks, lakes, hiking trails and bicycle paths. St. Charles also includes an 18-hole public golf course. Each community is planned for a mix of residential housing, including detached homes, townhomes, multiplex units and rental apartments. Typical lot sizes for detached homes range from 5,000 to 8,000 square feet. IGC's development of St. Charles as a planned unit development ("PUD") began in 1972 when a comprehensive planned unit development for St. Charles was approved by the County. This master plan contemplates construction of approximately 24,730 housing units and 1,390 acres of commercial and industrial development. As of December 31, 1998, there were over 11,000 completed housing units in St. Charles, including Carrington Neighborhood which began prior to 1972 and is not included in the PUD. In addition there are schools, recreation facilities, commercial, office and retail space in excess of 4.2 million square feet. In St. Charles, ACPT, through outside planners, engineers, architects and contractors, obtains necessary approvals for land development, plans individual neighborhoods in accordance with regulatory requirements, constructs roads, utilities and community facilities. ACPT develops lots for sale for detached homes, townhomes, apartment complexes, and commercial and industrial development. The third village, Fairway Village, so named for the existing 18-hole public golf course which it surrounds, is currently being developed. Its master plan provides for 3,346 dwelling units consisting of 1,287 acres of land including an industrial park and 40-acre commercial center. The last two villages, Wooded Glen and Piney Reach, which include approximately 3,000 acres, are planned for development after the completion of Fairway Village. The total number and mix of residential units must be approved by the County Commissioners before development can begin on these two villages and there can be no assurances that the total of 24,730 units in the master plan can be attained. Government Approvals The St. Charles master plan has been incorporated in Charles County's comprehensive zoning plan. In addition, the Charles County government has agreed to provide sufficient water and sewer connections for the balance of the housing units to be developed in St. Charles. Specific development plans for each village in St. Charles is subject to approval of the County Planning Commission. Such approvals have previously been received for the villages of Smallwood, Westlake and Fairway. Approvals have not yet been sought on the final two villages. The Charles County government recently enacted a zoning text amendment which imposed more stringent standards for the construction of townhomes and for the zoning of townhome land outside of St. Charles. We do not expect that this amendment will affect the number of units built in St. Charles. However, it will affect the selling price of the new townhomes built in the county, including St. Charles. Competition Competition among residential communities in Charles County is intense. Currently, there are approximately 30 subdivisions competing for new home buyers within a five mile radius of St. Charles. The largest competing housing developments are Kingsview, a 640 unit project being developed by Miller & Smith and Southwinds, a 367 unit project being developed by Washington Homes. Smaller projects are being developed by more than 20 other developers. This is the result of several major national and regional homebuilders becoming attracted by the growing marketplace. According to DPGM, Charles County residential building permits have increased yearly from 1993, with 962 in 1993, 964 in 1994, 965 in 1995, 1,090 in 1996 and 1,232 in 1997 and 1,454 in 1998. In this very price sensitive market, ACPT attempts to position St. Charles to provide among the lowest priced building lots and homes while offering more amenities than the competition. ACPT intends to continue this strategy. Environmental Impact Management of ACPT believes that the St. Charles master plan can be completed with respect to ACPT's properties without material adverse environmental impact and in compliance with governmental regulations. In preparation for immediate and future development, Phase I Environmental Site Assessments have been prepared for substantially all of the undeveloped parcels. The historical use of the land has been farming and forestry and no significant environmental concerns were found. Jurisdictional determinations for wetlands have been approved by the Corps for Sheffield Neighborhood, the next phase of residential development containing 1,642 dwelling units. Management has developed an Environmental Policy Manual and has established an Environmental Review Committee and an Environmental Coordination Officer to anticipate environmental impacts and avoid regulatory violations. However, development can be delayed while plans are being reviewed by local, state and federal agencies for environmentally sensitive areas. ACPT's predecessor, IGC, remains party to certain litigation regarding the development of wetlands. As a result of the restructuring, the property held by ACPT in St. Charles is not the subject of that litigation. Parque Escorial. ACPT, indirectly through American Land, IGP Group and IGP holds a 100% interest in LDA, which in 1989 acquired the 431 acre site of the former El Comandante Race Track. The master plan for Parque Escorial was approved in 1992 and contemplates the construction of 2,700 dwelling units of various types on 312 acres and the development of 120 acres for commercial, office and light industrial uses. LDA has developed and sold 147 acres, and continues to own 285 acres of developed and undeveloped land at this site which has been established as the planned community of Parque Escorial. Parque Escorial is located approximately six miles from the central business district in San Juan, Puerto Rico. Development of Parque Escorial began in 1994 with the sale of 61 acres of commercial land to Wal-Mart. Wal-Mart and Sam's Club stores, each consisting of 125,000 square feet, opened in 1995. Since then 200,000 square feet of commercial space has opened on that site. An additional 14 acres of commercial land have been sold subsequently by LDA for prices up to $1.1 million per acre. Residential development began in 1996 and 1,081 units have settled. Of these, 216 units are "walk-up" condominiums built and sold by a joint venture 50% owned by IGP Group. In January 1998, construction of the office park encompassing 23 acres of saleable land began. In December 1998, LDA transferred title to ELI S.E., a special partnership in which LDA holds a 48% interest, a 7 acre site on which a 150,000 square foot building is presently being built to be leased to the State Insurance Fund of Puerto Rico, a government agency, for thirty years at the end of which the leasee can acquire it for $1. For income tax purposes, the lease is considered a finance lease, therefore, the lease payments are treated as mortgage payments. A significant portion of the lease payments consist of interest due from a government agency which when received by ELI are tax free. The tax free status stays intact when ELI distributes its income to the Company. Site improvements for the next residential phase comprising 872 units will commence in June 1999 for delivery to homebuilders in June 2000. Government Approvals Parque Escorial's master plan has been approved but specific site plans are subject to planning commission review and approval. LDA has secured agreements with the Puerto Rico Aqueduct and Sewer Authority to provide for adequate water and sewer capacity for the first 2,200 units, which includes the commercial space. ACPT believes that in addition to developing commercial land for sale, opportunities exist for ACPT to develop commercial rental properties in Puerto Rico. Competition The scarcity of developable land in the San Juan metropolitan area creates a favorable market for home sales at Parque Escorial. Competition for home sales is expected primarily from small scale condominium projects in areas considered to be similar or less desirable than Parque Escorial. Furthermore, it is one of only two master planned communities currently under development in the San Juan metropolitan area. The other is the 500-acre Encantada, which is marketed toward higher income homebuyers. Parque Escorial's home prices appeal primarily to entry level purchasers. In addition, Encantada's developer is building all the homes in the community, while Parque Escorial features six different projects in its first phase, providing more selections for the consumer. Environmental Impact Management of ACPT believes that the Parque Escorial master plan can be completed without material adverse environmental impact and in compliance with government regulations. All of the necessary agencies have endorsed Parque Escorial's environmental impact statement. Wal-Mart has provided mitigation for 11.87 acres of wetlands impacted by its development of the shopping center site and other land. COMMERCIAL RENTAL PROPERTIES. LDA also owns a parcel of land of approximately 540 acres adjacent to the El Comandante Race Track in Canovanas, Puerto Rico. At present, LDA is evaluating the viability of developing and/or leasing the land for a fully integrated entertainment complex consisting of movie studios, an amphitheater with a capacity of 20,000, and an amusement park. LDA is in the process of securing all necessary zoning approvals, utilities endorsements and approvals for infrastructure for development of all sites. On June 3, 1998, LDA entered into an agreement pursuant to which LDA will construct and lease movie studio facilities to an entity specializing in renting such facilities. Portions of the land may also be developed for residential use if commercial development or leasing is not feasible. PROPERTY MANAGEMENT. ACPT, indirectly through its subsidiary American Management, operates the property management business in the United States. In connection with this business, American Management will earn fees from the management of 4,176 rental apartment units, including 2,246 units in which ACPT holds an ownership interest. Management fees for the 2,246 units are based on a percentage of rents ranging from 2.5% to 10.4%. The management contracts for these properties have terms of one or two years and are customarily renewed upon expiration but may be terminated on 30 days notice by either party. Management fees for other apartment properties range from 2.5% to 3.5% of rents. In addition, IGP earns fees from the management of 2,653 rental apartment units owned by the 9 Puerto Rico Apartment Partnerships, in which the Company holds an ownership interest. Management fees for these apartment properties, like those in the U.S., are based on a percentage of rents ranging from 2.25% to 7.5% and the management contracts for these properties have terms of one or two years and are customarily renewed upon expiration. IGP also is entitled to receive up to an aggregate of $192,000 annually in certain incentive management fees with respect to six properties owned by the Puerto Rico Apartment Partnerships. Upon the conversion of such units to condominiums, the number of units under management, and the corresponding management fees, will be reduced. However, IGP would receive fees in connection with managing the conversion process. IGP currently manages 918 rental apartments owned by a non-profit entity which acquired the units from IGP in 1996 under the provisions of LIHPRHA. The management agreements for these properties expire April 1, 2001. In addition, IGP manages 511 units owned by the Puerto Rico Housing Finance Agency. These units are expected to be converted to condominiums in 1999 by entities other than IGP, at which time IGP will cease to receive said management fees. HOMEBUILDING IN PUERTO RICO. ACPT, through IGP Group, holds a 50% interest in Escorial Builders S.E., a Puerto Rico partnership ("Escorial Builders"), which is a construction joint venture at Parque Escorial. The remaining interest in the joint venture is held by an unrelated third party which is the general contractor for the project. Escorial Builders has acquired lots at Parque Escorial on which it is building 216 "walk-up" condominium units. As of December 31, 1998, 123 units have been closed with the balance expected to close in 1999. Escorial Builders is not expected to develop any additional projects. However, IGP Group, on its own or through joint ventures, may construct additional projects if an appropriate opportunity arises. ITEM 2. PROPERTIES ACPT owns real property located in Maryland and Puerto Rico. As of December 31, 1998, the Company's community development land holdings consisted of the following: Charles County, Maryland Finished inventory- Residential lots 109 Commercial, office or light industrial acres 83 Under development- Residential lots 551 Commercial, office or light industrial acres 110 Pre-development - master plan approved Residential lots 2,686 Commercial office or light industrial acres 510 Held for future development acres 3,071 Carolina, Puerto Rico Finished inventory- Residential lots -- Commercial, office or light industrial acres 15 Under development- Commercial, office or light industrial acres 13 Pre-development Residential lots 872 Held for future development acres 135 Canovanas, Puerto Rico Held for future development acres 540 The Company holds an interest in a non-consolidated homebuilding joint venture in Puerto Rico. As of December 31, 1998, it had 64 units under construction. The Company also holds interests in partnerships that own properties in the United States and Puerto Rico as further described in Item I of this Annual Report on Form 10-K. ITEM 3. LEGAL PROCEEDINGS St. Charles has been zoned as a planned unit development that allows construction of approximately 24,730 housing units and 1,390 acres of commercial and industrial development. The County has agreed to provide sufficient sewer and water connections for all housing units remaining to be developed in St. Charles. IGC and SCA are involved in litigation with the County regarding (1) the level of sewer and water fees that may be imposed and (2) the level of school construction impact fees that may be imposed. In addition, IGC and SCA are asserting claims against the County for the repayment of excessive sewer and water fees and school construction impact fees paid by them in the past. The sewer and water litigation is entitled St. Charles Associates Limited Partnership, et al. v. County Commissioners of Charles County, et al., No. 89-720, Circuit Court for Charles County, Maryland. That litigation was filed in June 1989 and is continuing. The litigation originally sought a court ruling that the County was not entitled to impose sewer and water fees at the then-existing level upon residential units in the St. Charles Communities. That aspect of the litigation was settled by a Settlement Agreement dated November 1989, which was confirmed in a Consent Decree entered in March 1990. Subsequent aspects of the litigation have resulted from disputes over the interpretation of the Settlement Agreement and Consent Decree. The principal issues that are presently being contested between the county, IGC, and SCA are (1) whether a study procured by the County in 1996 justifies the level of sewer and water connection fees which it imposes upon the St. Charles Communities; (2) whether SCA and IGC are entitled to an injunction against future excessive sewer and water fees; and (3) to what degree SCA and IGC are entitled to recover what they regard as excessive sewer and water fees they have paid in the past. The Circuit Court has ruled in SCA and IGC's favor that the County's 1996 study did not comply with the applicable restrictions and that SCA and IGC are entitled to an injunction against future excessive sewer and water fees. The Court further ruled that SCA and IGC must pursue claims for excess sewer and water fees paid in the past in Maryland's Tax Court. The Court's rulings are on appeal to Maryland's Court of Special Appeals. As a result of IGC's restructure, St. Charles Community, LLC has been added as an additional party to that appeal. SCA has commenced an action in Maryland Tax Court, which is a State administrative agency, to recover what it regards as excessive sewer and water fees that have been paid in the past. That case is titled St. Charles Associates Limited Partnership, et al. v. Charles County, et al., No. 1205, and was filed in February 1997. SCA's and IGC's claims for the refund of excessive school impact fee claims paid to the County in the past are being pursued in the Maryland Tax Court as well, in actions entitled St. Charles Associates Limited Partnership, et al. v. County Commissioners of Charles County, et al., Case Nos. 961 (filed March 1994), 1038 (filed October 1994), and 98-MI-0083 (filed February 6, 1998). In those cases SCA and IGC are seeking both repayment of past excessive school impact fees paid to the County and a ruling as to the nature of their rights to credits against school impact fees for school sites that they have donated to the County. On December 15, 1998, the Circuit Court for Charles County, on appeal from a ruling of the Tax Court, ruled that certain of SCA's and IGC's refund claims had not been filed on a timely basis. SCA and IGC have appealed that ruling to Maryland's Court of Special Appeals. SCA and IGC assigned their rights under the settlement agreement to St. Charles Community, LLC with respect to the land transferred to St. Charles Community, LLC, but retained its rights to any repayment or refund of the water and sewer service and connection fees and school impact fees with respect to any construction or building activity on the land in St. Charles prior to the dates of transfer to St. Charles Community, LLC. On October 30, 1998, St. Charles Community, LLC filed a complaint in the Circuit Court for Charles County, Maryland against the County Commissioners of Charles County and five individual members of the commission. The complaint presents a challenge to Charles County Ordinance No. 98-69, which became effective on October 1, 1998. That ordinance places a moratorium on the issuance of building permits for multi-family or townhouse developments in Charles County for the period of October 2, 1998 through March 15, 1999. The complaint alleges that the County's enforcement of the moratorium against St. Charles Community, LLC amounts to a breach of a 1989 settlement agreement between St. Charles Associates and the County. St. Charles Community, LLC is a successor in interest to the rights of St. Charles Associates under that agreement. The October 30, 1998 complaint also alleges that the procedure by which the moratorium ordinance was enacted violated Maryland law relating to open government meetings. The complaint seeks in excess of $7,000,000 in damages and an injunction preventing enforcement of the moratorium. Subsequent to the filing of the complaint, the moratorium ended with the result that the aspect of the complaint that seeks injunctive relief is now moot. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The ACPT shares are traded on the American and the Pacific Stock Exchanges under the symbol "APO". The following table sets forth, for the periods indicated, the high and low sales prices per ACPT share as reported in the consolidated transaction reporting system, and cash distributions paid to shareholders during these periods. ACPT shares commenced public trading on October 6, 1998. Cash Dividends Price Range of ACPT Shares ------------------ -------------------------- Total Per Share High Low -------- --------- ------------ ---------- 1998 October 5 to: December 31 $259,578 $.05 $7-1/8 $3-3/4 As of the close of business on March 15, 1999, there were 244 shareholders of record. As of March 15, 1999, the closing price reported by the American Stock Exchange was $4.25 per share. Future distributions by the Company will be at the discretion of the Board of Trustees. The Board of Trustees will review the adequacy of the Company's distribution rate quarterly. Future distributions by the Company will depend on its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986 and such other factors as the Board of Trustees deems relevant. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth financial and operating information of ACPT for the five year period ended December 31, 1998 as if it had been a separate company operating for all periods presented. It should be read in conjunction with the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Year Ended December 31, -------------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (In thousands) Income Statement Data: Land sales $16,670 $13,165 $13,674 $15,441 $21,168 Rental property revenues 8,979 8,737 7,577 4,642 4,537 Equity in earnings from partnerships and developer fees 1,638 1,509 16,585 2,514 4,878 Management and other fees 3,447 3,775 4,816 3,894 3,507 Interest and other income 1,031 943 982 693 649 Total revenues 31,765 28,129 43,634 27,184 34,739 Cost of land sales 11,106 8,494 9,378 7,801 12,934 Interest expense 3,724 3,820 4,433 4,263 4,337 General and administrative expense 5,793 6,607 6,810 6,769 6,619 Other operating expenses 7,974 6,744 5,518 2,667 2,676 Total expenses 28,597 25,665 26,139 21,500 26,566 Minority interest (697) (600) (444) (511) (680) Income tax (benefit) provision 1,289 470 3,424 1,369 3,304 Net income 1,182 1,394 12,695 (1) 3,804 4,189 Year Ended December 31, -------------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (In thousands) Balance Sheet Data: Assets related to rental properties $47,577 $47,421 $52,011 $35,561 $35,107 Assets related to commercial properties 4,535 -- -- -- -- Assets related to community development 57,683 61,647 63,000 59,309 49,490 Cash and other assets 8,371 6,054 5,565 7,083 7,491 Total assets 118,166 115,122 120,576 101,953 92,088 Debt related to rental properties Recourse 2,723 969 1,139 1,334 1,559 Non-recourse 38,662 39,101 39,508 22,650 22,771 Debt related to community development Recourse 42,013 39,784 38,943 49,941 42,351 Non-recourse -- 2,295 2,153 2,034 4,270 Other liabilities 18,035 16,957 18,745 12,781 10,961 Total liabilities 101,433 99,106 100,488 88,740 81,912 Capital 16,733 16,016 20,088 13,213 10,176 Operating Data: Rental apartment units managed at end of period 8,139 8,139 8,139 8,085 8,085 Units under construction -- -- -- 54 -- Community Development Residential lots sold 399 231 406 113 101 Residential lots transferred to joint venture -- 118 98 -- -- Residential lots transferred to Company's rental property operations -- -- -- 54 -- Commercial and business park acres sold 43 17 5 20 76 Undeveloped acres sold -- 381 -- 2 20 Other: EBITDA (2) $10,808 $8,704 $23,938 $10,706 $14,801 (1) Includes a $932,000 reduction for an extraordinary item-early extinguishment of debt. (2) EBITDA - Earnings before interest, taxes, depreciation and amortization is presented as a comparative measurement tool. It is calculated by adding back to net income, interest expense, interest included in cost of sales, taxes, depreciation and amortization.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS Forward-Looking Statements Certain matters discussed and statements made within this 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. General: On October 5, 1998 IGC transferred to ACPT the common shares of four subsidiaries that collectively comprised the majority of principal real estate operations and assets of IGC. In exchange, ACPT issued to IGC 5,207,954 common shares of ACPT, all of which were distributed ("the Distribution") to the partners of IGC. The financial information below for periods prior to October 5, 1998, include the accounts of IGC for the operations and assets distributed to ACPT as if the distribution had occurred prior to January 1, 1996. Historically, the Company's financial results have been significantly affected by the cyclical nature of the real estate industry. Accordingly, the Company's historical financial statements may not be indicative of future results. For the Years Ended December 31, 1998 and 1997 Community Development Operations. Community development land sales revenue increased $3,505,000 to $16,670,000 during the twelve months ended December 31, 1998, compared to sales of $13,165,000 during the twelve months ended December 31, 1997. The increase was attributable to residential lot sales in Puerto Rico in 1998 of $7,900,000 compared to 3,275,000 in 1996. The effect of this increase was offset in part by a reduction of residential sales in the U.S. during the 1998 period compared to 1997. The gross profit margin for 1998 decreased to 33%, as compared to 35% in 1997. This decrease was due primarily to the sales mix. During 1998, 64% of the sales revenue was generated by Puerto Rico land sales compared to 45% in 1997. U.S. land has historically produced higher gross profits due to their lower land basis. Rental Property Revenues and Operating Results. Rental property revenues, net of operating expenses, increased 5% to $5,401,000 for the twelve months ended December 31, 1998, as compared to $5,140,000 in the same period in 1997. The increase is primarily attributable to a 3% increase in rental revenues and a less than 1% decrease in operating expenses. The increase in rental revenues is a result of a reduction in vacancies and an increase in rental rates. Equity in Earnings from Partnerships and Developer Fees. Equity in earnings increased 9% to $1,638,000 during the twelve months ended December 31, 1998, as compared to $1,509,000 during the twelve months ended December 31, 1997. The increase is primarily attributable to an increase of earnings generated from the homebuilding joint venture during 1998, as compared to the same period in 1997, offset in part by reduced earnings from the two rental partnerships that paid refinancing fees in 1998. Management and Other Fees. Management and other fees decreased 9% to $3,447,000 in the twelve months ended December 31, 1998, as compared to $3,775,000 in the same period in 1997. This decrease is primarily due to a $375,000 reduction in fees earned from the refinancing of certain apartment complexes during 1998 as compared to 1997. In addition, during 1998 the Company recognized $230,000 less of management fees reserved in prior periods than it recognized in 1997. These amounts were offset in part by $200,000 of incentive fees earned during 1998 with no comparable fee earned during 1997. Interest Expense. Interest expense decreased $96,000 to $3,724,000 during 1998, as compared to $3,820,000 in 1997. This 3% decrease is primarily attributable to a decrease in the average debt outstanding during the year ended December 31, 1998. General and Administrative Expense. General and administrative expenses decreased 12% to $5,793,000 during the twelve months ended December 31, 1998, as compared to $6,607,000 during the same period of 1997. This decrease was primarily a result of a net reduction in bad debt expense of $903,000, which was primarily attributable to discounts on notes receivable of $801,000 in 1997, with $43,000 of similar expense in 1998. Spin-off Costs. Costs of $2,324,000 related to the restructuring of IGC, the Predecessor, were recognized as an expense in 1998, as compared to $1,164,000 for the same period of 1997. For the Years Ended December 31, 1997 and 1996 Community Development Operations. Community development land sales revenue decreased 4% to $13,165,000 during the twelve months ended December 31, 1997, compared to sales of $13,675,000 during the twelve months ended December 31, 1996. The decrease was attributable to a decrease in residential lot sales in Puerto Rico. These lots are sold to homebuilders in bulk, and in 1997 there were fewer sales transactions. In addition, the U.S. residential lot sales volume has continued to be unfavorably impacted by the competitive market conditions and the delay in development of the next village, Fairway. Even though the sales were down, the gross profit margin during 1997 increased to 35%, as compared to 31% in the same period of 1996. This increase was due primarily to the sales mix. During 1997, 23% of the sales revenue was generated by an undeveloped bulk parcel, which had a low acquisition price. There were no similar sales during 1996. Rental Property Revenues and Operating Results. Rental property revenues, net of operating expenses, increased 19% to $5,140,000 in the twelve months ended December 31, 1997, as compared to $4,332,000 during the same period in 1996. As of April 1, 1996 four additional partnerships were consolidated when they became majority owned through an acquisition of additional limited partnership interests. Equity in Earnings from Partnerships and Developer Fees. During March 1996, IGC completed the sale of four Puerto Rico apartment projects. The properties, totaling 918 rental units, were sold under the 1990 Low Income Housing Preservation and Resident Homeownership Act ("LIHPRHA"). Equity in earnings decreased $15,076,000, to $1,509,000 during the twelve months ended December 31, 1997, as compared to $16,585,000 during the twelve months ended December 31, 1996. This decrease was primarily due to the $14,637,000 earned on the sales of the four properties during 1996, with no similar transaction in 1997. Management and Other Fees. Management and other fees decreased 22% to $3,775,000 in 1997, as compared to $4,816,000 in 1996. This decrease was due primarily to $1,362,000 of special management fees earned in 1996 from the LIHPRHA sales and the elimination of the management fees from four partnerships consolidated during the entire twelve months ended December 31, 1997, offset in part by fees of $724,000 earned from the refinancing of two apartment complexes in 1997. Interest Expense. Interest expense decreased $613,000 to $3,820,000 during 1997, as compared to $4,433,000 in 1996. The decrease was primarily attributable to $500,000 in late fees incurred in 1996 and a decrease in the average debt outstanding during the 1997 period, offset in part by interest attributable to the additional four properties consolidated April 1, 1996, as discussed in Rental Property Revenues and Operating Results. General and Administrative Expense. General and administrative expenses decreased by $203,000 to $6,607,000 during 1997 compared to $6,810,000 during 1996 as a result of management's continued focus on cost efficiency offset by a $754,000 increase in net bad debt expense primarily attributable to discounts on notes receivable. Spin-off Costs. Costs of $1,164,000 related to the restructuring of IGC, the Predecessor, were recognized as an expense for the year ended December 31, 1997, as compared to $0 for the year ended December 31, 1996. Liquidity and Capital Resources Cash and cash equivalents were $2,903,000 and $2,127,000 at December 31, 1998 and December 31, 1997, respectively. This increase was attributable to $17,818,000 provided by operations, offset by $14,787,000 and $2,255,000 used in investing and financing activities, respectively. The cash inflow from operating activities was primarily attributable to distributions from unconsolidated partnerships, land sales, increased accounts payable and accrued liabilities and collection of notes receivable. The cash outflow for investing activities was primarily attributable to land improvements put in place for future land sales. During 1998, the Company purchased a subsidiary's minority interest for $3,100,000 and distributed $469,000 to ACPT's shareholders and IGC's unitholders. The Company has historically met its liquidity requirements principally from cash flow generated from residential and commercial land sales, property management fees, distributions from residential rental partnerships and from bank financing providing funds for development and working capital. The Company has sufficient loans in place to develop the projects currently underway in St. Charles and Parque Escorial. The Company's principal demands for liquidity are expected to be the continued funding of its current debt service, development costs in Fairway Village and Parque Escorial and other normal operating costs. The Company does not expect to generate cash flows in excess of its existing obligations. Management is pursuing additional capital which can be used by ACPT to fund new community development projects, reduce payables and provide for other working capital needs. Such sources of funding may include, but are not limited to, secured or unsecured financings, private or public offerings of debt or equity securities and proceeds from sales of properties. The Company's anticipated cash provided by operations, new and existing financing facilities, and extension or refinancing of $14,702,000 of loans that are due in the next twelve months are expected to satisfy the Company's financial requirements for the next year. However, there are no assurances that these funds will be generated. Debt Summary Substantially all of ACPT's assets are encumbered by $45,000,000 of recourse debt and $39,000,000 of non-recourse debt. The non-recourse debt is attributable to the mortgages of consolidated rental property partnerships. The significant terms of ACPT's other debt financing arrangements are shown below (dollars in thousands): Balance Maximum Interest Maturity Outstanding Borrowings Rate Date 12/31/98 ---------- -------- -------- ----------- Banc One-term loan $11,000 P+2.5% 7/31/04 $ 8,335 Banc One-development loan 4,000 P+2.5% 7/31/04 3,054 Banc One-remediation loan 5,000 P+2.5% 7/31/04 3,746 First Bank-term loan 6,084 P+1.5% 6/30/99 6,084 First Bank-construction loan 8,350 P+1.5% 12/31/00 2,821 RG-Premier Bank 1,641 P+1.5% 4/30/99 1,236 Citibank 898 (d) demand 898 Washington Savings Bank 1,317 9.5% 9/30/99 991 Banco Popular 5,600 P+1.0% 7/30/99 5,600 Annapolis National Bank 2,460 P+1.0% 12/22/00 2,460 Monserrate Associates 1,885 P+1.0% demand 1,825 Interstate General Company L.P. 7,500 P+1.5% 8/02/09 7,500 Other miscellaneous 264 Various Various 186 ------- ------- $55,999 $44,736 ======= ======= Material Negative Debt Covenants ACPT is subject to certain restrictive covenants by its debt instruments. The material negative covenants are as follows: ACPT is required to obtain prior approval before incurring any liens on its assets or incurring any additional indebtedness. ACPT is prohibited from making distributions in excess of the minimum distributions required by ACPT's Declaration of Trust without prior lender approval. Lender approval is also required by LDA prior to making cash distributions in excess of distributions to pay income taxes on LDA generated taxable income unless certain cash flow conditions exist that provide adequate working capital for debt service and operations for the following twelve months. Lender approval is required prior to ACPT making any guarantee or loan out of the normal course of business. ACPT is prohibited from selling or disposing of substantially all of its assets outside the ordinary course of business or entering into any significant new line of business. LDA may not enter into any transaction with any affiliate out of the normal course of business and for terms less favorable than would be obtained in an arm's-length transaction without prior lender approval. Prior approval is also required for any change in the ownership of LDA, any amendments to LDA's partnership agreement, or any merger, reorganization or acquisition of LDA. Outlook American Rental Properties Trust ("ARPT"), as a new REIT, has one taxable year to comply with certain REIT rules which it currently does not meet, including ownership of more than 50% of the REIT shares by less than five individuals ("The 5/50 test"). ARPT has until July 1, 1999 to comply with the 5/50 test. If they do not comply, ARPT will become taxed as a U.S. C corporation and will not be allowed to reapply for REIT status for five years. Year 2000 What is Year 2000?: The Year 2000 ("Y2K") issue exists because many computer systems and applications and other electronically controlled systems and equipment currently use two-digit fields to designate a year. As the century date occurs, date sensitive systems with this deficiency may recognize the year 2000 as 1900 or not at all. This inability to recognize or properly treat the year 2000 can cause the systems to process critical financial and operations information incorrectly. ACPT has assessed and continues to assess the impact of the Y2K issue on its reporting systems and operations. Current ACPT State of Readiness: The systems and applications that can affect ACPT's operations due to the Y2K issue are its financial reporting and billing systems and those electronically controlled systems and equipment installed at the commercial and residential properties managed by ACPT, many of which ACPT holds an ownership interest. These systems include four accounting/billing applications, two time and attendance applications and the computer network systems which they are installed on and the telephone, security, elevator, HVAC, and other like systems installed at ACPT properties. Of secondary importance are those administrative systems and equipment not directly involved in revenue production but can still minimally impact ACPT operations. Of the four software financial applications employed by ACPT, three are currently certified by their respective publishers to be Y2K compliant. The one non-compliant application, the property management billing system for the Puerto Rico properties, is undergoing an upgrade at this time and is scheduled to be completed by March 31, 1999. Active testing to verify the Y2K compliance of the companies financial systems 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 U.S. and Puerto Rico operations rely on separate time and attendance systems for payroll processing. The U.S. payroll system utilizes the services of a third party provider and is certified Y2K compliant by the provider. Puerto Rico payroll processing is performed in- house and was upgraded to a Y2K compliant system in December 1998. The direct deposit function of the Puerto Rico payroll system relies on a third party component provided by Banco Popular of Puerto Rico and is not Y2K compliant. Banco Popular was scheduled to provide a Y2K update of the direct deposit interface by December 1998 but is behind schedule and has yet to do so. It is expected that Banco Popular will have the update delivered by June 1999. The hardware component of ACPT's financial systems consists of industry standard PC operating systems, servers, desktop computers, and networking hardware. These systems have been evaluated and verified to be Y2K compliant. The non-IT related electronically controlled systems installed at ACPT owned and managed properties are currently being inventoried and evaluated for Y2K exposure. This evaluation is expected to be completed by March 31, 1999. Once the extent of Y2K exposure is determined for these systems, costs will be ascertained and procedures implemented to bring non-compliant systems into Y2K compliance. Since it has already been determined that a majority of these systems are not "date sensitive" and do not perform data logging, it is expected that Y2K exposure and related costs in this area will be minimal. The administrative applications (word processing, spreadsheet, messaging, etc.) utilized by ACPT have been certified by the various publishers and verified to be Y2K compliant. Third Party Impact on Company Operations: ACPT performs all financial and revenue production procedures in house with the exception of U.S. rental payment processing. Failure to timely process and deposit tenant payments indirectly impacts the Company's cash flow. Statements of Y2K compliance have been requested from those vendors supplying these services to ACPT. Of the administrative procedures, U.S. payroll processing and the Puerto Rico direct deposit function is performed by third party vendors. A statement of Y2K compliance has been obtained from the U.S. payroll vendor and ACPT considers Y2K exposure with U.S. payroll processing to be minimal. Currently Y2K non-complaint, the Puerto Rico direct deposit function is expected to be compliant by July 1999. Y2K non-compliance of the Puerto Rico direct deposit function is not considered detrimental to company operations. With the exception of rental payment processing, the Company does not foresee any adverse impact to company fiscal operations due to third party non-compliance. Costs to Achieve Y2K Compliance: Because of ACPT'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 the companies financial and billing systems have been included with standard system updates as part of the normal maintenance procedures. Costs to upgrade the Puerto Rico property management system is expected to be in the range of $4,000 to $5,000. ACPT does not separately track the internal costs incurred for the Y2K project, these costs are principally related payroll costs for the companies information systems and property management groups. The costs for the financial departments to perform the scheduled tests of the accounting and billing systems for Y2K compliance has not been ascertained, though it is expected that these costs will be nominal. Risks of ACPT's Y2K Issues: The failure of one or all of ACPT's financial systems for more than a few days would create a hardship on company operations. Failure of the basic accounting systems will affect the companies general ledger, accounts payable, accounts receivable, and reporting functions. Of utmost importance is the correct operation of the companies property management systems. Failure of these systems could have a negative impact on ACPT's cash flow from these rental operations. Failure of the various non-IT systems installed at the Company's owned and managed properties could seriously affect employee/tenant ingress and egress and could affect environmental conditions at these properties. ACPT has not obtained insurance specific to Y2K liability issues. However, after discussions with its insurance carrier, ACPT has determined that current policies will cover damages due to the Company's systems Y2K non-compliance. ACPT's Contingency Plans: ACPT is evaluating its various Y2K failure scenarios and developing contingency plans to ensure continued company operations. ITEM 7a. MARKET RISK Market risks relating to the Company's operations result primarily from changes in the prime interest rate. It is the Company's policy to minimize the impact of variable rate debt to the greatest extent possible by pursuing equity and long term fixed rate financing and refinancings of current fixed rate debt at lower rates when favorable market conditions exist. The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. The table presents the Company's debt obligations, principal repayments, related weighted average interest rates by expected maturity dates and fair values. The Company has no derivative financial instruments.
Interest Rate Sensitivity Principal Amount by Expected Maturity Average Interest Rate (In thousands) Fair Value December 31, 1999 2000 2001 2002 2003 Thereafter Total 1998 ---- ---- ---- ---- ---- ---------- ----- ------------ Long-term debt, including current portions: Fixed rate debt - principal $ 1,703 $ 576 $ 628 $ 705 $ 745 $35,717 $40,074 $42,548 Fixed rate debt - interest 3,127 3,002 2,844 2,575 2,525 33,730 47,803 Average interest rate 9.08% 8.16% 8.09% 8.03% 7.98% 7.93% 8.21% 6.49% Variable rate debt - principal 18,643 8,281 3,000 3,000 3,000 7,635 43,559 43,559 Variable rate debt - interest 3,738 2,360 1,577 1,269 962 13,106 23,012 Average interest rate 9.15% 9.46% 10.25% 10.25% 10.25% 9.27% 9.77% 9.77%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of American Community Properties Trust: We have audited the accompanying consolidated balance sheets of American Community Properties Trust (a Maryland real estate investment trust) and subsidiaries ("the Company") as of December 31, 1998 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibil- ity is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Community Properties Trust as of December 31, 1998 and the results of their operations and their cash flows for each of the three years in the period ending December 31, 1998 in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule included on pages 55 through 65 of the Form 10-K is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Washington, D.C. March 26, 1999 AMERICAN COMMUNITY PROPERTIES TRUST CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) YEARS ENDED DECEMBER 31, -------------------------- 1998 1997 1996 -------- -------- -------- REVENUES Community development-land sales Non-affiliates $ 14,942 $ 9,693 $ 3,608 Affiliates 1,728 3,472 10,066 Equity in earnings from partnerships and developer fees 1,638 1,509 16,585 Rental property revenues 8,979 8,737 7,577 Management and other fees, substantially all from related entities 3,447 3,775 4,816 Interest and other income 1,031 943 982 -------- -------- -------- Total revenues 31,765 28,129 43,634 -------- -------- -------- EXPENSES Cost of land sales, including cost of sales to affiliates of $1,427, $2,063, and $6,075 11,106 8,494 9,378 Selling and marketing 60 127 226 General and administrative 5,793 6,607 6,810 Interest expense 3,724 3,820 4,433 Rental properties operating expense 3,578 3,597 3,245 Depreciation and amortization 1,926 1,850 1,726 Write-off of deferred project costs 86 6 321 Spin-off costs 2,324 1,164 -- -------- -------- -------- Total expenses 28,597 25,665 26,139 -------- -------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST 3,168 2,464 17,495 PROVISION FOR INCOME TAXES 1,289 470 3,424 -------- -------- -------- INCOME BEFORE MINORITY INTEREST 1,879 1,994 14,071 MINORITY INTEREST (697) (600) (444) -------- -------- -------- NET INCOME BEFORE EXTRAORDINARY ITEM 1,182 1,394 13,627 EXTRAORDINARY ITEM-EARLY EXTINGUISHMENT OF DEBT -- -- (932) -------- -------- -------- NET INCOME $ 1,182 $ 1,394 $ 12,695 ======== ======== ======== BASIC NET INCOME (LOSS) PER SHARE Income (loss) before extraordinary item $ .23 $ .27 $ 2.63 Extraordinary item -- -- (.18) -------- -------- -------- Net income (loss) $ .23 $ .27 $ 2.45 ======== ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING 5,212 5,196 5,180 ======== ======== ======== The accompanying notes are an integral part of these consolidated statements. AMERICAN COMMUNITY PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (In thousands) A S S E T S AS OF DECEMBER 31, ------------------- 1998 1997 -------- -------- CASH AND CASH EQUIVALENTS Unrestricted $ 2,903 $ 2,127 Restricted 1,167 374 -------- -------- 4,070 2,501 -------- -------- ASSETS RELATED TO INVESTMENT PROPERTIES Operating properties, net of accumulated depreciation of $22,703 and $21,392, respectively 37,178 38,143 Investment in unconsolidated rental property partnerships, net of deferred income of $1,804 and $2,193, respectively 7,613 8,657 Investment in unconsolidated commercial property partnerships 4,535 -- Other receivables, net of reserves of $204 and $223, respectively 2,786 621 -------- -------- 52,112 47,421 -------- -------- ASSETS RELATED TO COMMUNITY DEVELOPMENT Land and development costs Puerto Rico 26,515 34,268 St. Charles, Maryland 26,932 21,750 Notes receivable on lot sales and other 4,236 5,629 -------- -------- 57,683 61,647 -------- -------- ASSETS RELATED TO HOMEBUILDING Investment in joint venture 1,145 591 -------- -------- OTHER ASSETS Receivables and other 2,690 2,514 Property, plant and equipment, less accumulated depreciation of $1,753 and $1,675, respectively 466 448 -------- -------- 3,156 2,962 -------- -------- Total assets $118,166 $115,122 ======== ======== The accompanying notes are an integral part of these consolidated balance sheets. AMERICAN COMMUNITY PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (In thousands) LIABILITIES AND SHAREHOLDERS' EQUITY AS OF DECEMBER 31, ------------------- 1998 1997 -------- -------- LIABILITIES RELATED TO INVESTMENT PROPERTIES Recourse debt $ 2,723 $ 969 Non-recourse debt 38,662 39,101 Accounts payable and accrued liabilities 3,036 2,779 -------- -------- 44,421 42,849 -------- -------- LIABILITIES RELATED TO COMMUNITY DEVELOPMENT Recourse debt 42,013 39,784 Non-recourse debt -- 2,295 Accounts payable and accrued liabilities 2,207 4,502 Deferred income 337 598 -------- -------- 44,557 47,179 -------- -------- OTHER LIABILITIES Accounts payable and accrued liabilities 6,620 4,785 Notes payable and capital leases 234 173 Accrued income tax liability - current 305 -- Accrued income tax liability - deferred 5,296 4,120 -------- -------- 12,455 9,078 -------- -------- Total liabilities 101,433 99,106 -------- -------- INVESTMENT IN AND ADVANCES FROM INTERSTATE GENERAL COMPANY L.P. -- 16,016 -------- -------- SHAREHOLDERS' EQUITY Common shares, $.01 par value, 10,000,000 million shares authorized, 5,191,544 shares issued and outstanding as of December 31, 1998 52 -- Additional paid-in capital 17,275 -- Retained earnings (594) -- -------- -------- Total shareholders' equity $ 16,733 $ -- -------- -------- Total liabilities and capital $118,166 $115,122 ======== ======== The accompanying notes are an integral part of these consolidated balance sheets. AMERICAN COMMUNITY PROPERTIES TRUST CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands) Additional Common Paid-in Retained Shares Shares Capital Earnings Total ------ ------ ---------- -------- ------- Balance October 5, 1998 -- $ -- $ -- $ -- $ -- Contributed capital from Interstate General Company L.P. 5,208 52 17,636 -- 17,688 Net loss October 5, 1998 through December 31, 1998 -- -- -- (594) (594) Declared dividends -- -- (260) -- (260) Issuance of warrants -- -- (101) -- (101) Retirement of shares (16) -- -- -- -- ------ ------ ------- ------- ------- Balance December 31, 1998 5,192 $ 52 $17,275 $ (594) $16,733 ====== ====== ======= ======= ======= The accompanying notes are an integral part of these consolidated statements. AMERICAN COMMUNITY PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,182 $ 1,394 $12,695 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary item -- -- 932 Depreciation and amortization 1,926 1,850 1,726 Provision (benefit) for deferred Provision (benefit) for deferred income taxes 1,176 (920) 419 Equity in earnings from unconsolidated partnerships and developer fees (1,084) (1,417)(16,660) Distributions from unconsolidated partnerships 2,056 5,155 15,574 Cost of sales-community development 11,106 8,494 9,378 Equity in (earnings) loss from homebuilding joint venture (554) (92) 75 Changes in other assets and liabilities 2,010 (1,064) 2,315 ------- ------- ------- Net cash provided by operating activities 17,818 13,400 26,454 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in land development (7,695) (6,764)(10,658) Change in investments related to unconsolidated rental property partnerships 72 (708) (84) Change in investments related to unconsolidated commercial property partnerships (4,535) -- -- Change in restricted cash (793) 521 1,150 Additions to rental operating properties, net (789) 141 (1,275) Acquisitions of other assets (1,047) (1,338) (117) Contributions to homebuilding joint venture -- (224) (100) ------- ------- ------- Net cash used in investing activities (14,787) (8,372)(11,084) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Cash proceeds from debt financing 18,577 19,203 4,994 Payment of debt (17,267)(18,781)(15,803) Cash distributions to Interstate General Company L.P. (163) (5,745) (4,660) Purchase of minority interest in subsidiary (3,100) -- -- Distributions to Interstate General Company L.P.'s unitholders (209) -- (1,140) Distributions to shareholders (260) -- -- Issuance of warrants 167 279 -- ------- ------- ------- Net cash used in financing activities (2,255) (5,044)(16,609) ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 776 (16) (1,239) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,127 2,143 3,382 ------- ------- ------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,903 $ 2,127 $ 2,143 ======= ======= ======= The accompanying notes are an integral part of these consolidated statements. AMERICAN COMMUNITY PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (1) ORGANIZATION American Community Properties Trust ("ACPT" or the "Company") was formed on March 17, 1997 as a real estate investment trust under Article 8 of the Maryland Trust Law. ACPT was formed to succeed most of Interstate General Company L.P.'s ("IGC" or "Predecessor") real estate operations. On October 5, 1998 IGC transferred to ACPT the common shares of four subsidiaries that collectively comprised the majority of the principal real estate operations and assets of IGC. In exchange, ACPT issued to IGC 5,207,954 common shares of ACPT, all of which were distributed ("the Distribution") to the partners of IGC. IGC distributed to its partners the 5,207,954 shares of common stock of ACPT, resulting in the division of IGC's operations into two companies. The shares were distributed on a basis of one ACPT share for every IGC Unit and a proportionate share to IGC's general partners. Prior to the distribution, IGC contributed to ACPT its ownership in four companies, American Rental Properties Trust ("American Rental"), American Rental Management Company ("American Management"), American Land Development U.S., Inc. ("American Land") and IGP Group Corp. ("IGP Group"). ACPT's operations are carried out through these companies and their subsidiaries. American Rental IGC expects to complete its transfer to American Rental its partnership interests in United States investment properties in 1999. The partnership interests in 13 investment apartment properties ("U.S. Apartment Partnerships") will be held by American Rental indirectly through American Housing Properties L.P. ("American Housing"), a Maryland partnership, in which American Rental will have a 99% limited partner interest and American Housing Management Company, a wholly owned subsidiary of American Rental, will have a 1% general partner interest. The transfer of the general partner interest in five partnerships requires limited partner approval which has not yet been obtained. Therefore, IGC has assigned to ACPT beneficial ownership in these partnerships. ACPT has agreed to indemnify IGC against any losses it may suffer as a result of being the general partner and IGC will be obligated to remit to ACPT any cash received from these five partnerships. To avoid termination of the partnership for tax purposes, sixty percent of the general partners' interest in four additional partnerships will not be transferred to ACPT until October 4, 1999. Where control does not exist in these cases, the cost method of accounting will be used. American Management IGC transferred to American Management its United States property management operations. The United States property management operations provide management services for the U.S. Apartment Partnerships and for other rental apartments not owned by IGC. American Land IGC transferred to American Land its principal United States property assets and operations. These included the following: 1. A 100% interest in St. Charles Community LLC which holds approximately 4,500 acres of land in St. Charles, Maryland. This constitutes substantially all of the land in St. Charles formerly held by IGC, except for the land subject to the wetlands litigation, the 26 remaining single-family lots in Dorchester and various scattered commercial lots. 2. A 41.0346% interest in Maryland Cable Limited Partnership which holds receivables from the 1988 sale of IGC's cable television assets. 3. The Class B IGP interest that represents IGP's rights to income, gains and losses associated with land in Puerto Rico held by Land Development Associates, S.E. ("LDA") and designated for development as saleable property. 4. As part of the asset transfers, IGC conditionally has agreed to transfer to American Land 14 acres of land in St. Charles that currently is zoned for commercial use (the "Commercial Parcel") if and when IGC settles the wetlands litigation on terms approved by the Board of Directors of IGC's general partner, provided that IGC shall have received confirmation that the transfer of the Commercial Parcel (and resulting decrease in the value of IGC's assets) will not cause the IGC Units to be delisted from AMEX or the PSE. The Commercial Parcel had a book value of approximately $1,000,000 at July 28, 1998. If IGC is unable to settle the wetlands litigation on satisfactory terms or IGC does not receive confirmation of the continued listing of IGC Units, IGC will retain the Commercial Parcel. There have been no adjustments made to the accompanying financial statements to record the inclusion of the Commercial Parcel. IGP Group. IGC transferred to IGP Group its entire 99% limited partnership interest and 1% general partner interest in Interstate General Properties Limited Partnership S.E., a Maryland partnership ("IGP") other than the Class B IGP interest transferred to American Land. IGP's assets and operations will continue to include: 1. a 100% partnership interest in LDA, a Puerto Rico special partnership, which holds 285 acres of land in the planned community of Parque Escorial and 540 acres of land in Canovanas; 2. a 50% partnership interest in Escorial Builders Associates S.E. ("Escorial Builders"), which is engaged in the construction of condominiums in the planned community of Parque Escorial; 3. a 1% interest in El Monte Properties S.E., a Puerto Rico special partnership which owns El Monte Mall Complex, a 169,000 square foot office complex in San Juan, Puerto Rico; and 4. general partner interests in 11 Puerto Rico apartment partnerships. An analysis of the activity in the capital account for each of the two years ended December 31, 1997 and through October 5, 1998 is as follows (in thousands): Balance, December 31, 1995 $13,213 Net income 12,695 Exchange of assets between Company and Unitholders of IGC (20) Cash distribution to Unitholders of IGC (1,140) Cash distributions to IGC (4,660) ------- Balance, December 31, 1996 20,088 Net income 1,394 Issuance of warrants 279 Cash distributions to IGC (5,745) ------- Balance, December 31, 1997 $16,016 Net income January 1, 1998 to October 4, 1998 1,776 Cash distribution to Unitholders of IGC (209) Issuance of warrants 268 Cash distributions to IGC (163) ------- Balance October 5, 1998 (a) $17,688 ======= (a) Contribution from IGC. Certain general and administrative costs of IGC were allocated to the Company, principally based on IGC's specific identification of individual cost items and otherwise based upon estimated levels of effort devoted by its general and administrative departments to individual entities or relative measures of size of the entities based on assets or operating profit. Such allocated amounts are included in general and administrative expenses. In the opinion of management, the methods used for allocating corporate general and administrative expenses and other direct costs are reasonable. ACPT is a self-managed holding company that is expected to be taxed as a partnership. The Company is primarily engaged in the investment of rental properties, community development and management services. These operations are concentrated in the Washington, D.C. metropolitan area and Puerto Rico. (2) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation and Presentation The accompanying consolidated financial statements include the accounts of American Community Properties Trust and its majority owned subsidiaries and partnerships, after eliminating all intercompany transactions. The financial statements for periods prior to October 5, 1998 include the accounts of the Predecessor for the operations and assets distributed to ACPT as if the Distribution had occurred prior to January 1, 1996. All of the entities included in the consolidated financial statements are hereinafter referred to collectively as the "Company" or "ACPT". As of December 31, 1998 the consolidated group includes ACPT and its four major subsidiaries, American Rental Properties Trust, American Rental Management Company, American Land Development U.S., Inc. and IGP Group Corp. In addition, the consolidated group includes American Housing Management Company, American Housing Properties L.P., St. Charles Community, LLC, Interstate General Properties Limited Partnership, S.E., Land Development Associates S.E., Lancaster Apartments Limited Partnership, New Forest Apartments General Partnership, Fox Chase Apartments General Partnership, Palmer Apartments Associates Limited Partnership, Headen House Associates Limited Partnership, Wakefield Terrace Associates Limited Partnership and Wakefield Third Age Associates Limited Partnership. The Company's investments in its partnerships that it does not control are recorded using the equity method of accounting. However, the recognition of losses is limited to the amount of direct or implied financial support. The assets and liabilities contributed to ACPT were transferred at their cost basis because of affiliate ownership and common management. Significant Accounting Policies A summary of the significant accounting policies is as follows: Sales and Profit Recognition and Cost Capitalization Community development land sales are recognized at closing only when sufficient down payments have been obtained, possession and other attributes of ownership have been transferred to the buyer, and ACPT has no significant continuing involvement. The costs of acquiring and developing land are allocated to these assets and charged to cost of sales as the related inventories are sold. ACPT's interest costs related to land assets are allocated to these assets based on their development stage and relative book value. The portion of interest allocated to land during the development and construction period is capitalized. Remaining interest costs are expensed. ACPT carries rental properties, land and development costs at the lower of cost or net realizable value. Quarterly, ACPT evaluates the carrying value of its long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." In cases where management is holding for sale particular properties, ACPT assesses impairment based on whether the net realizable value (estimated sales price less costs of disposal) of each individual property to be sold is less than the net book value. A property is considered to be held for sale when ACPT has made the decision to dispose of the property. Otherwise, ACPT assesses impairment of its real estate properties based on whether it is probable that undiscounted future cash flows from each individual property will be less than its net book value. If a property is impaired, its basis is adjusted to its fair market value. Management Fees ACPT records management fees in the period in which services are rendered. Depreciation and Amortization Buildings are depreciated over 35 to 40 years using the straight-line method. Furniture, fixtures and equipment are depreciated over five to seven years using the straight-line method. Deferred expenses are amortized over the period of estimated benefit using the straight-line method. Investment in Rental Property Partnerships ACPT's investment in rental property partnerships consists of long-term receivables, nominal capital contributions, working capital loans and ACPT's share of unconsolidated partnership income and losses. The working capital loans receive priority distributions from the cash flow generated from the operations of the partnerships. The long-term receivables represent loans to the partnerships for payment of construction and development costs in excess of the project mortgages. Substantially all of the long-term receivables are non-interest bearing and have been discounted at an effective rate of 14% based on the projected maturity date which will occur upon the refinancing, sale or other disposition of the partnerships' properties. The discount, which represents deferred sponsor and developer fees, is netted in the combined historical financial statements against the long-term receivables. Certain partnerships are accumulating cash from operations in excess of the maximum distribution amounts permitted by U.S. Department of Housing and Urban Development ("HUD") and other regulatory authorities. This cash, accumulated in restricted cash accounts, will be available to pay the long-term receivables due to ACPT and to make cash distributions to ACPT and the limited partners when the partnerships' projects are refinanced or sold. Pursuant to the partnership agreements, the general partners of the unconsolidated partnerships are prohibited from selling or refinancing the apartment complexes without majority limited partner approval. Due to the absence of control and non-majority ownership, these partnerships are accounted for under the equity method of accounting. For those partnerships where control does not exist and IGC has only transferred the beneficial interests, the cost method is employed. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, unrestricted deposits with financial institutions and short-term investments with original maturities of three months or less. Income Taxes ACPT does not expect to be subject to U.S. income taxes under current law. ACPT's shareholders are expected to be taxed directly on their share of ACPT's income. American Land Development U.S., Inc. and American Rental Management Company are subject to federal and state tax at the applicable corporate rates. American Rental Properties Trust ("ARPT"), which expects to qualify as a real estate investment trust, does not expect to be subject to tax under current law. ARPT, as a new REIT, has one taxable year to comply with certain REIT rules which it currently does not meet, including ownership of more than 50% of the REIT shares by less than five individuals ("The 5/50 test"). ARPT has until July 1, 1999 to comply with the 5/50 test. If they do not comply, ARPT will become taxed as a U.S. C corporation and will not be allowed to reapply for REIT status for five years. Furthermore, IGP Group, Inc. is subject to Puerto Rico income tax on its Puerto Rico source income. The combined historical financial statements of ACPT have been presented without effect for income taxes of American Land, American Management and American Rental prior to their start of operations. The Predecessor was not subject to U.S. income tax on its U.S. source income. Earnings Per Share The earnings per share information presented assumes that the Distribution occurred prior to the years reported. The weighted average shares outstanding reflects the distribution of one share of ACPT common stock for two IGC Units and a pro rata number of ACPT shares to IGC's general partners. The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share" on December 31, 1997. All prior year earnings per share data have been restated. This statement requires the computation and reporting of both "basic" and "diluted" earnings per share. Share options issued pursuant to the Company's compensation plans and warrants issued to a lender are the only dilutive securities in 1998, 1997 and 1996. The diluted weighted average shares outstanding for 1998, 1997 and 1996 were 5,236,000, 5,204,000 and 5,189,000, respectively. There is no dilutive effect on basic earnings per share. Potentially dilutive options and warrants are described in Note 10. Comprehensive Income ACPT has no items of comprehensive income that would require separate reporting in the accompanying consolidated statements of shareholders' equity. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Impact of Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information", which is effective for fiscal years beginning after December 15, 1997. ACPT adopted SFAS No. 131 in 1998. In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The statement revises employers' disclosures about pension and other postretirement benefit plans and is effective for fiscal years beginning after December 15, 1997. ACPT adopted SFAS No. 132 in 1998 and the impact was not significant. In June 1998, 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 position 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 liability 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 ACPT has no derivative instruments this statement would apply if derivative instruments were transacted by ACPT 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. Also included are two partnerships that the beneficial ownership interest was transferred to ACPT prior to the distribution but the legal ownership is expected to be transferred during the second quarter of 1999. The information is presented to segregate the two projects undergoing condominium conversion from the operating properties (in thousands). Projects Operating Under Condo Properties Conversions Total ---------- ----------- ----- SUMMARY FINANCIAL POSITION: Total Assets December 31, 1998 $ 98,823 $14,662 $113,485 December 31, 1997 102,466 9,509 111,975 Total Non-Recourse Debt December 31, 1998 107,097 15,055 122,152 December 31, 1997 106,390 11,612 118,002 Total Other Liabilities December 31, 1998 10,024 3,818 13,842 December 31, 1997 9,903 122 10,025 Total Equity December 31, 1998 (18,298) (4,211) (22,509) December 31, 1997 (13,827) (2,225) (16,052) Company's Investment December 31, 1998 7,613 -- 7,613 December 31, 1997 8,657 -- 8,657 SUMMARY OF OPERATIONS: Total Revenue Year Ended December 31, 1998 $ 27,118 $ 110 $ 27,228 Year Ended December 31, 1997 26,356 1,557 27,913 Year Ended December 31, 1996 28,128 2,744 30,872 Net Income (Loss) Year Ended December 31, 1998 1,114 (1,985) (871) Year Ended December 31, 1997 767 (438) 329 Year Ended December 31, 1996 897 801 1,698 Company's recognition of equity in earnings and developer fees Year Ended December 31, 1998 1,084 -- 1,084 Year Ended December 31, 1997 1,417 -- 1,417 Year Ended December 31, 1996 1,622 401 2,023 Projects Operating Under Condo Properties Conversions Total ---------- ----------- ----- SUMMARY OF CASH FLOWS: Cash flows from operating activities Year Ended December 31, 1998 5,338 (5,433) (95) Year Ended December 31, 1997 4,911 (1,499) 3,412 Year Ended December 31, 1996 6,068 1,290 7,358 Company's share of cash flows from operating activities Year Ended December 31, 1998 1,852 (2,717) (865) Year Ended December 31, 1997 1,801 (750) 1,051 Year Ended December 31, 1996 2,169 645 2,814 Operating cash distributions Year Ended December 31, 1998 5,309 -- 5,309 Year Ended December 31, 1997 1,355 9,292 10,647 Year Ended December 31, 1996 1,500 120 1,620 Company's share of operating cash distributions Year Ended December 31, 1998 1,795 -- 1,795 Year Ended December 31, 1997 509 4,646 5,155 Year Ended December 31, 1996 349 60 409 SUMMARY OF 1996 SALES TRANSACTION: Gain on sale $ 39,934 Company's equity and earnings recognition 14,637 Total distribution of sales proceeds 36,235 Company's share of sales proceeds distribution 15,165 The unconsolidated rental properties partnerships as of December 31, 1998 include 17 partnerships owning 4,159 rental units in 20 apartment complexes owned by Alturas Del Senorial Associates Limited Partnership, Bannister Associates Limited Partnership, Bayamon Gardens Associates Limited Partnership, Brookside Gardens Limited Partnership, Carolina Associates Limited Partnership, Colinas de San Juan Associates Limited Partnership, Crossland Associates Limited Partnership, Essex Apartments Associates Limited Partnership, Huntington Associates Limited Partnership, Jardines de Caparra Associates Limited Partnership, Lakeside Apartments Limited Partnership, Monserrate Associates Limited Partnership, Monte de Oro Associates Limited Partnership, New Center Associates Limited Partnership, San Anton Associates Limited Partnership, Turabo Limited Dividend Partnership and Valle del Sol Limited Partnership. The Company holds a general partner interest in these partnerships and generally shares in zero to 5% of profits, losses and cash flow from operations until such time as the limited partners have received cash distributions equal to their capital contributions. Thereafter, the Company generally shares in 50% of cash distributions from operations. Pursuant to the partnership agreements, the general partners of the unconsolidated partnerships are prohibited from selling or refinancing the apartment complexes without majority limited partner approval. Due to the absence of control and non- majority ownership, these partnerships are accounted for under the equity method of accounting. During 1997, the rental complexes owned by Monte de Oro and New Center were refinanced to provide distributions to their partners and funds to convert the rental units into condominiums. Rental revenues started to decline in 1997 as the units were vacated in preparation for conversion. In March of 1996, ACPT completed the sale of four Puerto Rico apartment properties totaling 918 units. The properties were purchased by non-profit organizations with financing provided by HUD through capital grants authorized by the Low Income Housing Preservation and Resident Home Ownership Act ("LIHPRHA"). The Company retained the management contract for these properties. Prior to the sale, these partnerships were accounted for using the equity method of accounting. Homebuilding Joint Venture The Company holds a 50% joint venture interest in Escorial Builders S.E. ("Escorial Builders"). Escorial Builders was formed in 1995 to purchase lots from the Company and construct homes for resale. It purchased land to construct 118 units in 1997 and land to construct 98 units in 1996. The profit on these lots are deferred until sold by Escorial Builders to a third party. The Company's share of the income (loss) and its investment are included with ACPT's assets related to homebuilding in the accompanying consolidated financial statements. The following tables summarize Escorial Builders' financial information (in thousands): SUMMARY OF FINANCIAL POSITION: AS OF DECEMBER 31, ---------------------------- 1998 1997 ------------- ------------ Total assets $ 9,396 $13,374 Total liabilities 7,107 12,191 Total equity 2,289 1,183 Company's investment 1,145 591 SUMMARY OF OPERATIONS: FOR THE YEAR ENDED --------------------------- 1998 1997 1996 ---- ---- ---- Total revenue $12,324 $ 2,491 $ -- Net income (loss) 1,107 183 (151) Company's recognition of equity in earnings (losses) 554 92 (75) SUMMARY OF OPERATING CASH FLOWS: FOR THE YEAR ENDED --------------------------- 1998 1997 1996 ---- ---- ---- Cash flows from operating activities $ 5,043 $(7,119) $(4,361) Company's share of cash flows from operating activities 2,521 (3,600) (2,181) Operating cash distributions -- -- -- Company's share of operating cash distributions -- -- -- Commercial Land Lease Partnership In December 1998, the Company obtained a limited partner interest in ELI, S.E. ("ELI"), a partnership formed for the purpose of constructing a building to lease to the State Insurance Fund of Puerto Rico. ACPT contributed the land in exchange for 48% of future income generated by the thirty year lease of the building and $700,000. The following tables summarize ELI's financial information (in thousands): SUMMARY OF FINANCIAL POSITION: As of December 31, 1998 ------------ Total assets $31,475 Total liabilities 27,482 Total equity 3,993 Company's investment 4,535 SUMMARY OF OPERATIONS: For the Year Ended 1998 ---------- Total revenue $ -- Net loss (7) Company's recognition of equity in losses (3) SUMMARY OF OPERATING CASH FLOWS: For the Year Ended 1998 ---------- Cash flows from operating activities $ 9,482 Company's share of cash flows from operating activities 3,793 Operating cash distributions -- Company's share of operating cash distributions -- (4) DEBT The Company's outstanding debt is collateralized primarily by land, land improvements, receivables, investment properties, investments in partnerships, and rental properties. The following table summarizes the indebtedness of the Company at December 31, 1998 and 1997 (in thousands): Outstanding Maturity Interest December 31, Dates Rates (a) -------------------------- From/To From/To 1998 1997 -------- --------- ------------- ------------ Related to community development: Recourse debt Demand/ P+1%/ (b,c) $42,013 $39,784 08-02-09 10.0% Non-recourse debt Paid P+1.5% -- 2,295 Related to investment properties: Recourse debt Demand 8.05% (d) 2,723 969 Non-recourse debt 10-01-19/ 6.85%/ 38,662 39,101 10-01-28 8.5% General: Recourse debt 03-01-00/ 9.45%/ 234 173 04-01-03 18.5% ------- ------- Total debt $83,632 $82,322 ======= ======= (a) P = Prime lending interest rate. (b) Approximately $15,135,000 of this debt requires additional interest payments on each annual anniversary date. The amount due is 1% of the outstanding balance in 1998 and 1999, and increases 1/2% each year thereafter, through 2003. (c) Approximately $187,000 of this debt is payable on demand. (d) All recourse debt, related to investment properties, is payable on demand. ACPT's loans contain various financial, cross-collateral, cross- default, technical and restrictive provisions; the most significant of which requires the Company to maintain a ratio of aggregate liabilities to tangible net worth of no greater than three to one. The material negative covenants require ACPT to obtain prior approval before incurring any liens on its assets or incurring any additional indebtedness. ACPT is prohibited from making distributions in excess of the minimum distributions required by ACPT's Declaration of Trust without prior lender approval. Lender approval is also required prior to LDA making cash distributions in excess of distributions to pay income taxes on LDA generated taxable income unless certain cash flow conditions exist that provide adequate working capital for debt service and operations for the following twelve months. Lender approval is required prior to ACPT making any guarantee or loan out of the normal course of business. ACPT is prohibited from selling or disposing substantially all of its assets outside the ordinary course of business or entering into any significant new line of business. LDA may not enter into any transaction with any affiliate out of the normal course of business and for terms less favorable than would be obtained in an arm's-length transaction without prior lender approval. Prior approval is also required for any change in the ownership of LDA, any amendments to LDA's partnership agreement, or any merger, reorganization or acquisition of LDA. As of December 31, 1998, the $42,013,000 of recourse debt related to community development assets is fully collateralized by substantially all of the community development assets. Approximately $15,135,000 of this amount is further secured by investments in apartment rental partnerships. As of December 31, 1998, recourse investment property debt is secured by cash receipts received by the Company pursuant to the terms of a sales contract. The non-recourse investment properties debt is collateralized by apartment projects and secured by FHA or the Maryland Housing Fund. Mortgage notes payable of $7,113,000 have stated interest rates of 7.5% and 7.75%; however, after deducting interest subsidies provided by HUD, the effective interest rate over the life of the loans is 1%. ACPT's weighted average interest rate during 1998 on its variable rate debt was 10.27%. The stated maturities (assuming no accelerations) of ACPT's indebtedness at December 31, 1998 are as follows (in thousands): 1999 $20,346 2000 8,857 2001 3,627 2002 3,705 2003 3,745 Thereafter 43,352 ------- $83,632 ======= The interest costs incurred were accounted for as follows (in thousands): December 31, -------------------------- 1998 1997 1996 ------ ------ ------ Expensed $3,724 $3,820 $4,433 Capitalized 2,912 3,434 4,394 ------ ------ ------ $6,636 $7,254 $8,827 ====== ====== ====== Extraordinary Item-Early Extinguishment of Debt On December 23, 1996, ACPT completed the restructuring of two non- recourse mortgages that will provide an interest savings of approximately $12,000,000 over the life of the loan. The new mortgage notes payable of $18,700,000 bear average annual interest rate over the life of the loans at approximately 6.8% compared to approximately 9.7% for the old loans. Prepayment fees of $932,000 were paid to the prior lender and charged as an extraordinary item in the accompanying financial statements. The loans are secured by the rental properties owned by two consolidated partnerships. (5) OTHER COMMITMENTS AND CONTINGENT LIABILITIES As of December 31, 1998, ACPT is guarantor of $6,246,000 of letters of credit and surety bonds for land development completion. IGP Group has assigned the receivables and cash proceeds from three apartment properties to serve as collateral for a letter of credit in the amount of $4,569,000 issued for the benefit of Chastleton Apartment Associates Limited Partnership, an entity related to IGC. ACPT entered into a consulting and retirement compensation agreement with IGC's founder and Chief Executive Officer, James J. Wilson, effective October 5, 1998 (the "Consulting Agreement"). The Consulting Agreement provides for annual cash payments during the first two years of $500,000 and annual cash payments for eight years thereafter of $200,000. During 1997, two substantially debt free complexes owned by two unconsolidated partnerships were refinanced to provide condominium conversion construction funds and distributions to their owners. The Company guaranteed these loans, which cannot exceed $24,900,000. In January 1998, two additional residential rental properties owned by separate unconsolidated partnerships, were refinanced with Firstbank of Puerto Rico. The Company guaranteed these loans which amount to $10,000,000. The new mortgage loans mature concurrently with the housing assistance payment contracts, at which time the Company expects to refinance the outstanding balance of the debt, to provide condominium conversion construction funds and distributions to their respective owners. In the normal course of business, ACPT 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 ACPT. (6) LEASES ACPT operates certain property and equipment under leases, some with purchase options that expire at various dates through 2005. ACPT is also obligated under several non-cancelable operating leases for office space and equipment. Future minimum lease payments are as follows (in thousands): Operating Capitalized Leases Leases --------- ----------- 1999 $ 404 $ 74 2000 384 87 2001 299 66 2002 149 46 2003 140 32 Thereafter 368 1 ------- ------- Total minimum lease payments $ 1,744 306 Less amount representing interest 72 ------- Present value of lease payments $ 234 Rental expense under non-cancelable operating leases was $415,000 in 1998, $417,000 in 1997 and $441,000 in 1996 and is included in general and administrative expenses in the accompanying consolidated statement of income. (7) RELATED PARTY TRANSACTIONS ACPT, certain officers and trustees of ACPT, IGC and a general partner of IGC, Interstate Business Corporation ("IBC"), have ownership interests in various entities that conduct business with the Company. The financial impact of the related party transactions on the accompanying financial statements are reflected below (in thousands):
CONSOLIDATED STATEMENT OF INCOME: Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- Community Development - Land Sales (A) IGC $ -- $ 105 $ 980 Homebuilding joint venture 1,728 367 -- Affiliate of IGC former director (A1) -- -- 5,704 IBC, general partner of IGC -- -- 1,869 Affiliate of IBC, general partner of IGC -- -- 1,513 Affiliate of IBC, general partner of IGC, and James Michael Wilson, trustee, former IGC director (A2) -- 3,000 -- ------ ------ ------- $1,728 $3,472 $10,066 ====== ====== ======= Cost of Land Sales IGC $ -- $ 71 $ 686 Homebuilding joint venture 1,427 303 -- Affiliate of IGC former director -- -- 4,123 IBC, general partner of IGC -- -- 586 Affiliate of IBC, general partner of IGC -- -- 680 Affiliate of IBC, general partner of IGC, and James Michael Wilson, trustee, former IGC director (A2) -- 1,689 -- ------ ------ ------- $1,427 $2,063 $ 6,075 ====== ====== ======= Management and Other Fees (B) Unconsolidated subsidiaries $2,322 $2,583 $ 3,614 Affiliate of IBC, general partner of IGC (B1) 344 550 627 Affiliate of James Michael Wilson, trustee, former IGC director, Thomas B. Wilson, trustee, former IGC director, and James J. Wilson, IGC director 157 148 193 Affiliate of James Michael Wilson, trustee, former IGC director, Thomas B. Wilson, trustee, former IGC director, James J. Wilson, IGC director, and an Affiliate of IBC, general partner of IGC 68 68 113 IBC, general partner of IGC -- -- 12 ------ ------ ------- $2,891 $3,349 $ 4,559 ====== ====== ======= Interest and Other Income Unconsolidated subsidiaries $ 86 $ 49 $ 49 Affiliate of IGC former director 125 263 429 Affiliate of IBC, general partner of IGC -- 120 -- Affiliate of Thomas B. Wilson, trustee, former IGC director -- 16 17 IBC, general partner of IGC -- -- 8 ------ ------ ------- $ 211 $ 448 $ 503 ====== ====== ======= General and Administrative Expense Affiliate of IBC, general partner of IGC (C1) $ 335 $ 339 $ 361 Reserve additions and other write-offs- Affiliate of IBC, general partner of IGC (B2,B3) (109) 220 169 Affiliate of IGC former director (A1) 43 388 319 Affiliate of Thomas B. Wilson, trustee, former IGC director -- 83 -- Unconsolidated subsidiaries (B3) 19 14 1 Reimbursement to IBC for ACPT's share of J. Michael Wilson's salary 91 14 -- Reimbursement of administrative costs-IGC (C7) (67) -- -- James J. Wilson, IGC director (C4,C6) 182 96 -- ------ ------ ------- $ 494 $1,154 $ 850 ====== ====== ======= Interest Expense IGC (C5) $ 227 $ 213 $ 242 IBC, general partner of IGC 8 -- -- ------ ------ ------- $ 235 $ 213 $ 242 ====== ====== ======= BALANCE SHEET IMPACT: Increase Increase Balance (Decrease) Balance (Decrease) December 31, in Reserves December 31, in Reserves 1998 1998 1997 1997 ------------ ----------- ------------ ----------- Assets Related to Investment Properties Receivables, all unsecured and due on demand- Unconsolidated subsidiaries $2,646 $ 19 $ 539 $ 112 Affiliate of IBC, general partner of IGC (B1) 84 (110) 51 (11) Affiliate of James Michael Wilson, trustee, former IGC director and James J. Wilson, IGC director 7 -- 20 -- ------ ----- ------ ----- $2,737 $ (91) $ 610 $ 101 ====== ===== ====== ===== Assets Related to Community Development Notes receivable and accrued interest- Affiliate of a former IGC Interest 10% director, secured by land matured April 1, 1998, paid (A1) $ -- $ -- $ 980 $ -- Affiliate of a former IGC Interest 10% director, secured by land payments per month $27,000, matures April 1, 1999 (A1) 1,970 43 2,088 388 Affiliate of IBC, general partner Interest P+1.5% of IGC, secured by land matured June 29, 1998, paid (A2) -- -- 2,520 -- ------ ----- ------ ----- $1,970 $ 43 $5,588 $ 388 ====== ===== ====== ===== Other Assets Receivables - All unsecured IBC, general partner of IGC Payable from IGC distributions, paid (C2) $ -- $ -- $ 681 $ -- Affiliate of IBC, general partner demand of IGC, and Thomas B. Wilson, trustee, former IGC director 5 -- (92) -- IBC, general partner of IGC demand 32 -- (39) -- IGC 98 -- -- -- ------ ----- ------ ----- $ 135 $ -- $ 550 $ -- ====== ===== ====== ===== Liabilities Related to Community Development Notes payable IGC (C5) $7,500 $ -- $6,772 $ -- ====== ===== ====== ===== Accounts payable Whitman, Requardt (C3) $ 139 $ -- $ 121 $ -- ====== ===== ====== ===== Other Liabilities IGC (C8) $2,188 $ -- $1,539 $ -- ====== ===== ====== =====
(A) Land Sales The Company sells land to affiliates and non-affiliates with similar terms. The sales prices to affiliates are based on third party appraisals, payable in cash or a combination of a 20% cash down payment and a note for the balance. The notes receivable are secured by deeds of trust on the land sold, and bear an interest rate equal to those charged at that time for land sales. The notes mature in one year or mature in five or less years with annual amortizations. As circumstances dictate, the maturity dates and repayment terms of the notes receivable due from affiliates or non-affiliates have been modified. Any sales transactions that vary from these terms are described below: (1) The notes receivable due from an affiliate of a former IGC director did not bear interest until certain infrastructure improvements were completed. This infrastructure was delayed and the interest commencement dates modified. These delays created the additional discount reflected above. (2) On June 30, 1997, the Company sold 374 acres to an affiliate of IBC for $3,000,000 and recognized a profit of $1,311,000. As payment for this parcel, the Company received a 20% down payment and assumption of a note payable. (B) Management and Other Services The Company provides management and other support services to its unconsolidated subsidiaries and other related entities in the normal course of business. These fees are typically collected on a monthly basis, one month in arrears. These receivables are unsecured and due upon demand. Certain partnerships experiencing cash shortfalls have not paid timely. As such, these receivable balances are reserved until satisfied or the prospects of collectibility improves. Decreases to the reserves for other than routine cash payments are discussed below: (1) During the second quarter of 1997, an affiliate of IBC purchased the management fees receivable of $190,000 due from Chastleton, Coachman's, Rolling Hills, and Village Lake for a cash payment of $190,000. The collection of these receivables had previously been questionable and they had been fully reserved. This transaction resulted in income recognition of $190,000. (2) During the third quarter of 1998, an affiliate of IBC guaranteed the payment of management fees due from Chastleton, Coachman's, Rolling Hills and Village Lake. The collection of these fees had previously been questionable and they had been fully reserved. (3) The collectibility of management fee receivables are evaluated quarterly. Any increase or decrease in the reserves are reflected as additional expenses or recovery of such expenses. (C) Other Other transactions with related parties are as follows: (1) The Company rents executive office space and other property from affiliates both in the United States and Puerto Rico pursuant to leases that expire through 2005. In management's opinion, all leases with affiliated persons are on terms generally available from unaffiliated persons for comparable property. (2) During 1996, the sale of four properties in Puerto Rico triggered a taxable gain, a portion of which is passed through to the predecessor of IGC that contributed those assets. IGC's partnership agreement provides for (1) an allocation to that predecessor of the income tax payable in Puerto Rico on such portion of the gain and (2) a reduction from its cash distributions in an amount equivalent to the Puerto Rico income tax specifically allocated to the predecessor. In accordance with these provisions, the Company recorded a receivable from IBC of $881,000 which was subsequently paid. (3) Thomas J. Shafer became a director of IGMC and a trustee of ACPT in 1998 after his retirement from Whitman, Requardt, where he was a Senior Partner. Whitman, Requardt provides engineering services to IGC. In management's opinion, services performed are on terms available to other clients. (4) James J. Wilson, as a former general partner of IGP, was entitled to priority distributions made by each housing partnership in which IGP is the general partner up until the Distribution Date. If IGP received a distribution which represents 1% or less of a partnership's total distribution, Mr. Wilson received the entire distribution. If IGP received a distribution which represents more than 1% of a partnership's total distribution, Mr. Wilson received the first 1% of such total. (5) Pursuant to the terms of IGC's restructuring, IGC retained a note receivable due from LDA. In addition to the portion of interest incurred on this note payable to IGC that was expensed, interest costs of $500,000 and $503,000 were allocated to land development and capitalized in the years ended 1998 and 1997, respectively. (6) Fees paid to James J. Wilson pursuant to a consulting and retirement agreement. Effective October 5, 1998, the consulting agreement provides for annual cash payments for the first two years of $500,000 and annual cash payments for eight years thereafter of $200,000. (7) During the transition period after the Distribution, the Company has provided land development, accounting, tax, human resources, payroll processing and other miscellaneous administrative support services to IGC. After the transition period, ACPT has agreed to continue to provide human resources, payroll processing and tax services to IGC on a cost reimbursement basis. (8) Reflects ACPT's obligation to reimburse IGC for the taxes that were generated by Puerto Rico source income prior to the Distribution date. This obligation accompanied the Puerto Rico assets that were transferred to ACPT during IGC's restructuring. (8) PURCHASE OF MINORITY INTEREST IN LDA On July 30, 1998, the Company redeemed the 20% minority interest in Land Development Associates S.E. ("LDA") from an outside partner for $3,100,000 and assumed a $472,000 deferred tax obligation. LDA also repaid a $2,400,000 note due to an affiliate of this unrelated partner. This transaction was financed with a $5,600,000 loan from a commercial bank. The loan bears interest at prime plus 1%, matures on July 30, 1999 and is collateralized by an assignment of the 20% partnership interest in LDA and a second mortgage on Parque El Comandante land held by LDA. The Company employed the purchase method of accounting for this transaction. (9) PUERTO RICO EXPROPRIATION During the third quarter of 1998, a Puerto Rico government agency expropriated 52 cuerdas located in Parque El Comandante and deposited $783,000 into an account for the Company. The Company believes that the market value is significantly higher and therefore has begun the appeal process to increase the amount of payment received for this land to the current market price. As a result of this transaction during the third quarter, the basis of the land was removed from inventory but no corresponding income or loss was recorded. This transaction will be recorded as a sale in the period that the Company and the government agree upon the fair market value of this property. (10) OPTIONS, APPRECIATION RIGHTS AND WARRANTS ACPT adopted an employee share incentive plan (the "Share Incentive Plan") and a Trustees share incentive plan (the "Trustee Share Plan") to provide for share-based incentive compensation for officers, key employees and Trustees. Under the Share Incentive Plan, the Compensation Committee of the Board of Trustees may grant to key employees the following types of share- based incentive compensation awards ("Awards") (i) options to purchase a specified number of shares ("Options"), (ii) forfeitable shares that vest upon the occurrence of certain vesting criteria ("Restricted Shares"), or (iii) Share Appreciation Rights ("Rights") that entitle the holder to receive upon exercise an amount payable in cash, shares or other property (or any combination of the foregoing) equal to the difference between the market value of shares and a base price fixed on the date of grant. A total of 500,000 shares has been reserved for issuance under the Share Incentive Plan. The Share Incentive Plan authorizes the Compensation Committee to determine the exercise price and manner of payment for Options and the base price for Rights. The Compensation Committee also is authorized to determine the duration and vesting criteria for Awards, including whether vesting will be accelerated upon a change in control of ACPT. Rights of key employees under Awards are not transferable other than to immediate family members or by will or the laws of intestate succession. The Trustee Share Plan authorizes the Board of Trustees, in its discretion, to grant to eligible Trustees awards of the same types and terms of Awards as provided under the Share Incentive Plan. Only Trustees who are not employees of ACPT or any affiliated company are eligible to receive Awards under the Trustee Share Plan. A total of 100,000 shares has been reserved for issuance under the Trustee Share Plan. Certain employees held options and incentive rights granted by the Predecessor. Pursuant to the terms of the restructure, the exercise price of the options and the base price of the rights were allocated between the Predecessor and ACPT based on their average closing prices for twenty days after they began trading independently. As a result, the Company granted options and incentive rights solely to separate the existing benefits into two parts. The awards were not adjusted in any other manner so as to provide additional compensation or reduce the employees' benefit. Options As a result of the restructuring, the Company issued 8,200 Options to employees that hold IGC options. As of December 31, 1998, all outstanding Options are fully vested and exercisable, however, 3,200 of these options expired on January 1, 1999. The remaining 5,000 Options expire on August 1, 2001 and bear an exercise price of $6.516 per share. The Company determined that the fair value of these Options are not material to the financial statements. Share Appreciation Rights As of December 31, 1998, the dates that the 98,400 share appreciation rights become exercisable and their expiration dates are as follows: Rights Expiring --------------------------------------------- May 15, October 18, June 19, August 13, Rights Exercisable at: 2004 2004 2007 2007 - - --------------------- ------- ----------- -------- ---------- December 31, 1998 32,320 500 6,500 5,000 May 15, 1999 8,080 June 19, 1999 6,500 August 13, 1999 5,000 June 19, 2000 6,500 August 13, 2000 5,000 June 19, 2001 6,500 August 13, 2001 5,000 June 19, 2002 6,500 August 13, 2002 5,000 ------ ------ ------ ------ 40,400 500 32,500 25,000 ====== ====== ====== ====== During 1998 and 1996, $85,000 and $94,000 of prior expense incurred by the Predecessor and ACPT was recovered due to a decline in the market price of the Predecessor's units and the Company's shares. During 1997, the Company recognized $105,000 of compensation expense in connection with the outstanding rights. No share appreciation rights have been issued in connection with the Trustee Share Plan. Warrants Pursuant to the terms of the restructure and the Banc One loan agreement, ACPT issued 112,500 warrants to Banc One to replace the 225,000 warrants issued by the Predecessor. These warrants have an exercise price of $6.10 per warrant. These warrants have a $428,000 value, net of $19,000 of amortization. For each year the loan remains outstanding, the Company must grant Banc One an additional 37,500 warrants to purchase 37,500 common shares of ACPT. The future warrants will bear an exercise price at the lesser of $6.10 or the average price of the issued shares during the twenty days immediately preceding the grant date. All warrants expire at the latter of July 31, 2002 or four years after the loan has been paid in full. (11) RETIREMENT AND PROFIT SHARING PLANS ACPT assumed all of IGC's obligations under the IGC Retirement Plan for the ACPT employees and in 1998 established its own retirement plan (the "Retirement Plan"). Employees are eligible to participate in the Retirement Plan when they have completed a minimum employment period of 1,000 hours. The Retirement Plan is a defined contribution plan which provides for contributions by ACPT for the accounts of eligible employees in amounts equal to 4% of base salaries and wages not in excess of the U.S. Social Security taxable wage base, and 8% of salaries (limited to $160,000) that exceeded that wage base. Eligible employees also may make voluntary contributions to their accounts and self direct the investment of their account balances in various investment funds offered under the plan. The Retirement Plan also contains a profit sharing provision that allows the Company to make cash awards to selected employees, a portion of which is contributed to the Retirement Plan. Contributions to the Retirement Plan were $53,000 in 1998. Prior to October 5, 1998, ACPT's employees participated in IGC's plan. (12) INCOME TAXES American Management and American Land are subject to federal and state income tax. As a U.S. Company doing business in Puerto Rico, ACPT is subject to Puerto Rico income tax on its Puerto Rico based income. Therefore, the calculation below for the provision for income taxes includes only income from American Management, American Land and Puerto Rico source income. The following table reconciles the effective rate (in thousands, except amounts in %): December 31, ------------------------------------------------- 1998 1997 1996 --------------- -------------- -------------- % of % of % of Amount Income Amount Income Amount Income ------ ------ ------ ------ ------ ------ Taxes at statutory U.S. federal income tax rate $1,109 35% $ -- -- $ -- -- Income taxed directly to partners (1,305) (41%) -- -- -- -- State income taxes, net of federal tax benefit 299 9% -- -- -- -- Income only subject to foreign tax (140) (4%) 470 29% 3,424 29% Tax effect of reorganization 842 27% -- -- -- -- Spin-off costs and other permanent differences 484 15% -- -- -- -- ------ --- ----- --- ------ --- $1,289 41% $ 470 29% $3,424 29% ====== === ===== === ====== === The provision for income taxes includes the following components (in thousands): YEARS ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 ----------- -------- -------- Current: United States $ 34 $ -- $ -- Puerto Rico 917 1,390 3,005 ------ ------ ------ 951 1,390 3,005 ------ ------ ------ Deferred: United States 711 -- -- Puerto Rico (373) (920) 419 ------ ------ ------ $338 (920) 419 ------ ------ ------ $1,289 $ 470 $3,424 ====== ====== ====== The components of deferred taxes payable include the following: AT DECEMBER 31, ------------------------ 1997 1996 ----------- ----------- (In thousands) Tax on amortization of deferred income related to long-term receivables from partnerships operating in Puerto Rico $ 481 $ 556 Tax on equity in earnings of partnerships operating in Puerto Rico 822 1,232 Tax on land development costs capitalized for book purposes but deducted currently for tax purposes 2,455 2,465 Tax on interest income, payable when collected 529 -- Tax on sale to related party deferred for book purposes but currently taxable (78) (133) Tax on collection of note receivable 1,266 -- Other (179) -- ------ ------ $5,296 $4,120 ====== ====== Deferred income taxes reflect the "temporary differences" between amounts of assets and liabilities for financial reporting purposes as determined in accordance with SFAS No. 109 and such amounts as measured by tax laws. (13) FAIR VALUE OF FINANCIAL INSTRUMENTS The balance sheet carrying amounts of cash and cash equivalents, receivables and other current assets approximate fair value due to the short-term nature of these items. Fair value of long-term debt instruments was determined by discounting future cash flows using ACPT's current market rates. As of December 31, 1998 and 1997, the fair value of long-term debt instruments were $86,108,000 and $78,307,000, respectively. (14) SEGMENT INFORMATION ACPT has two reportable segments: U.S. operations and Puerto Rico operations. The U.S. operations include investments in rental properties, community development and management services. The Puerto Rico operations include investments in rental properties, investments 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 summary of significant accounting policies. The following presents the segment information for the years ended December 31, 1998, 1997 and 1996 (in thousands): United Puerto Inter- States Rico Segment Total ------ ------ ------- ------- 1998: Total revenues $15,329 $16,686 $ (250) $ 31,765 Interest income 78 410 (250) 238 Interest expense 3,122 852 (250) 3,724 Depreciation and amortization 1,781 145 -- 1,926 Income taxes 707 582 -- 1,289 Income before income taxes and minority interest 593 2,799 (224) 3,168 Net income (loss) (454) 1,860 (224) 1,182 Total assets 73,131 48,533 (3,498) 118,166 Additions to long lived assets 6,578 1,957 -- 8,535 1997: Total revenues $17,664 $10,940 $ (475) $ 28,129 Interest income 167 944 (475) 636 Interest expense 3,098 1,197 (475) 3,820 Depreciation and amortization 1,706 144 -- 1,850 Income taxes -- 470 -- 470 Income before income taxes and minority interest 850 1,768 (154) 2,464 Net income 549 999 (154) 1,394 Total assets 70,472 50,113 (5,463) 115,122 Additions to long lived assets 3,315 3,449 -- 6,764 1996: Total revenues $17,216 $26,845 $ (427) $ 43,634 Interest income 197 998 (427) 768 Interest expense 3,374 1,486 (427) 4,433 Depreciation and amortization 1,580 146 -- 1,726 Income taxes -- 3,424 -- 3,424 Income before income taxes, minority interest and extraordinary item 1,580 16,137 (222) 17,495 Extraordinary item 932 -- -- 932 Net income 424 12,493 (222) 12,695 Total assets 69,633 54,400 (3,457) 120,576 Additions to long lived assets 3,215 7,443 -- 10,658 (15) QUARTERLY SUMMARY (UNAUDITED) ACPT's quarterly results are summarized as follows: Year Ended December 31, 1998 ---------------------------------------------- 1st 2nd 3rd 4th Total for Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- --------- (In thousands, except per share amounts) Revenues $ 9,788 $ 9,921 $ 4,493 $ 7,563 $31,765 Income (loss) before taxes and minority interest 1,525 2,178 (580) (45) 3,168 Net income (loss) 1,001 1,800 (867) (752) 1,182 Basic earnings per share: Net income (loss) .19 .35 (.17) (.14) .23 Year Ended December 31, 1997 ---------------------------------------------- 1st 2nd 3rd 4th Total for Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- --------- (In thousands, except per share amounts) Revenues $ 5,561 $ 7,641 $ 5,353 $9,574 $28,129 Income (loss) before taxes and minority interest 775 1,014 (171) 846 2,464 Net income (loss) 621 1,059 (784) 498 1,394 Basic earnings per share: Net income (loss) .12 .20 (.15) .10 .27 (16) SUPPLEMENTAL CASH FLOW INFORMATION Interest paid and income taxes paid were as follows for the years ended December 31 (in thousands): 1998 1997 1996 ------ ------ ------ Interest paid $6,248 $5,583 $7,004 Income taxes paid $ -- $3,828 $ 371 Significant non-cash financing and investing activities included a transaction in 1996 whereby ACPT received partnership interests from the general partner of the Predecessor valued at $69,000 in satisfaction of $69,000 of notes receivable. AMERICAN COMMUNITY PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998 INITIAL AND SUBSEQUENT COSTS AND ENCUMBRANCES (In thousands) Bldgs. & Improve- Subsequent Description Encumbrances Land ments Costs - - -------------------- ------------ -------- ----------- ---------- Bannister Apartments $ 3,550 $ 410 $ 4,180 $ 555 Garden Apartments St. Charles, MD Brookmont Apartments 2,262 162 2,677 342 Garden Apartments St. Charles, MD Brookside Gardens Apartments 873 156 2,487 45 Garden Shared Housing St. Charles, MD Crossland Apartments 2,085 350 2,697 262 Garden Apartments St. Charles, MD Essex Village Apts. 15,660 2,667 21,381 (4,760) Garden Apartments Richmond, VA Fox Chase Apartments 6,440 745 7,014 182 Garden Apartments St. Charles, MD Headen Apartments 4,780 205 4,765 1,103 Garden Apartments St. Charles, MD Huntington Apartments 7,558 350 8,513 1,588 Garden Apartments St. Charles, MD Lakeside Apartments 2,239 440 3,649 80 Garden Apartments St. Charles, MD Lancaster Apartments 4,232 484 4,292 198 Garden Apartments St. Charles, MD New Forest Apartments 11,981 1,229 12,102 505 Garden Apartments St. Charles, MD AMERICAN COMMUNITY PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998 INITIAL AND SUBSEQUENT COSTS AND ENCUMBRANCES (continued) (In thousands) Bldgs. & Improve- Subsequent Description Encumbrances Land ments Costs - - -------------------- ------------ -------- ----------- ---------- Palmer Apartments 4,116 471 4,788 499 Garden Apartments St. Charles, MD Terrace Apartments 4,851 497 5,377 575 Garden Apartments St. Charles, MD Alturas Del Senorial 3,426 345 4,185 137 Highrise Apts. Rio Piedras, PR Bayamon Gardens 9,220 1,153 12,050 457 Highrise/Garden Apts. Bayamon, PR Colinas De San Juan 8,204 900 10,742 452 Highrise Apts. Carolina, PR De Diego 6,242 601 6,718 237 Highrise Apts. Rio Piedras, PR Jardines De Caparra 4,821 546 5,719 1,107 Garden Apartments Bayamon, PR Monserrate I 2,946 543 10,436 591 Highrise Apts. Carolina, PR Monserrate II 10,708 731 11,172 436 Highrise Apts. Carolina, PR Monte De Oro 7,766 562 5,217 581 Highrise Apts. Rio Piedras, PR New Center 7,289 589 5,702 135 Highrise Apts. San Juan, PR AMERICAN COMMUNITY PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998 INITIAL AND SUBSEQUENT COSTS AND ENCUMBRANCES (continued) (In thousands) Bldgs. & Improve- Subsequent Description Encumbrances Land ments Costs - - -------------------- ------------ -------- ----------- ---------- San Anton 2,801 313 3,525 804 Highrise Apts. Carolina, PR Santa Juana 6,944 509 6,748 253 Highrise Apts. Caguas, PR Torre De Las Cumbres 5,454 466 5,954 226 Highrise Apts. Rio Piedras, PR Valle Del Sol 10,872 992 14,017 286 Highrise Apts. Bayamon, PR Vistas Del Turabo 2,201 354 2,508 509 Highrise Apts. Caguas, PR ----------- ---------- ----------- --------- Total Properties $ 159,521 $ 16,770 $ 188,615 $ 7,385 =========== ========== =========== ========= AMERICAN COMMUNITY PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998 TOTAL CAPITALIZED COSTS AND ACCUMULATED DEPRECIATION (In thousands) Bldgs. & Accumulated Description Land Improvements Total Depreciation - - -------------------- ---- ------------ ----- ------------ Bannister Apartments $ 410 $ 4,735 $ 5,145 $ 3,863 Garden Apartments St. Charles, MD Brookmont Apartments 162 3,019 3,181 2,404 Garden Apartments St. Charles, MD Brookside Gardens Apartments 156 2,534 2,690 399 Garden Shared Housing St. Charles, MD Crossland Apartments 350 2,959 3,309 1,918 Garden Apartments St. Charles, MD Essex Village Apts. 2,667 16,621 19,288 14,954 Garden Apartments Richmond, VA Fox Chase Apartments 745 7,196 7,941 2,184 Garden Apartments St. Charles, MD Headen Apartments 205 5,868 6,073 4,222 Garden Apartments St. Charles, MD Huntington Apartments 350 10,101 10,451 5,276 Garden Apartments St. Charles, MD Lakeside Apartments 440 3,724 4,164 227 Garden Apartments St. Charles, MD Lancaster Apartments 484 4,490 4,974 1,643 Garden Apartments St. Charles, MD New Forest Apartments 1,229 12,607 13,836 3,437 Garden Apartments St. Charles, MD AMERICAN COMMUNITY PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998 TOTAL CAPITALIZED COSTS AND ACCUMULATED DEPRECIATION (continued) (In thousands) Bldgs. & Accumulated Description Land Improvements Total Depreciation - - -------------------- ---- ------------ ----- ------------ Palmer Apartments 471 5,287 5,758 4,242 Garden Apartments St. Charles, MD Terrace Apartments 497 5,952 6,449 4,738 Garden Apartments St. Charles, MD Alturas Del Senorial 345 4,322 4,667 2,150 Highrise Apts. Rio Piedras, PR Bayamon Gardens 1,153 12,507 13,660 5,629 Highrise/Garden Apts. Bayamon, PR Colinas De San Juan 900 11,194 12,094 5,099 Highrise Apts. Carolina, PR De Diego 601 6,955 7,556 3,338 Highrise Apts. Rio Piedras, PR Jardines De Caparra 546 6,826 7,372 3,311 Garden Apartments Bayamon, PR Monserrate I 543 11,027 11,570 5,473 Highrise Apts. Carolina, PR Monserrate II 731 11,608 12,339 5,558 Highrise Apts. Carolina, PR Monte De Oro 562 5,798 6,360 2,792 Highrise Apts. Rio Piedras, PR New Center 589 5,837 6,426 2,816 Highrise Apts. San Juan, PR AMERICAN COMMUNITY PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998 TOTAL CAPITALIZED COSTS AND ACCUMULATED DEPRECIATION (continued) (In thousands) Bldgs. & Accumulated Description Land Improvements Total Depreciation - - -------------------- ---- ------------ ----- ------------ San Anton 313 4,329 4,642 2,499 Highrise Apts. Carolina, PR Santa Juana 509 7,001 7,510 3,369 Highrise Apts. Caguas, PR Torre De Las Cumbres 466 6,180 6,646 2,990 Highrise Apts. Rio Piedras, PR Valle Del Sol 992 14,303 15,295 5,758 Highrise Apts. Bayamon, PR Vistas Del Turabo 354 3,017 3,371 1,221 Highrise Apts. Caguas, PR ---------- ----------- ----------- ---------- Total Properties $ 16,770 $ 195,997 $ 212,767 $ 101,510 ========== =========== =========== ========== NOTE TO TOTAL CAPITALIZED COSTS: THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES FOR U.S. AND P.R. PROPERTIES IS $161,449 AMERICAN COMMUNITY PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998 DATE CONSTRUCTED OR ACQUIRED AND DEPRECIABLE LIVES Date Constructed Description or Acquired Depreciable Life - - -------------------- ----------- ------------------ Bannister Apartments 11/30/76 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5/7 Yrs St. Charles, MD Brookmont Apartments 5/18/79 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5/7 Yrs St. Charles, MD Brookside Gardens Apartments 11/10/94 Bldg - 40 Yrs Garden Shared Housing Constructed Bldg Equip - 5/7 Yrs St. Charles, MD Crossland Apartments 1/13/78 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5/7 Yrs St. Charles, MD Essex Village Apts. 1/31/82 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5/7 Yrs Richmond, VA Fox Chase Apartments 3/31/87 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5/7 Yrs St. Charles, MD Headen Apartments 10/30/80 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5/7 Yrs St. Charles, MD Huntington Apartments 10/7/80 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5/7 Yrs St. Charles, MD Lakeside Apartments 7/1/96 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5/7 Yrs St. Charles, MD Lancaster Apartments 12/31/85 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5/7 Yrs St. Charles, MD New Forest Apartments 6/28/88 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5/7 Yrs St. Charles, MD AMERICAN COMMUNITY PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998 DATE CONSTRUCTED OR ACQUIRED AND DEPRECIABLE LIVES (continued) Date Constructed Description or Acquired Depreciable Life - - -------------------- ----------- --------------------- Palmer Apartments 3/31/80 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5/7 Yrs St. Charles, MD Terrace Apartments 11/1/79 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5/7 Yrs St. Charles, MD Alturas Del Senorial 11/17/79 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5/7 Yrs Rio Piedras, PR Bayamon Gardens 7/6/81 Bldg - 40 Yrs Highrise/Garden Apts. Constructed Bldg Equip - 5/7 Yrs Bayamon, PR Colinas De San Juan 3/20/81 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5/7 Yrs Carolina, PR De Diego 3/20/80 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5/7 Yrs Rio Piedras, PR Jardines De Caparra 4/1/80 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5/7 Yrs Bayamon, PR Monserrate I 5/1/79 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5/7 Yrs Carolina, PR Monserrate II 1/30/80 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5/7 Yrs Carolina, PR Monte De Oro 12/1/77 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5/7 Yrs Rio Piedras, PR New Center 3/15/78 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5/7 Yrs San Juan, PR AMERICAN COMMUNITY PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998 DATE CONSTRUCTED OR ACQUIRED AND DEPRECIABLE LIVES (continued) Date Constructed Description or Acquired Depreciable Life - - -------------------- ----------- ------------------ San Anton 12/10/74 Bldg - 40 Yrs Highrise Apts. Acquired Bldg Equip - 5/7 Yrs Carolina, PR Santa Juana 2/8/80 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5/7 Yrs Caguas, PR Torre De Las Cumbres 12/6/79 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5/7 Yrs Rio Piedras, PR Valle Del Sol 3/15/83 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5/7 Yrs Bayamon, PR Vistas Del Turabo 12/30/83 Bldg - 40 Yrs Highrise Apts. Acquired Bldg Equip - 5/7 Yrs Caguas, PR AMERICAN COMMUNITY PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998 AND 1997 (In thousands) Real Estate at December 31, 1996 $ 211,399 =========== Additions for 1997: Improvements 1,554 ----------- Deductions for 1997: Dispositions (1,318) ----------- Real Estate at December 31, 1997 $ 211,635 =========== Additions for 1998: Improvements 1,670 ----------- Deductions for 1998: Dispositions 538 ----------- Real Estate at December 31, 1998 $ 212,767 =========== AMERICAN COMMUNITY PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998 AND 1997 (In thousands) Accumulated depreciation at December 31, 1996 $ 92,323 =========== Additions for 1997: Depreciation expense 5,551 ----------- Deductions for 1997: Dispositions (1,211) ----------- Accumulated depreciation at December 31, 1997 $ 96,663 =========== Additions for 1998: Depreciation expense 5,344 ----------- Deductions for 1998: Dispositions 497 ----------- Accumulated depreciation at December 31, 1998 $ 101,510 =========== ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III Certain information required by Part III is omitted from the Report. The Registrant will file a definitive proxy statement with the Securities and Exchange Commission (the "Commission") pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information to be included therein is incorporated herein by reference. Only those sections of the Proxy Statement which specifically address the items set forth herein are incorporated by reference. Such incorporation does not include the Performance Graph included in the Proxy Statement. ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS The information required by this Item is incorporated by reference to the Company's Proxy Statement to be filed with the Commission for its annual shareholders' meeting to be held in June 1999. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Company's Proxy Statement to be filed with the Commission for its annual shareholders' meeting to be held in June 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the Company's Proxy Statement to be filed with the Commission for its annual shareholders' meeting to be held in June 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the Company's Proxy Statement to be filed with the Commission for its annual shareholders' meeting to be held in June 1999. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following financial statements of Interstate General Company L.P. are contained herein: Report of Independent Public Accountants Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Changes in Partners' Capital for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements for the years ended December 31, 1998, 1997 and 1996 2. Financial Statement Schedules The following financial statements schedules are contained herein: Report of Independent Public Accountants Schedule III -- Real Estate and Accumulated Depreciation 3. Exhibits Exhibits required by Securities and Exchange Commission Section 601 of Regulation S-K. Exhibit No. Description of Exhibit Reference - - ------- ----------------------------------------- ------------------------ 2 Form of Restructuring Agreement dated as Exhibit 2 to of August 21, 1998 between the Company Registration and Interstate General Company L.P. Statement on Form S-11 ("IGC") No. 333-58835 of the Company ("Form S-11") 3.1 Form of Restated Declaration of Trust of Exhibit 3.1 to Form S-11 the Company 3.2 Bylaws of the Company Exhibit 3.2 to Form S-11 4.1 Form of Common Share Certificate Exhibit 4.1 to Form S-11 10.1 Employment Agreement, dated August 25, Exhibit 10.1 to Form S-11 1998, between the Company and Edwin L. Kelly 10.2 Employment Agreement, dated August 25, Exhibit 10.2 to Form S-11 1998, between the Company and Francisco Arrivi Cros 10.3 Employment Agreement, dated August 25, Exhibit 10.3 to Form S-11 1998, between the Company and Paul A. Resnik 10.4 Form of Consulting Agreement, dated Exhibit 10.4 to Form S-11 August 24, 1998, between the Company and James J. Wilson 10.5 Employees' Share Incentive Plan Exhibit 10.5 to Form S-11 10.6 Trustee's Share Incentive Plan Exhibit 10.6 to Form S-11 10.7 Housing Management Agreement, dated Exhibit 10.7 to Form S-11 May 12, 1994, between IGC and Capital Park Associates 10.8 Housing Management Agreement, dated Exhibit 10.8 to Form S-11 January 1, 1987, between IGC and Chastleton Apartments Associates 10.9 Housing Management Agreement, dated Exhibit 10.9 to Form S-11 September 30, 1983, between IGC and G.L. Limited Partnership 10.10 Master Loan Agreement dated as of Exhibit 10.10 to Form 10-Q August 1, 1997 by and among Interstate for the quarter ended General Company L.P. and American June 30, 1998 Community Properties Trust, St. Charles Community, LLC and Banc One Capital Partners IV, Ltd. 10.11 First Amendment to Master Loan Agreement Exhibit 10.11 to Form 10-Q between Interstate General Company L.P., for the quarter ended American Community Properties Trust, St. June 30, 1998 Charles Community, LLC and Banc One Capital Partners, IV, Ltd dated September 30, 1997 10.12 First Modification to Credit Facility Exhibit 10.1 to Form 10-Q and Second Amendment to Master Loan for the quarter ended Agreement between Banc One Capital September 30, 1998 Partners IV, Ltd., Interstate General Company L.P., American Community Properties Trust, St. Charles Community, LLC, James J. Wilson, J. Michael Wilson, Edwin L. Kelly, American Rental Properties Trust, American Rental Management Company, American Land Development U.S., Inc., IGP Group Corp., and American Housing Properties L.P. dated October 1, 1998 10.13 Seventh Amendment to Second Amended and Exhibit 10.2 to Form 10-Q Restated Certificate and Agreement of for the quarter ended Limited Partnership of Interstate General September 30, 1998 Properties Limited Partnership S.E. dated October 1, 1998 10.14 Consulting Agreement between St. Charles Filed herewith Community, LLC and Thomas J. Shafer dated January 1, 1998 21. List of Subsidiaries of American Filed herewith Community Properties Trust (b) Reports on Form 8-K None (c) Exhibits See (a) 2, above. (d) Financial Statement Schedules See (a) 2, above. 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. AMERICAN COMMUNITY PROPERTIES TRUST ----------------------------------- (Registrant) Dated: March 31, 1999 By: /s/ J. Michael Wilson ----------------- ----------------------------- J. Michael Wilson Chairman and Chief Executive Officer Dated: March 31, 1999 By: /s/ Cynthia L. Hedrick ----------------- ----------------------------- Cynthia L. Hedrick Vice President and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date --------- ------------------------- ------ /s/ J. Michael Wilson March 31, 1999 - - ------------------------- Chairman, Chief Executive --------------- J. Michael Wilson Officer and Trustee /s/ Edwin L. Kelly March 31, 1999 - - ------------------------- President, Chief Operating --------------- Edwin L. Kelly Officer and Trustee /s/ Thomas B. Wilson March 31, 1999 - - ---------------------- Trustee --------------- Thomas B. Wilson /s/ Thomas J. Shafer March 31, 1999 - - ---------------------- Trustee --------------- Thomas J. Shafer /s/ Pedro Vazquez March 31, 1999 - - ---------------------- Trustee --------------- Pedro Vazquez INDEX TO EXHIBITS EXHIBIT NUMBER EXHIBIT - - ------- ------- 10.14 Consulting Agreement between St. Charles Community, LLC and Thomas J. Shafer dated January 1, 1998 21. List of Subsidiaries of American Community Properties Trust 27. Financial Data Schedule EX-10 2 CONSULTING AGREEMENT - TOM SHAFER Exhibit 10.14 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT ("Agreement") is made and entered into this 1st day of January 1998, by and between ST. CHARLES COMMUNITY, LLC (the "Company") and Thomas J. Shafer (the "Consultant"). WHEREAS, Thomas J. Shafer has been associated with St. Charles as a consulting engineer since 1965 and the Company believes it is essential to retain his involvement with the St. Charles Planned Community, the Company wishes to secure his services as a Consultant, and the Consultant wishes to provide such services, in accordance with the terms and subject to the conditions provided herein; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties agree to be bound by the following terms and conditions: I. POSITION The Company hereby engages the Consultant, and the Consultant hereby agrees to provide engineering and consulting services including but not limited to assistance in environmental matters, advice on property transfers, liaison with Charles County, participation in the Planning Development Review Board and general consultation on development issue. II. COMPENSATION The Consultant will be paid $2,500 per month for these services, payable semi-monthly. III. TERM The term of this Agreement shall commence on the date hereof, and shall continue for one year, renewable each year for an additional term of one year. The Company or the Consultant may terminate this agreement at any time by giving thirty (30) days written notice delivered by hand or facsimile transmission or when mailed by United States registered or certified mail, return receipt requested, addressed as follows: If to the Company: St. Charles Community, LLC 222 Smallwood Village Center St. Charles, Maryland 20602 Attention: Edwin L. Kelly If to the Consultant: Thomas J. Shafer 2928 Normandy Drive Ellicott City, MD 21043 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above. WITNESS ST. CHARLES COMMUNITY, LLC /s/ Richard E. Barnas /s/ Edwin L. Kelly - - ------------------------ -------------------------------- Its: Chairman Date: February 2, 1999 /s/ Robert D. Britt /s/ Thomas J. Shafer - - ----------------------- -------------------------------- Date: February 2, 1999 EX-21 3 SUBSIDIARY LIST EXHIBIT 21 AMERICAN COMMUNITY PROPERTIES TRUST CONSOLIDATED ENTITIES AND SUBSIDIARIES OF THE REGISTRANT DECEMBER 31, 1998 At December 31, 1998, the financial statements of the following entities were consolidated with those of the Registrant in the Consolidated Financial Statements incorporated herein: American Community Properties Trust, a Maryland business trust American Housing Management Company, a Delaware corporation American Housing Properties L.P., a Delaware limited partnership American Land Development U.S., Inc., a Maryland corporation American Rental Management Company, a Delaware corporation American Rental Properties Trust, a Maryland real estate investment trust Fox Chase Apartments General Partnership, a Maryland general partnership Headen House Associates Limited Partnership, a Maryland limited partnership IGP Group Corp., a Puerto Rico corporation Interstate General Properties Limited Partnership S.E., a Maryland limited partnership Lancaster Apartments Limited Partnership, a Maryland limited partnership Land Development Associates S.E., a Puerto Rico partnership New Forest Apartments General Partnership, a Maryland general partnership Palmer Apartments Associates Limited Partnership, a Maryland limited partnership St. Charles Community, LLC, a Delaware limited liability company Wakefield Terrace Associates Limited Partnership, a Maryland limited partnership Wakefield Third Age Associates Limited Partnership, a Maryland limited partnership At December 31, 1998, the Registrant and its consolidated entities had the following significant unconsolidated subsidiaries: Alturas del Senorial Associates Limited Partnership, a Maryland limited partnership Bannister Associates Limited Partnership, a Maryland limited partnership Bayamon Gardens Associates Limited Partnership, a Maryland limited partnership Brookside Gardens Limited Partnership, a Maryland limited partnership Carolina Associates Limited Partnership, a Maryland limited partnership Chastleton Apartments Associates, a District of Columbia limited partnership Coachman's Limited Partnership, a Maryland limited partnership Colinas de San Juan Associates Limited Partnership, a Maryland limited partnership Crossland Associates Limited Partnership, a Maryland limited partnership ELI S.E., a Puerto Rico special partnership Escorial Builders S.E., a Puerto Rico special partnership Essex Apartments Associates, a Virginia limited partnership Huntington Associates Limited Partnership, a Maryland limited partnership Jardines de Camparra Associates Limited Partnership, a Maryland limited partnership Lakeside Apartments Limited Partnership, a Maryland limited partnership Maryland Cable Limited Partnership, a Maryland limited partnership Monserrate Associates Limited Partnership, a Maryland limited partnership Monte de Oro Associates, a Maryland limited partnership New Center Associates Limited Partnership, a Maryland limited partnership San Anton Associates, a Massachusetts limited partnership Turabo Limited Dividend Partnership, a Massachusetts limited partnership Valle del Sol Limited Partnership, a Maryland limited partnership EX-27 4 12/31/98 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 4,070 0 7,847 (204) 53,447 0 2,219 1,753 118,166 0 83,632 0 0 0 16,733 118,166 16,670 31,765 11,106 14,744 10,008 121 3,724 2,471 1,289 1,182 0 0 0 1,182 .23 .23 Balance includes $1,167 of restricted cash.
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