-----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, KmcunNFon2lTFEkLeSMSBPx3AmposG/OJ/MQgYOKcfSoVZv78gVer1WuQh6OcKNm 6HoqTAR5+jn4uFr+Kl51lw== 0000807364-96-000002.txt : 19960402 0000807364-96-000002.hdr.sgml : 19960402 ACCESSION NUMBER: 0000807364-96-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: AMEX SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERSTATE GENERAL CO L P CENTRAL INDEX KEY: 0000807364 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 521488756 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09393 FILM NUMBER: 96542971 BUSINESS ADDRESS: STREET 1: 222 SMALLWOOD VILLAGE CTR CITY: ST CHARLES STATE: MD ZIP: 20602 BUSINESS PHONE: 3018438600 MAIL ADDRESS: STREET 1: 222 SMALLWOOD VILLAGE CENTER CITY: WALDORF STATE: MD ZIP: 20602 10-K 1 1995 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 Commission File Number 1-9393 INTERSTATE GENERAL COMPANY L.P. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 52-1488756 - ------------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 222 Smallwood Village Center St. Charles, Maryland 20602 - ------------------------------- -------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (301) 843-8600 ---------------------- Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Class A Units representing assignment of American Stock Exchange beneficial ownership of Class A limited partnership interest and evidenced by Pacific Stock Exchange beneficial assignment certificates ("Units") Securities registered pursuant to Section 12(g) of the Act: 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 reports), 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 registrant's 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. [ ] As of March 1, 1996 the aggregate market value of the Units held by non-affiliates of the registrant based on the closing price reported on the American Stock Exchange was $16,085,404. Class A Units Outstanding at March 1, 1996: 10,256,785 Class A Units DOCUMENTS INCORPORATED BY REFERENCE Form 10-K Item N/A 2 INTERSTATE GENERAL COMPANY L.P. 1995 Form 10-K ANNUAL REPORT TABLE OF CONTENTS PART I ------ Page ---- Item 1. Business 3 Item 2. Properties 18 Item 3. Legal Proceedings 18 Item 4. Submission of Matters to a Vote of Security Holders 20 PART II ------- Item 5. Market Prices and Distribution on Units 21 Item 6. Selected Financial and Operating Data 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 8. Financial Statements and Supplementary Data 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 86 PART III -------- Item 10. Directors and Executive Officers of the Registrant 87 Item 11. Executive Compensation 91 Item 12. Security Ownership of Certain Unitholders and Management 95 Item 13. Certain Relationships and Related Transactions 96 PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 97 3 PART I ITEM 1. BUSINESS DEVELOPMENT Interstate General Company L.P. ("IGC") was formed as a Delaware limited partnership in 1986 and directly and through predecessors has been engaged in business since 1957. IGC directly and through its primary subsidiaries (the "Company" or "IGC"), Interstate General Properties S.E. ("IGP"), St. Charles Associates Limited Partnership ("SCA"), Land Development Associates, S.E. ("LDA"), American Family Homes, Inc. ("AFH") and Interstate Waste Technologies, Inc. ("IWT") own and participate in diversified real estate operations. The Company is the developer of planned communities in the Washington, D.C. suburbs and Puerto Rico. IGC engages in homebuilding in Maryland, Virginia, North Carolina, South Carolina and Puerto Rico. IGC also holds ownership interests in investment properties, and manages rental apartment projects in Puerto Rico, Maryland, Virginia, and Washington, D.C. IGC is also engaged in the pre- development of municipal waste treatment facilities. The business activities of IGC and its subsidiaries are presented below: A. COMMUNITY DEVELOPMENT IGC has extensive experience in developing planned communities. IGC and its predecessors develop sites for single-family homes, condominiums and apartments in Puerto Rico and the United States. IGC, through outside planners, engineers, architects and contractors, obtains necessary approvals for land development, plans individual neighborhoods in accordance with regulatory requirements and constructs roads, utility facilities and community facilities. The Company develops these sites primarily for sale to third parties and to a lesser extent for use in its homebuilding and investment property operations. Currently, IGC's development activities are focused on the remaining two thirds of the 9,100 acre planned community in St. Charles located in the Washington, D.C. metropolitan area and the remaining phases of Parque Escorial, a 432 acre planned community in the San Juan, Puerto Rico metropolitan area. In addition to these two planned communities, IGC holds approximately 539 acres in Puerto Rico for Parque El Comandante and 1,676 acres at several locations surrounding suburban Washington, D.C., including Prince William County, Virginia and Charles County, Prince George's County and St. Mary's County, Maryland. Years Ended December 31, ---------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Community Development: Residential lots sold 134 228 295 80 81 Residential lots used by IGC's homebuilding division 25 44 91 120 140 Residential lots used by IGC's investment property division 54 -- 56 -- -- --- --- --- --- --- Total residential lots used and sold 213 272 442 200 221 === === === === === Commercial and business park acres sold 20 76 12 1 6 === === === === === Undeveloped acres sold 2 20 27 46 -- === === === === === 4 St. Charles. IGC is the developer of St. Charles, a 9,100 acre planned community located 23 miles southeast of Washington, D.C. in Charles County, Maryland. The comprehensive planned unit development (the "Master Plan") for St. Charles was originally approved by the Charles County government in 1972. Since that time a series of amendments have been approved. The Master Plan contemplates the construction of over 20,000 housing units and over 1,300 bulk acres of commercial, office and light industrial use. IGC's development plans include the future addition of 1,186 acres of adjacent land currently owned by the Company for enhancement of the design and size of the existing approved residential units. St. Charles is divided by U.S. Route 301 and has Conrail access. St. Charles consists of five separate villages: Smallwood, Westlake, Fairway, Piney Reach and Wooded Glen. Each village consists of individually planned neighborhoods and includes schools, churches and recreation centers. Other amenities include parks, lakes, hiking trails and bicycle paths. St. Charles also includes an 18 hole public golf course and regional park that is owned and managed by the Charles County Government and a 1.1 million square foot regional shopping mall. The first two villages, Smallwood and Westlake, are substantially complete and include over 10,900 completed housing units as well as schools, recreational facilities, approximately three million square feet of developed commercial space and 1.4 million square feet of business park space. The Company currently has 188 mixed use residential lots and 228 acres of commercial, office and light industrial acres available to deliver in 1996. Development of the third village, Fairway, is scheduled to begin in 1996. Including Fairway Village, the Company's remaining inventory in St. Charles is expected to produce over 13,000 mixed residential units and 271 acres for business use. Utilities, Zoning, Environmental, Seasonality, Competition and Other Concerns - Water supply and sewage treatment for St. Charles are provided by Charles County under agreements with IGC. In 1989, the Charles County government and IGC entered into an agreement (the "Water and Sewer Agreement") which provides for the continued availability of water and sewer services for the balance of housing units to be developed in St. Charles. For its part, IGC has agreed to a cumulative limit of the community's growth to 600 units per year during the 1990's and 650 units thereafter until full buildout. Water is presently being supplied from county wells. Additionally, the Charles County government has agreed with neighboring Prince George's County to purchase water from the Washington Suburban Sanitary Commission, a regional water and sewer authority, through transmission lines to be constructed during the next few years. In the opinion of Whitman, Requardt and Associates ("WRA"), an independent engineering consultant, and IGC, the County will be able to provide sufficient water and sewer for full planned development of St. Charles. Pursuant to the Water and Sewer Agreement with Charles County, St. Charles is permitted to discharge into the existing county sewage facilities. The Master Plan has been incorporated in Charles County's Comprehensive Master Plan. Notwithstanding such zoning, county approval of specific plans for each village is required. Such approval has been obtained with respect to Smallwood Village, Westlake Village and Fairway Village. Approval has not yet been sought with respect to the other two villages. IGC believes that the land in Westlake and Fairway Villages will be sufficient for IGC's development and homebuilding operations in St. Charles for the next 10-12 years. In 1977, a full environmental impact statement for the Master Plan was prepared by the federal government and considered at federal, state and local levels. The statement included specific consideration of the effect of planned 5 development upon land classified as "wetlands". Development of wetlands is subject to approval by the U.S. Army Corps of Engineers ("the Corps"), the U.S. Environmental Protection Agency ("EPA") and the State of Maryland. In March 1990, the Company received a notice (the "Notice") from the U.S. Army Corps of Engineers (the "Corps") asserting that unauthorized fill materials had been placed in portions of an approximately five acre parcel in Charles County, Maryland (the "Site") owned by the Company and claimed by the Corps to constitute wetlands subject to regulation pursuant to the Clean Water Act. Following receipt of the Notice, the Company ceased development of the Site and remediated a portion of the Site in accordance with instructions issued by the Corps. The Company also commenced discussions with the Corps regarding mitigation plans that would preserve some commercial value for the Site and filed suit against the Corps claiming that a prohibition of development on the entire Site would constitute a governmental taking for which the Company would be entitled to compensation. In November 1993, the Company believed that it had an agreement in principle with the Corps that would settle the Company's claim and permit commercial development of a portion of the Site. However, in early 1994, the Company became aware that this matter had been referred to the U.S. Attorney for the District of Maryland. After conducting a lengthy investigation of the Company's wetlands practices in St. Charles, in October 1995 a grand jury convened by the U.S. Attorney charged that certain of the Company's practices with respect to four parcels, including the Site, constituted criminal violations of Section 404 of the Clean Water Act. The indictment charged each of IGC, its affiliate, St. Charles Associates, L.P. ("SCA"), and the Company's Chairman, James J. Wilson. During the U.S. Attorney's investigation, the Corps issued additional violation notices relating to filling portions of other parcels claimed by the Corps to be protected wetlands. In October 1995 the government filed a civil action in the U.S. District Court for the District of Maryland charging the Company and Mr. Wilson with violations of the Clean Water Act. Of the approximately 4,400 acres developed by the Company in St. Charles, approximately 70 acres are the subject of the civil and criminal charges. On February 29, 1996, each of IGC, SCA and Mr. Wilson were convicted on four counts of felony violations of Section 404 of the Clean Water Act. Sentencing is expected in June 1996. On March 12, 1996, IGC and SCA received service of process with respect to the civil action. In addition to monetary fines, the U.S. attorney also seeks to enjoin the Company from engaging in future illegal wetlands practices. Management believes that the Company and Mr. Wilson have strong arguments to present on appeal of the criminal convictions. Accordingly, the Company and Mr. Wilson will continue to defend vigorously against charges in the civil action. The Washington metropolitan area is highly competitive. There are currently approximately thirty single-family communities in the Waldorf/St. Charles area which would qualify as subdivision sites. The majority of the sites, aside from St. Charles, are on the Route 228 corridor which is the main east-west access road in the County. In the last few years, several major national and regional builders have entered the marketplace. For example, Charles County residential building permits have steadily increased over the past several years to 995 in 1995 compared to 971 in 1994 and 948 in 1993. With the addition of more competition and two planned communities scheduled to start development over the next twelve months, competition for lot and house sales will intensify. IGC's community development in the United States is influenced by seasonal factors. Unfavorable winter weather conditions in the region causes heavier land development and sales during the spring and summer months. 6 Parque Escorial. Parque Escorial is a 432 acre planned community located six miles from downtown San Juan, Puerto Rico. The original master plan was approved in October 1992 by the Puerto Rico Planning Board (the "Planning Board"). Since that time, a series of amendments have been approved. The plan contemplates the construction of 2,900 mixed dwelling units and 120 acres of commercial, light industrial and office use. Unlike the suburban development of the existing surrounding area, Parque Escorial will be a planned community which has a mix of uses focused around a centrally located shopping center. A commercial center fronting a major highway and two service centers will provide a mix of retail, office and service uses. Twenty-seven percent of the Parque Escorial land has been set aside for a variety of community facilities, open space and roads. Phase I is substantially complete and includes 260,000 square feet of commercial space. Development of Phase II infrastructure which consists of 10 "superpads" encompassing 1,095 residential units commenced in September 1995 and should be finished in September 1996. The remaining 301 residential acres and 35 acres for business use are expected to be developed and delivered over the next ten years. The Company has firm contracts for 22 residential acres and 4.3 commercial acres. Development activities in Puerto Rico are generally not influenced by seasonal factors. Utilities, Zoning, Environmental, Seasonality, Competition and Other Concerns - Development of the Puerto Rico communities requires design and construction of adequate infrastructure for streets, electrical, water, sewer and telephone service. The proposed water supply systems for Parque Escorial and Parque El Comandante will connect with the existing Puerto Rico Aqueduct and Sewer Authority ("PRASA") system. For Parque Escorial, PRASA has approved the formation of a combine (the "Combine") of the Company and two other developers in the Carolina area to make certain improvements to the existing Canovanas water filter plant (the "Plant") in order to increase its production by a million gallons per day. The effect on the Parque Escorial project will be as follows: (i) IGC's share of the Combine costs is $924,000, (ii) PRASA reserved in its system the total of 1,400 equivalent residential units ("ERU's") to be used by IGC and a major shopping center; (iii) the special contribution of $4,000 per ERU previously established by PRASA was reduced to $480 per unit for the first 1,400 units and to $1,000 per unit thereafter. Parque Escorial and Parque El Comandante are both served by a major six- lane arterial and other local roads. A planned limited access expressway, which will be a private toll road, will bisect Parque El Comandante and pass within one mile of Parque Escorial. The Puerto Rico Highway Authority ("PRHA") approved Parque Escorial subject to the contribution by the Company and the buyer of the shopping center site, of approximately $7 million for the improvement of Highway 3, including an overpass serving Parque Escorial which is estimated to cost $4.7 million. This amount is payable over the construction period of the Parque Escorial project. The buyer of the shopping center has agreed to build the overpass and to pay up to $4.2 million of these costs. Parque Escorial and the 500-acre Encantada planned community under development in the San Juan Metropolitan area are the only master planned communities at the planning or development stage in Puerto Rico. Encantada is primarily geared at higher income homebuyers while Parque Escorial will primarily seek entry level buyers. The developer of Encantada is a homebuilder and does not sell land to other home builders, whereas IGC plans to build only a portion of the housing units, and sell the majority of the lots to builders. 7 Due to the scarcity of developable land in the San Juan Metropolitan area, competition foreseen for Parque Escorial is expected to be primarily from small walk-up projects being developed in areas considered to be less attractive than Parque Escorial. IGC believes that the Parque Escorial Master Plan can be implemented without material adverse, environmental impact and in compliance with Planning Board environmental criteria. All of the concerned agencies have endorsed Parque Escorial's Environmental Impact Statement which was finalized on January 21, 1992. The buyer of the 61-acre shopping center, assisted by LDA, submitted a mitigation plan for 11.87 acres of wetlands on the shopping center site and other Parque Escorial land. Other U.S. Community Developments. The Company has five other sites for community development in the Washington, D.C. suburban area; Montclair, Westbury, Brandywine, Middletown and Pomfret. Montclair, a planned unit development of approximately 4,000 residential units, was initially undertaken by other developers in 1987. Montclair is located in Prince William County, Virginia, approximately 28 miles southwest of Washington, D.C. and is developed around a 108-acre lake. IGC owns the last remaining developable land in Montclair. In 1995, IGC sold 21 lots under an option contract with a third party builder and of the remaining 243 lots, 190 are under contract and 53 are being negotiated. In 1987 IGC purchased Westbury, a 170-acre planned unit development currently zoned for 150 single-family homes, 600 multi-family units and 16 acres of commercial and industrial property in St. Mary's County near the Patuxent River Naval Air Station. Development of Phase I commenced in 1988 and the Company has a sales contract for Phase II. As a result of slower than anticipated sales of the townhomes, the undeveloped portion of Phase I has been redesigned to accommodate single-family homes and offered for sale to outside homebuilders. Until sold, the Company will continue to build and sell homes on the remaining lots. IGC is the general partner in a limited partnership that owns a 277-acre tract of land in Brandywine in Prince George's County, Maryland. The property was acquired in October 1985 in partial consideration for the regional shopping mall site in St. Charles. The partnership agreement provides for IGC to receive reimbursement of expenses, a development fee equal to 5% of development costs and the first $5,540,000 of net cash proceeds from the property, after which the remaining proceeds are to be divided equally between IGC and the non- affiliated limited partners. The Brandywine tract is part of a sectional map amendment process by the regional planning agency, Maryland-National Capital Park and Planning ("MNCPP"). The Company's staff and planners have been working with the MNCPP staff in an effort to achieve approval for a community of some 1,200 housing units and approximately 400,000 square feet for various commercial uses. In November of 1994, the Company received preliminary plan approval for the development of the first 300 of these housing units. The remaining two sites, Middletown Road and Pomfret are for future planned unit development and are in the planning process. Other Puerto Rico Community Development. A master plan for the 539 acre Parque El Comandante planned community is expected to be submitted to the Planning Board in 1996. While there can be no assurance as to the availability, IGC's management believes that there will be sufficient sewer, water and electrical capacity for the community. The preliminary plan consists 8 of over 3,000 mixed residential units, 100 acres for business use, schools, parks, community club, and other public uses. The development process is expected to commence in 1998 and extend over a period of approximately 20 years. B. HOMEBUILDING IGC, primarily through AFH, builds semi-custom single-family homes for homebuyers who own their own land or who intend to purchase land in a location of their choice. The Semi-Custom Homebuilding Division currently markets its products in the mid-Atlantic region of the United States. The Company's tract homebuilding operations construct tract homes on land developed as part of its community development activities. IGC has built and marketed single-family detached homes, duplexes and townhomes in its communities of St. Charles, Montclair, Westbury and in Puerto Rico. During 1995, the Company restructured its homebuilding division to reallocate its resources and focus on stronger markets. The management of the semi-custom operations was streamlined and non-productive locations eliminated. The Company's U.S. tract homebuilding operations are in the final wind-down stage and the Puerto Rico homebuilding operations have been reactivated. The Company formed a joint venture to construct homes in its Puerto Rico planned community, Parque Escorial. 9 The following table sets forth the number of housing unit sales (settlements), average sales price, net new orders and backlog orders, units under construction or completed: 1995 1994 1993 ---------- ---------- --------- Settlements Semi-custom homebuilding 76 144 125 Tract homebuilding 26 56 91 ---------- ---------- --------- Total Settlements 102 200 216 ---------- ---------- --------- Average sales price Semi-custom homebuilding (does not include land) $ 92,200 $ 84,500 $ 77,600 ---------- ---------- ---------- Tract homebuilding $ 146,800 $ 144,700 $ 133,700 ---------- ---------- ---------- Net new orders (1) Semi-custom homebuilding 83 90 150 Tract homebuilding 25 44 82 ---------- ---------- ----------- Total net new orders 108 134 232 ---------- ---------- ----------- Backlog Semi-custom homebuilding (2) 88 81 135 Tract homebuilding (3) 4 5 17 ---------- ---------- ----------- Total backlog 92 86 152 ---------- ---------- ----------- Unit backlog under construction Semi-custom homebuilding 38 35 63 Tract homebuilding 24 28 35 ---------- ---------- ----------- 62 63 98 ========== ========== =========== Backlog dollars $9,037,000 $7,582,000 $13,724,000 ========== ========== =========== Backlog average sales price $ 98,000 $ 96,000 $ 91,000 ========== ========== =========== (1) Net of cancellations primarily due to lack of financing or inability to sell existing home. (2) May be cancelled prior to start of construction. (3) May be cancelled at any time. The Semi-Custom homebuilding market is directed toward families who own their own land, thereby eliminating the cost of carrying land inventory. Typically, these are young "entry level" or older "move-up" buyers attracted by low to medium sales price homes that can be financed under government insured and guaranteed programs. The Company plans to continue assisting our homebuyers in obtaining financing from several unaffiliated mortgage companies that have provided mortgage loans for its qualified homebuyers. IGC's operations are subject to building, environmental and other regulations of various state and local authorities. For its homes to qualify for Federal Housing Administration ("FHA") or Veterans Administration ("VA") mortgages, IGC 10 must satisfy the valuation standards, site and material requirements of those agencies. The Company's sales and marketing program simplifies the process of building a wide variety of homes on scattered home sites and has on staff approximately 13 full-time salespersons. The remaining tract homes are listed with an outside agency. Furnished housing models and sales centers are open for inspection by prospective purchasers and provide sales literature, including floor plans, elevations and price information. In addition to customer referral, radio, newspaper and television advertising are also utilized throughout the Mid-Atlantic region. Each home is traditionally built on the home site by skilled craftsmen, 100 percent complete and carrying a 10 year warranty. Construction is performed by subcontractors under a fixed price contract for labor and materials. The typical construction period is 90-120 days after receipt of a firm contract. IGC cannot determine the extent to which necessary building materials will be available in the future and has, on occasion, experienced shortages of skilled labor and certain materials within some markets. Base prices for homes range from $60,000 to $140,000, exclusive of land costs. There are over 30 floor plans that can be customized for the individual home buyer, which range in size from 1,000 to 2,200 square feet, include such standard features as one and two-car garages, family rooms and luxury baths. Many optional features are also available, including fireplaces, sunrooms, skylights and outdoor decks and patios. The homebuilding industry is highly competitive nationwide and includes a wide variety of builders. An abundant supply of resale homes and rental units intensifies this condition. To offset these factors, IGC can build a home on the buyer's lot, usually in a rural area, or on a lot within its own community development. The housing industry is cyclical and is influenced by various economic and seasonality factors, for example: consumer confidence, interest rates, property and federal taxes, demographics and mortgage financing programs. As a result, IGC's business and operations could be affected by unanticipated shifts in new home demand resulting from the above factors. C. DEVELOPMENT AND OWNERSHIP OF INVESTMENT PROPERTIES Residential Rental Investment Properties. Since 1959, IGC and its predecessors have been engaged in the development and ownership of residential rental apartment properties in Puerto Rico, Maryland, Virginia and Washington, D.C. IGC is a general partner of 29 partnerships that own 32 residential rental apartment properties, most of which were developed by the Company. In addition to a general partner interest, IGC holds certain limited partnership interests in six of these partnerships. Based on these ownership interests, 26 of the partnerships are recorded under the equity method of accounting and the accounts and operations of the remaining three partnerships are consolidated with those of the Company as the Company controls the partnerships. Based on the terms of the partnership agreements, IGC as general partner, typically recognizes zero to 5% of profits and losses of the partnerships until such time as the limited partners have recovered their capital and the partnerships have accumulated earnings. Thereafter, IGC generally recognizes 50% of the partnerships' profits and losses. The Company's share of revenue recognized and cash received from these partnerships has fluctuated the last three years as a result of the Company's efforts to improve the operations of the properties and escalate the return of equity to its owners. 11 Investment Property Development Activity - For a typical apartment project, IGC locates the land, conducts a feasibility study, forms a partnership to acquire the project, arranges for construction and permanent financing for the project (including governmental mortgage insurance, rent subsidy or other forms of housing assistance) and provides cost and completion guarantees. For projects developed through 1986, limited partners were admitted to the partnerships through syndication at the time the financings for the projects were closed. For the three projects developed between 1986 and 1992, financing partners, an outsider and Interstate Business Corporation ("IBC"), a general partner of the Company, were admitted into the partnerships. Limited partners, holding entities for tax credits, were also admitted into the most recent project developed. The outsider's interests were purchased by the respective partnerships in 1993. 12 The following table lists the completed apartment projects in which IGC has an ownership interest: Financed, Number of Insured and Apartment Occupancy at Subsidized Project Name and Location Units 12/31/95 Under - ------------------------- --------- -------------- ----------- Apartment Projects Owned by Partnerships Accounted for Under the Equity Method of Accounting: Puerto Rico Las Americas I (8) 266 93% (1) Las Americas II (8) 266 96% (1) Las Lomas (8) 120 99% (2) Monacillos (8) 266 99% (2) San Anton 184 99% (2) Monte de Oro 196 99% (2) New Center 196 99% (2) Monserrate I 304 99% (2) Alturas del Senorial 124 99% (2) Monserrate II 304 99% (2) Torre de las Cumbres 155 99% (2) De Diego 198 99% (2) Santa Juana 198 99% (2) Jardines de Caparra 198 99% (2) Colinas de San Juan 300 99% (2) Bayamon Gardens 280 99% (2) Vistas del Turabo 96 99% (2) Valle del Sol 312 99% (2) St. Charles, MD Bannister 208 94% (1,2) Crossland 96 85% (6) Palmer 152 88% (4) Wakefield Third Age 104 99% (1,2) Wakefield Terrace 204 96% (1,2) Headen 136 99% (2) Huntington 204 96% (2) Coachman's Landing 104 85% (6) Brookside Gardens 56 92% (7) Essex Apartments, Richmond, VA 496 98% (2) Chastleton, Washington, D.C. 300 91% (5) ----- 6,023 Apartment Projects Owned by Partnerships whose Operations, Assets and Liabilities are Consolidated with those of IGC (St. Charles, MD): Lancaster 104 91% (3) Fox Chase 176 91% (3) New Forest 256 88% (3) ----- 6,559 ===== 13 (1) Receives interest subsidies under Section 236 of the National Housing Act. (2) Receives subsidies under Section 8 of the National Housing Act. (3) Not subsidized, but 51% of the units are subject to income guidelines set by the Maryland Community Development Administration ("MCDA"). (4) 56 units are subsidized and 96 units are not subsidized, but 51% of the non-subsidized units are subject to income guidelines MCDA. (5) Not subsidized, but 60 units are set aside for low to moderate income tenants under provisions set by the District of Columbia Housing Finance Agency ("DCHFA"). (6) Not subsidized. (7) Not subsidized, but all units are set aside for low to moderate income tenants under provisions set by the Low Income Housing Tax Credit ("LIHTC") program. (8) Sold in March 1996 under the 1990 Low Income Housing Preservation and Resident Homeownership Act ("LIHPRHA"). In addition to the completed projects, Lakeside Apartments, a 54 unit project financed with LIHTC, is under construction and Darby Station, a 127 unit project to be financed with LIHTC is in the pre-development stage. These apartment properties are financed by non-recourse mortgages. Of the 6,559 apartment units in the various partnerships in both the U.S. and Puerto Rico, the U.S. Department of Housing and Urban Development ("HUD") provides low and moderate income subsidies for 5,371 units, mortgage insurance and/or interest subsidies. Additionally, 56 units located in St. Charles, MD, are leased to low and moderate income tenants pursuant to the LIHTC program, and other units are subject to income guidelines set by MCDA. HUD subsidies are provided principally under Sections 8 and 236 of the National Housing Act. Under Section 8, the government pays to the owner of the project the difference between market rental rates (determined in accordance with government procedures) and the rents that tenants are deemed able to afford. Under Section 236, the government provides interest subsidies directly to the owner via a reduction in the project's mortgage interest rate and with a corresponding reduction in tenant rents. In order to comply with Section 8 and Section 236 requirements, tenants are screened by IGC for eligibility pursuant to HUD guidelines. Subsidies are provided under long-term subsidy contracts between the federal government and the owner/partnerships. Cash flow from operations is subject to guidelines and limits established in the regulatory agreements the projects have with HUD, and the Maryland, Virginia, Puerto Rico and Washington, D.C. housing agencies ("State Finance Agencies"). The regulatory agreements also define that if the projects have generated significant cash from operations in amounts exceeding permitted cash distributions, such excesses must be deposited into restricted escrow accounts held by the mortgagee and controlled by HUD or the State Financing Agency. Funds in restricted escrow accounts may be used, with the approval of HUD and/or the State Finance Agencies, for maintenance and capital improvements. The Company has refinanced ten projects since December 1993. As a result of the refinancings of seven properties in Puerto Rico, $24 million of cash held in restricted residual receipts and replacement reserve accounts was released. Most of this cash was distributed to the owners of these properties including IGC with the balance being used to reduce the debt of the apartments. The reduction of the interest rate on the three U.S. properties refinanced will result in increased operating cash flow available for distribution. 14 During March 1996, under LIHPRHA, the Company sold four properties to a non-profit organization for $52,660,000. The Company will continue to manage these properties. This sale provided approximately $16 million of cash distributions, repayment of receivables and fees to the Company, substantially all of which will be used to pay taxes and repay existing debt of IGC. In November 1994, a LIHPRHA application was filed for a fifth project in Puerto Rico. The timetable for completing the LIHPRHA processing is approximately two years. Depending on potential legislation that may be enacted, management may withdraw the application. Management plans to monitor the situation closely during this processing period in order to determine the best course of action for this property. In addition to these refinancings and sales, the Company has strengthened its ownership interest in seven U.S. properties through the purchase of the outside partnership interests in three projects and the transfer of substantially all of IBC's interest in six projects. IBC's remaining interest in these projects will be transferred to IGC during 1996. Competition, Government Regulations and Other Risks - The development of future projects and existing U.S. and Puerto Rico projects are greatly affected by changes in government regulations. The federal government has virtually eliminated subsidy programs for the new construction of low and moderate income housing by profit-motivated developers such as IGC. As a result, IGC has developed only six new apartment projects since 1981, providing for rentals at market rates. IGC is developing additional unsubsidized apartment projects in St. Charles under the LIHTC program. One project opened in 1994 and a second is scheduled for completion in 1996. IGC plans to explore the possibilities of developing such projects in Puerto Rico. The expiration date of the subsidy contracts for these properties ranges from 1997 to 2019. HUD has stated that they do not plan to renew these contracts and are seeking Congress' authority to convert these contracts to tenant-based subsidy, in the form of certificates or vouchers. This method would allow tenants to choose where they wish to reside. This process will impact owners of subsidized housing by potentially reducing a project's income stream. IGC plans to maintain the projects in such a fashion as to retain residents by making IGC apartments the housing of choice. Additionally, HUD is also seeking authority to work with projects that have both Section 8 contracts and HUD-insured loans by engaging in a project known as "Portfolio re- engineering" or "Mark-to-Market". Under this proposal, HUD would assist the owners of projects that cannot service their loans after the Section 8 contracts have been converted to tenant-based assistance restructure HUD insured loan. No definite plan has been determined as to how to structure this process. IGC will monitor the development of this proposal and its impact on the projects it owns and manages. Upon the termination or cancellation of the existing subsidy contracts, IGC may convert units in such projects into condominiums and sell such units if LIHPRHA is not amended to incorporate these projects under its provisions. The subsidized apartment projects incorporate features, such as separate utility metering for each apartment, designed to facilitate such conversion. IGC and its management have experience in converting non-subsidized projects into condominiums. IGC's predecessors have converted approximately 1,800 units in Puerto Rico. There can be no assurance that market conditions will be favorable for sale or rental at market rates at the time that any subsidy contracts terminate. 15 IGC's development of investment properties in the United States is generally influenced by seasonal factors. Due to unfavorable weather conditions during the winter months, IGC's development activities during this period are generally limited. The operation of IGC's investment properties in the United States is not generally influenced by such factors. IGC's development and operation of investment properties in Puerto Rico is not generally affected by seasonal factors. IGC's investment properties in St. Charles compete with other similar apartment projects in the Charles County area, as well as with other projects located throughout the greater metropolitan Washington, D.C. area. The operation of IGC's investment properties in the United States is impacted not only by the supply and demand for competing rental units within the area, but also by local market conditions for housing. When market conditions for housing become favorable to potential buyers due to excess supply or a softening of home prices, this can adversely impact the market for rental units such as those owned by IGC. Similarly, when market conditions for housing deteriorate for potential buyers due to rising interest rates or an increase in housing prices, the market for IGC's rental units may benefit. At December 31, 1995, the overall apartment occupancy of the U.S. properties was 93%. In Puerto Rico, IGC's apartment projects compete with similar projects located in San Juan, Carolina, Guaynabo and Caguas, Puerto Rico. All of the presently owned IGC Puerto Rico projects have subsidized rent and occupancy has averaged close to 99% for 3,963 apartments during the past year. As a result of the rent subsidies, the projects in Puerto Rico are not subject to market conditions that affect market rate projects. The value of IGC's residual interest as a general partner is dependent, among other things, upon the properties being well maintained. Therefore, replacements and maintenance are done in a timely manner and emphasis is placed on preventive maintenance. In Puerto Rico, tenant relation specialists perform regular social work activities, and provide special programs for the elderly and summer athletic programs for children. In St. Charles, the tenants have free access to community centers which provide social and athletic facilities. Through the combination of active property management, property maintenance and social work programs, IGC seeks to provide quality housing for tenants in its apartment projects and to maintain the properties in excellent condition for possible future sale or condominium conversion. Valuation - Management's estimate of IGC's residual interest as of December 31, 1995 in the 32 completed projects and net of the projects sold under LIHPRHA was approximately $61.3 million and $44.9 million, respectively. The residual interest was based on IGC's receivables and expected share of cash flow distributions in accordance with the priorities determined in the partnership agreements, assuming the properties are sold at their estimated fair market value of $299.6 million. This interest (consisting of investments in partnerships, working capital loans and long-term receivables) and the assets and liabilities of the three consolidated apartment partnerships are carried on the Company's books at approximately $10.3 million at December 31, 1995. At December 31, 1995, IGC's residual interest is assigned as collateral for loans with the FDIC and NationsBank. Management determined its valuation estimate from third party appraisals for eleven projects and internal estimates for the remaining projects based on the discounted cash flow method. This method takes future projections of net operating income ("NOI") on a cash basis after debt service and capitalizes the NOI in the year of sale using a rate of 10%. This method also incorporates historical occupancy rates, performance and current discount rates of 12% on the annual cash flow. 16 Operations Distributed to Unitholders. On February 6, 1995, IGC distributed to its unitholders its 99% limited partnership interest in Equus Gaming Company L.P. ("Equus") (the "Equus Distribution"). IGC and its wholly-owned subsidiary, Equus Management Company ("EMC"), retained the 1% general partner interest and will continue to manage Equus. Certain directors and officers of EMC serve as officers and directors of IGMC. For a transitional period following completion of the Equus Distribution, IGC will provide certain administrative services and support to Equus pursuant to a Master Support and Services Agreement (the "Support Agreement"). Equus will reimburse IGC for costs incurred in providing these services. Originally formed in September 1993, Equus was restructured as a limited partnership between IGC and EMC through a series of transactions in August 1994 for the purpose of succeeding to substantially all of IGC's ownership interest in real estate assets employed in thoroughbred racing and related wagering businesses. In connection with this restructuring, Equus became the owner of a 67% interest in HDA's profits. Subsequent to the Distribution, in March 1995, Equus issued additional units to HDA Management Corporation ("HDAMC") in exchange for another 15% interest in HDA's profits. Housing Development Associates S.E. ("HDA") owns the El Comandante Race Track ("Race Track"), the only licensed thoroughbred horse racing facility in Puerto Rico. Pursuant to a lease agreement, El Comandante Operating Company, Inc. ("ECOC"), an unaffiliated company, operates the Race Track and related racing operations and pays rent to HDA, based on 25% of ECOC's share of wagering revenue. The lease agreement between ECOC and HDA expires on December 14, 2004. Live thoroughbred horse racing has been conducted continuously at El Comandante since 1976 and at a predecessor facility since 1957. Also in connection with this restructuring, an IGC subsidiary, Interstate General Properties S.E. ("IGP") held a 1% profits interest and 41.65% capital interest in HDA's profits. On February 7, 1996, IGP transferred to Equus all of its remaining interest in HDA except for a 1% interest in profits and capital. IGP provides management services to HDA pursuant to an existing management agreement. Equus retained its 100% ownership of the issued and outstanding stock of Virginia Jockey Club, Inc. ("VJC"), which applied to the Virginia Racing Commission for licenses to own and operate a thoroughbred horse racing and wagering facility in Virginia. On October 12, 1994, the Virginia Racing Commission awarded the Virginia racing licenses to an applicant other than VJC. VJC appealed the decision of the Virginia Racing Commission to the Circuit Court of Richmond, which on May 23, 1995 affirmed the award to the other applicant. VJC has appealed the decision of the Circuit Court to the Virginia Court of Appeals (the "VJC Appeal"). There can be no assurance that such an appeal would result in the award of the Virginia Licenses to VJC. Cable Television. On January 6, 1988, Maryland Cable Limited Partnership closed the sale of the assets of its cable television system in Charles County, Maryland to Jones Intercable, Inc. IGC holds a 40% general partnership and a 1% limited partnership interest in Maryland Cable Limited Partnership. In connection with the sales agreement, IGC earned $207,000, $345,000 and $508,000 of fees in 1995, 1994 and 1993, respectively. The Company is entitled to receive an additional $2.1 million of fees over the next four years. However, the majority of these fees are based on building rates. Due to anticipated moderate rate of growth, the fees expected to be received by the Company are approximately $1.3 million. These proceeds are pledged as security for a loan with Citibank. 17 D. MANAGEMENT SERVICES IGC earns management fees from management of apartment complexes owned by partnerships in which IGC is the general partner and from management of other apartment complexes and commercial and industrial properties. The commercial and industrial properties and most of the other apartments are owned by affiliates of IGC. Management agreements for the rental apartments owned by partnerships in which IGC is a general partner call for management fees based on a percentage of rents ranging from 2.25% to 10.95%. These contracts are for periods of one or two years and are customarily renewed. Although HUD and the State Finance Agencies have the right to cancel these contracts with or without cause, no contracts of IGC have ever been cancelled. Fees for managing other apartment projects range from 2.5% to 4.5% of rents and fees for managing commercial and industrial properties are typically 3.5% of gross rents on the properties. Management fees for each of the years ended December 31, 1995, 1994 and 1993 were: 1995 1994 1993 ---- ---- ---- (In thousands) Property Management Fees: Apartment projects $3,368 $2,855 $2,891 Commercial properties 262 253 240 HDA (1) 264 257 593 Refinancing fees -- 142 769 ------ ------ ------ $3,894 $3,507 $4,493 ====== ====== ====== (1) Until December 15, 1993, this management agreement provided for payments by HDA of 5% of HDA's rental income as a management fee. The management agreement was amended on December 15, 1993 to provide for payment of a $250,000 annual fee, adjusted beginning in 1994 by the increase in the CPI over the prior year. INTERSTATE WASTE TECHNOLOGIES, INC. IGC, engaged in the pre-development of municipal waste facilities, formed a wholly owned corporation, Interstate Waste Technologies, Inc. ("IWT"), to pursue contracts with municipalities regarding waste disposal. Three individuals representing IWT have filed for patent protection for a process which converts sludge into three useful and saleable products: methanol, sulfur and an aggregate material. An amended patent application was filed in October 1995 in response to additional information requests from the U.S. Patent Office. Comments by the U.S. Patent Office on the October 1995 amended patent application were received in February 1996. Issuance of patents is pending and there is no assurance that patents for such process will be issued. IWT's first project was a sludge reduction facility in Carteret, New Jersey for the Passaic Valley Sewerage Commissioners ("PVSC"). IWT located a site and entered into a contract with the Borough of Carteret to serve, for a fee, as a host community. However, on December 31, 1991, the Borough Council passed a resolution rescinding the Carteret Mayor's authority to enter into the agreement. IWT commenced legal action seeking a declaratory judgment that the 18 contract was valid and enforceable. In February 1993, the contract was ruled valid and enforceable. In May 1994, IWT accepted a cash settlement of $750,000 from the Borough of Carteret and its insurers which was recorded as a recovery of deferred costs. The attempt to invalidate the contract and the lawsuit has required IWT to discontinue its plans to develop the Carteret project. IWT responded to a Request for Proposals from Bridgeport, Connecticut for a regional sludge management facility to dispose of the city's sludge as well as sludge from other communities. In February 1994, IWT was notified that it was identified by the city as the preferred vendor for the regional sludge management facility. In June 1994, IWT and the city executed a host community agreement. The agreement affirms the willingness of Bridgeport to allow the sludge management facility to be built in the city. Before construction can begin on the facility, IWT must acquire long-term sludge disposal service agreements with sludge generators in the New Jersey-New York-New England service region of the facility. Negotiation of a sludge disposal service agreement with the city's wastewater authority is pending the acquisition of other sludge disposal contracts for the facility. In March 1995, IWT submitted a Proposal for Solid Waste Recycling Services to the Solid Waste Management Authority of the Commonwealth of Puerto Rico. The proposed facility is a 2,640 ton per day plant, using a demonstrated solid waste processing technology developed in Europe. Continuing discussions with representatives of the government of Puerto Rico have led to the development of a draft Letter of Intent. During 1993, as a result of the legal action discussed above and its decision to abandon another site, IGC reserved approximately $1,000,000 against the investment. At December 31, 1995 and 1994, deferred costs regarding waste technology, net of reserves, were $2,364,000 and $1,798,000, respectively. E. GENERAL Employees. IGC had 323 full-time employees as of December 31, 1995 (147 based in Puerto Rico and 176 in the United States). These employees are engaged in investment property operations and maintenance, construction, accounting and other areas. Included among these employees are on-site personnel for various rental apartment projects of partnerships in which IGC is the management agent. Employees' salaries (other than executive officers and certain other employees) related to the properties managed by IGC are funded by the owner partnerships. IGC intends to continue its practice of contracting out a substantial portion of land development, project maintenance and construction work. Significant Customers. No single customer accounted for more than 10% of IGC's revenues during the year ended December 31, 1995. ITEM 2. PROPERTIES IGC owns real property located in Charles County, Maryland; Prince George's County, Maryland; St. Mary's County, Maryland; Prince William County, Virginia; North Carolina; South Carolina, Virginia and Puerto Rico. Properties in Maryland and Puerto Rico are described above in Item 1 and Schedule XI. ITEM 3. LEGAL PROCEEDINGS In 1994, the Company filed two claims against Charles County, Maryland and its County Commissioners in the Maryland Tax Court, a state administrative 19 agency, seeking compensation for school sites that it previously had deeded to the County. The actions seek to enforce an agreement settling litigation between the parties that was entered into in 1989 and also rights pursuant to Charles County law. Under the terms of the settlement agreement, the County agreed to credit the Company for school sites contributed and also agreed to repay to the Company any excess school impact fees paid. The Company seeks $5.5 million, equal to the fair market value of the school sites. The Company's claims have not yet been decided by the Tax Court. In a separate proceeding, the Company filed suit in 1990 against Charles County and the County Commissioners in the Circuit Court for Charles County to enforce a provision of the same settlement agreement that required the County to conduct an appropriate water and sewer connection fee study as the basis on which to set such fees for the St. Charles Communities. On June 22, 1992, judgment was rendered in favor of the Company. The judgment requires the County to conduct the appropriate water and sewer connection fee study. In 1995, the Court of Special Appeals of Maryland affirmed the judgment. The County has indicated that it is now in the course of conducting a water and sewer connection fee study. The adequacy of the study will be subject to review by the Company and, if necessary, the courts. In March 1990, the Company received a notice (the "Notice") from the U.S. Army Corps of Engineers (the "Corps") asserting that unauthorized fill materials had been placed in portions of an approximately five acre parcel in Charles County, Maryland (the "Site") owned by the Company and claimed by the Corps to constitute wetlands subject to regulation pursuant to the Clean Water Act. Following receipt of the Notice, the Company ceased development of the Site and remediated a portion of the Site in accordance with instructions issued by the Corps. The Company also commenced discussions with the Corps regarding mitigation plans that would preserve some commercial value for the Site and filed suit against the Corps claiming that a prohibition of development on the entire Site would constitute a governmental taking for which the Company would be entitled to compensation. In November 1993, the Company believed that it had an agreement in principle with the Corps that would settle the Company's claim and permit commercial development of a portion of the Site. However, in early 1994, the Company became aware that this matter had been referred to the U.S. Attorney for the District of Maryland. After conducting a lengthy investigation of the Company's wetlands practices in St. Charles, in October 1995 a grand jury convened by the U.S. Attorney charged that certain of the Company's practices with respect to four parcels, including the Site, constituted criminal violations of Section 404 of the Clean Water Act. The indictment charged each of IGC, its affiliate, St. Charles Associates, L.P. ("SCA"), and the Company's Chairman, James J. Wilson. During the U.S. Attorney's investigation, the Corps issued additional violation notices relating to filling portions of other parcels claimed by the Corps to be protected wetlands. In October 1995 the government filed a civil action in the U.S. District Court for the District of Maryland charging the Company and Mr. Wilson with violations of the Clean Water Act. Of the approximately 4,400 acres developed by the Company in St. Charles, approximately 70 acres are the subject of the civil and criminal charges. On February 29, 1996, each of IGC, SCA and Mr. Wilson were convicted on four counts of felony violations of Section 404 of the Clean Water Act. Sentencing is expected to occur in June 1996. On March 12, 1996, IGC and SCA received service of process with respect to the civil action. Maximum statutory penalties possible against each of IGC and SCA under the criminal action are $50,000 per day for each of four felony violations or, 20 alternatively, twice the pecuniary gain realized by the Company from any illegal action. The maximum statutory penalty possible under the civil action is $25,000 per day for each of nine separate violations. In the civil action the U.S. Attorney also seeks to enjoin the Company from engaging in future illegal wetlands practices. Management believes the Company and Mr. Wilson have many strong arguments to present on appeal of the criminal convictions. Accordingly, the Company and Mr. Wilson will appeal the criminal convictions and will continue to defend vigorously against charges in the civil action. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS IGC did not submit to its partners or Unitholders any matters for a vote during the fourth quarter of the year ended December 31, 1995. 21 PART II ITEM 5. MARKET PRICES AND DISTRIBUTIONS ON UNITS The IGC Units are traded on the American and the Pacific Stock Exchanges. The following table sets forth, for the periods indicated, the high and low sales prices per IGC Unit as reported in the consolidated transaction reporting system, and cash distributions paid to unitholders during these periods. IGC Units commenced public trading on February 19, 1987. Cash Distributions Price Range of IGC Units ------------------ ------------------------ Total Per Unit High Low ----- -------- ----------- --------- 1995 Quarter: Fourth $ -- $ -- $4-1/8 $2-15/16 Third -- -- 4-3/4 3-1/2 Second -- -- 4-3/8 3-1/4 First -- -- 7-1/2 3-1/4 1994 Quarter: Fourth $ -- $ -- $8-7/8 $6 Third 516 .05 9-1/4 6-7/8 Second 504 .05 7-5/8 6-1/4 First -- -- 7-7/8 6 As of the close of business on March 1, 1996, there were 336 Unitholders of record. As of March 1, 1996, the closing price reported by the American Stock Exchange was $3.25 per unit. This price reflects the market impact of IGC's distribution of Equus limited partnership units representing a 99% limited partnership interest in Equus, to IGC Unitholders on February 6, 1995, as further discussed in Note 4 to the Consolidated Financial Statements included in Item 8 of this report. IGC is required by its Third Amended and Restated Limited Partnership Agreement, as amended, to make cash distributions to limited partners of not less than 55% of taxable income calculated for public IGC Unitholders as of the date of IGC's initial public offering. During the years ended December 31, 1995 and 1994, IGC had taxable income (losses) of $1,446,000 and $(1,749,000), respectively, or $.14 and $(.17), respectively, per unit. ITEM 6. SELECTED FINANCIAL AND OPERATING DATA The following tables set forth combined financial data and operating data for IGC. The following selected income statement and balance sheet data have been extracted from the audited financial statements of IGC for each of the years in the five-year period ended December 31, 1995. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations.") This information should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and related footnotes. 22 IGC SELECTED FINANCIAL AND OPERATING DATA Years Ended December 31, ---------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (In thousands, except per unit amounts) Income Statement Data Revenues Land sales $14,824 $22,296 $13,809 $ 3,359 $ 3,151 Home sales 10,826 20,265 21,884 30,761 33,043 Investment in gaming properties (80) 7,288 2,358 591 4,881 Equity in earnings from partnerships and development fees 2,942 4,960 3,901 2,819 2,135 Apartment rental revenues 4,642 4,538 2,113 -- -- Management and other fees 3,894 3,507 4,493 4,016 3,463 Interest and other income 652 668 773 1,089 1,652 ------- ------- ------- ------- ------- Total revenues 37,700 63,522 49,331 42,635 48,325 Provision for wetlands litigation expenses 4,107 498 -- -- -- Provision for restructuring -- -- -- 15,795 -- Other expenses 35,108 52,872 42,973 41,316 47,716 Income taxes 1,452 3,511 (835)(1) 471 133 Net (loss) income (2,967) 6,641 7,193 (1) (14,947) 476 Net (loss) income per unit (.29) .66 .71 (1) (1.47) .05 Cash distributions per unit -- .10 -- -- -- Years Ended December 31, ---------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Balance Sheet Data (In thousands) Assets related to community development $ 79,558 $ 70,061 $ 78,876 $ 82,686 $ 95,549 Assets related to home building projects 3,819 4,998 7,566 8,637 15,674 Assets related to investment properties 36,722 35,608 42,707 23,516 19,132 Total assets 132,093 123,513 140,314 125,523 144,779 Short-term debt Banks Recourse 48,836 25,130 39,026 35,174 41,929 Non-recourse 133 122 321 1,142 930 Long-term debt Banks Recourse 1,042 15,333 16,113 34,889 35,662 Non-recourse 24,551 26,917 25,501 10,415 10,646 Total liabilities 94,184 82,808 108,069 100,481 104,790 Partners' equity 37,909 40,705 32,245 25,042 39,989 23 (1) Included in this amount is a $1.5 million or $.15 per unit benefit for the cumulative effect of a change in accounting principle to reflect the adoption of SFAS No. 109 "Accounting for Income Taxes". See additional discussion of this change in Note 1 to the Company's consolidated financial statements included at Item 8. Years Ended December 31, ---------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Operating Data Community Development Residential lots sold 134 228 295 80 81 Residential lots used by Company 25 44 91 120 140 Commercial and business park acres sold 20 76 12 1 6 Undeveloped acres sold 2 20 27 46 -- Homebuilding, all locations Contracts for sale, net of cancellations 108 134 232 288 284 Number of homes sold 190 200 216 288 284 Backlog at end of period 92 86 152 136 168 Rental apartment units managed at end of period 8,085 8,085 8,029 7,907 7,933 Units under construction 54 -- 56 -- -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A summary of the Company's operating results is as follows: 1995 1994 1993 ---- ---- ---- (In thousands) Community development $ 6,617 $ 6,707 $ 4,373 Homebuilding (481) 310 1,805 Investment properties and asset management 7,013 8,479 8,331 Operations distributed to unitholders (80) 5,527 2,358 Other income and expenses (14,584) (10,871) (10,509) -------- -------- -------- Net income before provision for income tax and cumulative effect of accounting change (1,515) 10,152 6,358 Provision for income tax (1,452) (3,511) (665) Cumulative benefit of accounting change -- -- 1,500 -------- -------- -------- Net (loss) income $ (2,967) $ 6,641 $ 7,193 ======== ======== ======== 24 The Company's homebuilding and community development sales continue to be greatly influenced by consumer confidence, housing demand, prevailing market interest rates, movements in such rates and expectations about future rates. Long term interest rates declined in 1993 to their lowest level in approximately 20 years making entry level housing more affordable to homebuyers. Even though the rates have remained fairly stable and an adequate supply is available to the entry-level homebuyer, the economic uncertainties associated with the federal budget and government furloughs during 1995 and 1996 came at a time when supplies and competition were high in the Washington, D.C. market. As a result, the profit margins in the region have continued to decline. Management anticipates the growth of the Washington, D.C. metropolitan real estate market to be adversely impacted by any future federal government closings and cutbacks. The Company has seen a significant increased interest in its U.S. commercial land. The Puerto Rico residential and business market is stable. 25 Community Development Operations The following table presents selected community development data: 1995 1994 1993 ---- ---- ---- (In thousands, except units and percentages) Lots Sold: Commercial and business parks (acres) St. Charles 14 15 12 Puerto Rico 6 61 -- Residential lots (units) St. Charles Developed single-family lots 113 100 114 Developed townhouse lots -- -- 66 Montclair Developed townhome lots -- 36 61 Semi-developed multi-family lots 21 69 45 Westbury developed single-family lots -- 22 9 Undeveloped land (acres) U.S. -- .06 27 Puerto Rico 2 20 -- Average Sales Price: Commercial and business parks (per acre) St. Charles $ 273 $ 97 $ 251 Puerto Rico $ 1,029 $ 196 $ -- Residential (per unit) St. Charles Developed single-family lots $ 39 $ 45 $ 46 Developed townhouse lots $ -- $ -- $ 25 Montclair Developed townhome lots $ -- $ 38 $ 36 Semi-developed multi-family lots $ 12 $ 11 $ 8 Westbury developed single-family lots $ -- $ 27 $ 26 Undeveloped land (per acre) U.S. $ -- $ 31 $ 26 Puerto Rico $ 33 $ 75 $ -- Average Gross Profit Margin: Commercial and business parks St. Charles 71% 69% 66% Puerto Rico 54% 37% -- Residential lots St. Charles Developed single-family lots 34% 40% 39% Developed townhouse lots -- -- 27% Montclair Developed townhome lots -- (1%) 5% Semi-developed townhome lots -- --% 5% Westbury developed single-family lots -- (1%) 3% Undeveloped land U.S. -- 100% 2% Puerto Rico 26% 41% -- 26 Community Development Data (continued) 1995 1994 1993 ---- ---- ---- (In thousands, except units and percentages) Sales revenue $14,824 $22,296 $13,809 Cost of sales 7,611 14,764 9,228 ------- ------- ------- Gross profit 7,213 49% 7,532 34% 4,581 33% ------- ------- ------- Selling and marketing 132 109 86 Minority interest 464 716 122 ------- ------- ------- Operating profit $ 6,617 $ 6,707 $ 4,373 ======= ======= ======= Interest expense included in cost of sales $ 613 $ 481 $ 1,005 ======= ======= ======= In 1995, land sales revenues decreased by $7.5 million or 34% compared to 1994 due primarily to the sales of a shopping center site in Puerto Rico during 1994, which in turn caused 1994 land sales to increase by $8.5 million or 61% over 1993. Even though the sales revenue decreased in 1995, the per acre commercial sales price in 1995 increased over 1994 prices which were lower than 1993 prices. These variations are due to the mix of commercial acres versus industrial and other business use land sales, the size and location of the property. The average sales price of the residential lots sold in St. Charles have slowly decreased over the last two years as the remaining lots in the second village which are smaller and less desirable than the prime lots are sold. Residential land sales remained slow resulting from increased competition and slow home sales. The increase in Community Development gross profit margins to 49% in 1995 versus 34% in the 1994 is due primarily to a heavier mix of the sales attributable to sales of commercial and business property. Commercial land sales produce the highest prices but require less development than the business park and residential land. Commercial sales as a percent of sales revenue were 66%, 57% and 22% for the years ended 1995, 1994, and 1993, respectively. The gross margins of the residential lots sold during 1995 decreased from those sold in 1994 due to the lower sales prices as discussed above and the added carrying costs due to slower than anticipated sales during 1995 and 1994. Minority interest expense decreased $252,000 to $464,000 in 1995 compared to $716,000 in 1994. Whereas, minority interest expense increased $594,000 to $716,000 in 1994 compared to $122,000 in 1993. This fluctuation is attributable to the decrease or increase in profits generated from the land sales in Puerto Rico in which a minority partner holds a 20% interest. 27 Homebuilding Operations The following table presents selected homebuilding data: 1995 1994 1993 ---- ---- ---- (In thousands, except units and percentages) Units Settled: Semi-Custom North and South Carolina 30 70 59 Virginia, Maryland and Other 46 74 66 Tract 26 56 (1) 91 (2) ---- ---- ---- 102 200 216 ==== ==== ==== Net New Orders: Semi-Custom North and South Carolina 28 47 79 Virginia, Maryland and Other 55 43 71 Tract 25 44 82 ---- ---- ---- 108 134 232 Units Backlog: ==== ==== ==== Semi-Custom North and South Carolina 34 36 59 Virginia, Maryland and Other 54 45 76 Tract 4 5 17 ---- ---- ---- 92 86 152 ==== ==== ==== Unit backlog under construction: Semi-custom North and South Carolina 18 14 32 Maryland, Virginia & Other 20 21 31 Tract 24 28 35 ---- ---- ---- 62 63 98 ==== ==== ==== Average Sales Price: Semi-Custom (excludes lots) $ 92 $ 84 $ 78 Tract $ 146 $ 144 $ 137 Backlog $ 9,037 $ 7,582 $13,724 ======= ======= ======= Backlog average sales price $ 98 $ 96 $ 91 ======= ======= ======= Home sales $10,826 $20,265 $21,884 Cost of sales 9,875 18,508 18,880 ------- ------- ------- Gross profit 951 9% 1,757 9% 3,004 14% ------- ------- ------- Selling and marketing 1,432 1,447 1,199 ------- ------- ------- Operating (loss) profit $ (481) 4% $ 310 1% $ 1,805 8% ======= ======= ======= (1) Includes seven homes sold on lots purchased from third parties. (2) Includes three homes sold on lots purchased from third parties. 28 The U.S. homebuilding operations were restructured in May 1995. Management will concentrate its homebuilding efforts on the semi-custom operations in Virginia and the Carolinas. The semi-custom operations in Maryland ceased during 1995 and the Company expects to wind-down its tract homebuilding operations in Maryland by the end of 1996. The Puerto Rico market is somewhat sheltered from the negative influences affecting the U.S. operations. The Company, through a joint venture, will expand its homebuilding operations in Puerto Rico. Revenues from home sales decreased 53% to $10,826,000 for 1995 from $20,265,000 for 1994 and from $21,884,000 or 7% from 1993. The primary reason for the two year decrease is an overall decline in the number of units sold. The increased focus by the Company on its Semi-Custom homebuilding operations, the restructuring of the homebuilding management team in 1994 and 1995 and the reduced availability of townhome lots to the Company's homebuilding division in St. Charles and Montclair due to lot sales to third party homebuilders, resulted in a 51% decline in the number of units sold during 1995 as compared to 1994 and a 38% decline in the number of units sold during 1994 compared to 1993. Gross profits as a percentage of homebuilding revenues for a particular period, are a function of various factors including volume, pricing, efficiency of homebuilding operations, and financing costs (including costs of subsidizing customer financing, if any). The gross profit margins earned during 1995 increased slightly by .1% to 8.8% from the 8.7% achieved during 1994. Even though the sales volume declined during 1995, management was able to reduce its overhead to offset its impact. The gross profit margins earned during 1994 decreased 36% to 8.7% from the 13.7% achieved during 1993. During 1994, tract homebuilding in southern Maryland became extremely competitive resulting in builders offering buyer incentives and reduced prices which caused the profit margins of the area's projects to decline. As a result of the declining profit margin, management decided to curtail expansion of any tract homebuilding operations and to complete the buildout of only those projects which had already commenced. Certain capitalized overhead costs were written off in 1994, which further lowered the gross margin. Investment Properties and Asset Management 1995 1994 1993 ---- ---- ---- (In thousands) Apartment rental revenues $ 4,642 $ 4,538 $ 2,113 Apartment operating expenses 4,465 4,526 2,176 ------- ------- ------- Apartment operating income (loss) 177 12 (63) Equity in earnings from partnerships and development fees 2,942 4,960 3,901 Management and other fees 3,894 3,507 4,493 ------- ------- ------- Total operating profit $ 7,013 $ 8,479 $ 8,331 ======= ======= ======= 29 Apartment rental revenues and operating expenses represent the results of operations of the three consolidated apartment projects. Apartment rental revenues increased $100,000 from 1994 to 1995 due primarily to an increase in rents and occupancy at the properties. Operating expenses decreased by $61,000 for the same time period due in part to a decrease in the operating contracts and repair and maintenance costs. Apartment rental revenues and apartment operating expenses during 1994 increased by $2.4 million each over 1993 due primarily to the fact that the operating results of Fox Chase and New Forest were consolidated for all of 1994 compared to being consolidated for only a portion of 1993. IGC's interest in these partnerships increased to 90% in August 1993 pursuant to a transfer of interest described in Note 3 to the Company's Consolidated Financial Statements included in Item 8. Equity in earnings from partnerships and development fees decreased $2.0 million or 41% during 1995 compared to 1994. These earnings during 1994 increased $1.1 million or 27% as compared to 1993. During 1993, the Company received developer fees from projects that were refinanced that year. During 1994, the Company received distributions from a partnership that owns four apartment projects that were refinanced. During 1995 no similar developer fees or distributions were received. Management and other fees increased 11% from 1994 to 1995 due to the recognition in income of reserves on fees earned from the management of certain apartment projects from a prior period but not determined to be collectible until 1995. Management fees decreased 22% from 1993 to 1994 due to the receipt of fees associated with the refinancing of certain projects in 1993. There were no similar fees received in 1994. Operations Distributed to Unitholders 1995 1994 1993 ---- ---- ---- (In thousands) Equity in (losses) earnings from gaming partnerships $ (80) $ 7,288 $2,358 Write-off deferred project costs -- (1,761) -- ------ ------- ------ $ (80) $ 5,527 $2,358 ====== ======= ====== During February 1995, 99% of the Company's interest in Equus was distributed to its Unitholders resulting in a $7 million decline in 1995 from 1994 in equity in earnings from gaming partnerships. These 1994 earnings were $5 million higher than those during 1993. In 1994, revenues from investment in gaming properties consisted of cash distributions received from HDA of $763,000 and $6.5 million of notes receivable distributed by HDA to IGC. HDA is a Puerto Rico special partnership and partners in such partnerships are not liable for losses in excess of their capital investment. The 1994 write-off of deferred project costs consists of $1,761,000 of costs associated with the Company's unsuccessful efforts to obtain the license to construct and operate a Virginia horse racing facility. After the Equus distribution, IGC's share of any similar write-offs is included with the Company's share of (losses) earnings. 30 Other Income and Expenses 1995 1994 1993 --------- --------- --------- (In thousands) Interest and other income $ 652 $ 668 $ 773 General and administrative expenses (8,326) (8,418) (8,590) Depreciation and amortization (371) (498) (499) Interest expense (2,432) (2,125) (2,193) Provision for wetlands litigation (4,107) (498) -- -------- -------- -------- $(14,584) $(10,871) $(10,509) ======== ======== ======== Interest and other income continued to decrease by 2% during 1995 compared to 1994 and 14% during 1994 compared to 1993 due to the reduction of the average outstanding balance of the notes receivable. General and administrative expenses decreased by approximately $92,000 or 1% during 1995 compared to 1994 and there was a $172,000 decrease during 1994 or 2% compared to 1993. Management continues to focus on cost efficiency and the reduction of these expenses. The $92,000 general and administrative expense reduction compared to 1994 can be attributed to the cost recovery of $273,000 for support provided Equus and a $164,000 reversal of compensation expense for the net decrease in value of the accrued Unit Appreciation Rights, offset in part by a $300,000 increase in salaries and benefits and increased consulting fees. The $172,000 general and administrative expense reduction in 1994 compared to 1993 resulted from the following; reductions in bad debt expense of $447,000 mostly due to a $562,000 management fee write-off in 1993 versus only $114,000 in 1994, reversal of accrued audit fees provision of $103,000, Board of Directors $28,000 due to shortfall of outside director, cost efficiency savings in legal fee $380,000, delivery $12,000 and repairs $12,000. Offsetting these reductions were salaries and benefits increase $591,000 which primarily consisted of $264,000 in compensation expense recognized in connection with the issuance of Unit Appreciation Rights to the Company's employees, $100,000 due to increased staff levels and $92,000 of relocation expense. Depreciation and amortization decreased by approximately $127,000 during 1995 compared to 1994 and only by $1,000 during 1994 compared to 1993. During 1993, certain fixed and intangible assets became fully depreciated or amortized. This trend continued throughout 1995 while minimal new depreciable assets have been acquired. Interest expense increased $307,000 or 14% during 1995 versus 1994 while interest in 1994 declined by $68,000 or 3% compared to 1993. The increase in 1995 is due to higher interest rates and costs associated with obtaining new debt and refinancing existing debt. Whereas, in 1994 there was a continued paydown of the Company's restructure debt resulting in the decline of interest expense in 1994 versus 1993. As a result of the environmental legal proceedings discussed in Item 3, the Company established a $498,000 provision relating to this litigation in 1994. In 1995, the Company increased this provision by $4,107,000. Provision for Income Taxes and Cumulative Effect of Accounting Change. The provision for income taxes in 1995 decreased to $1,452,000 compared to 31 $3,511,000 during 1994 which increased from $665,000 during 1993. This decrease in 1995 and increase in 1994 are attributable to taxable income resulting from distributions received from partnerships in Puerto Rico that refinanced their apartment projects and from the sale of a shopping center site in Puerto Rico during 1994. The implementation of SFAS No. 109 by the Company during 1993 generated a $1.5 million Puerto Rico income tax benefit which has been reflected in the Company's 1993 financial statements as the cumulative effect of an accounting change. LIQUIDITY AND CAPITAL RESOURCES In March 1990, the Company received a notice (the "Notice") from the U.S. Army Corps of Engineers (the "Corps") asserting that unauthorized fill materials had been placed in portions of an approximately five-acre parcel in Charles County, Maryland (the "Site") owned by the Company and claimed by the Corps to constitute wetlands subject to regulation pursuant to the Clean Water Act. Following receipt of the Notice, the Company ceased development of the Site and remediated a portion of the Site in accordance with instructions issued by the Corps. The Company also commenced discussions with the Corps regarding mitigation plans that would preserve some commercial value for the Site and filed suit against the Corps claiming that a prohibition of development on the entire Site would constitute a governmental taking for which the Company would be entitled to compensation. In November 1993, the Company believed that it had an agreement in principle with the Corps that would settle the Company's claim and permit commercial development of a portion of the Site. However, in early 1994, the Company became aware that this matter had been referred to the U.S. Attorney for the District of Maryland. After conducting a lengthy investigation of the Company's wetlands practices in St. Charles, in October 1995 a grand jury convened by the U.S. Attorney charged that certain of the Company's practices with respect to four parcels, including the Site, constituted criminal violations of Section 404 of the Clean Water Act. The indictment charged each of IGC, its affiliate, St. Charles Associates, L.P. ("SCA"), and the Company's Chairman, James J. Wilson. During the U.S. Attorney's investigation, the Corps issued additional violation notices relating to filling portions of other parcels claimed by the Corps to be protected wetlands. In October 1995 the government filed a civil action in the U.S. District Court for the District of Maryland charging the Company and Mr. Wilson with violations of the Clean Water Act. Of the approximately 4,400 acres developed by the Company in St. Charles, approximately 70 acres are the subject of the civil and criminal charges. On February 29, 1996, each of IGC, SCA and Mr. Wilson were convicted on four counts of felony violations of Section 404 of the Clean Water Act. Sentencing is expected to occur in June 1996. On March 12, 1996, IGC and SCA received service of process with respect to the civil action. Maximum statutory penalties possible against each of IGC and SCA under the criminal action are $50,000 per day for each of four felony violations or, alternatively, twice the pecuniary gain realized by the Company from any illegal action. The maximum statutory penalty possible under the civil action is $25,000 per day for each of nine separate violations. Because the investigation with regard to the sentencing is ongoing, the Company cannot determine from what point in time these fines could be assessed. In the civil action, the U.S. Attorney also seeks to enjoin the Company from engaging in future illegal wetlands practices. During 1994 and 1995, the Company recognized approximately $4.6 million in legal and consulting expenses relating to these matters. Such expenses include 32 a reserve available to cover future anticipated costs of the criminal and civil actions, including costs of appealing the criminal convictions. The amount of any fine in the current case cannot be estimated with certainty and as such the total costs incurred may exceed the amount reserved. Management believes the Company and Mr. Wilson have many strong arguments to present on appeal of the criminal convictions. Accordingly, the Company and Mr. Wilson will appeal the criminal convictions and will continue to defend vigorously against charges in the civil action. The Company's loan agreements contain certain restrictive covenants, cross default provisions and material adverse change in financial condition clauses. As a result of the Company's conviction on four felony counts of the Clean Water Act, Signet Bank issued a notice of default by the Company of certain loan agreement covenants pertaining to $3.3 million of debt. Negotiations of the terms and conditions of a forbearance agreement are in process. In addition, a $2.2 million payment was due NationsBank on March 31, 1996. Negotiations are in process to modify certain terms and conditions of the loans. Management expects to finalize these amendments and make the principal curtailment in April 1996. As a result of this notice of default, past due payment, and unless and until the criminal convictions are reversed on appeal, $47.3 million of the Company's bank debt could be called into default. The uncertainty with respect to the amount of penalties has hindered the Company's ability to secure financing and bonds necessary for the development of Fairway Village, the third of five villages in the Planned Unit Development of St. Charles, Maryland. The Company's current inventory of finished lots in St. Charles is anticipated to be sold during 1996, therefore, the development of additional lots is necessary to provide inventory for sales in 1997 and beyond. As a result of the uncertainty regarding the magnitude of fines, events of default, multiple loan defaults and uncertainty regarding the ability to obtain future financing, which may cause the Company to have negative cash flow in 1996, there is substantial doubt about the Company's ability to continue as a going concern. The Company has historically met its liquidity requirements principally from cash flow generated by land and home sales, property management fees, distributions from HDA and residential rental partnerships and from bank financing providing funds for development and working capital. As discussed in Note 4, the Company no longer receives distributions from HDA, as a result of the Company's distribution of Equus Units representing a 99% limited partnership interest in Equus to IGC Unitholders in February 1995. In addition, under the terms of IGC's loans, most of the cash generated by U.S. home and lot sales and distributions from partnerships, including distributions from partnership refinancings, will be used to further reduce bank loans and meet debt service requirements. As mentioned above, project financings have been delayed by the inability to determine the penalties related to the Company's felony convictions. Given these factors, the Company's ability to generate cash for overhead, development and other uses is limited. During the first quarter of 1996, four apartment projects in Puerto Rico were sold under the 1990 Low Income Housing Preservation and Resident Homeownership Act ("LIHPRHA"). The Company will retain the management contracts on the four apartments. This sale, after taxes, generated approximately $11.5 of cash. Approximately $10.2 million of cash proceeds is 33 pledged to curtail bank debt and the remainder will be used to pay legal fees related to the wetlands convictions and support operations. As a result of the debt curtailments, the FDIC loan will be paid off and NationsBank will have a first lien on commercial properties in St. Charles which will have the effect of improving the Company's cash flow as the release prices under the NationsBank agreement are less than that of the FDIC. During 1995, the Company negotiated loan extensions with NationsBank and Signet Bank. NationsBank has agreed to extend the maturity of its loans until May 1998. Under the agreement, the extension of the maturity beyond November 30, 1995 was contingent upon a mandatory principal curtailment of $2.2 million which will be made with the proceeds of the LIHPRHA sale. Signet Bank agreed to extend the maturity of its loans until September 1996. The balance of the Signet loans as of December 31, 1995 is $3.3 million. The Company anticipates it will pay off these loans prior to their maturity with the proceeds from the sale of commercial and residential land which secure the loans. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 34 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of Interstate General Company L.P.: We have audited the accompanying consolidated balance sheets of Interstate General Company L.P. (a Delaware limited partnership) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of (loss) income, changes in partners' capital and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an 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 Interstate General Company L.P. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, because of uncertainties, including substantial monetary fines, facing the Company from its conviction of violations of The Clean Water Act and the resultant defaults on substantially all of its recourse bank debt, there is substantial doubt about its ability to continue as a going concern. Management's plan in regard to these matters is also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 1 to the financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule included on pages 72 through 85 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 financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Washington, D.C. March 29, 1996 35 INTERSTATE GENERAL COMPANY L.P. CONSOLIDATED STATEMENTS OF (LOSS) INCOME (In thousands, except per Unit amounts) YEARS ENDED DECEMBER 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ----------- REVENUES Community development-land sales $ 14,824 $ 22,296 $ 13,809 Homebuilding-home sales 10,826 20,265 21,884 Revenues from investment properties Investment in gaming properties (80) 7,288 2,358 Equity in earnings from partnerships and development fees 2,942 4,960 3,901 Apartment rental income 4,642 4,538 2,113 Management and other fees, substantially all from related entities 3,894 3,507 4,493 Interest and other income 652 668 773 ----------- ----------- ----------- Total revenues 37,700 63,522 49,331 ----------- ----------- ----------- EXPENSES Cost of land sales 7,611 14,764 9,228 Cost of home sales 9,875 18,508 18,880 Selling and marketing 1,564 1,556 1,285 General and administrative 8,326 8,418 8,590 Rental apartment expense 4,465 4,526 2,176 Depreciation and amortization 371 498 499 Interest expense 2,432 2,125 2,193 Wetlands litigation expenses 4,107 498 -- Write-off of deferred project costs -- 1,761 -- ----------- ----------- ----------- Total expenses 38,751 52,654 42,851 ----------- ----------- ----------- (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (1,051) 10,868 6,480 PROVISION FOR INCOME TAXES 1,452 3,511 665 ----------- ----------- ----------- (LOSS) INCOME BEFORE MINORITY INTEREST (2,503) 7,357 5,815 Minority interest (464) (716) (122) ----------- ----------- ----------- NET (LOSS) INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (2,967) 6,641 5,693 CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- -- 1,500 ----------- ----------- ----------- NET (LOSS) INCOME $ (2,967) $ 6,641 $ 7,193 =========== =========== =========== The accompanying notes are an integral part of these consolidated statements. 36 INTERSTATE GENERAL COMPANY L.P. CONSOLIDATED STATEMENTS OF (LOSS) INCOME (continued) (In thousands, except per Unit amounts) YEARS ENDED DECEMBER 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ----------- PER UNIT AMOUNTS-- NET (LOSS) INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ (.29) $ .66 $ .56 CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- -- .15 ----------- ----------- ------ - ----------- NET (LOSS) INCOME PER UNIT $ (.29) $ .66 $ .71 =========== =========== =========== NET (LOSS) INCOME General Partners $ (30) $ 66 $ 71 Limited Partners (2,937) 6,575 7,122 ----------- ----------- ----------- $ (2,967) $ 6,641 $ 7,193 =========== =========== =========== WEIGHTED AVERAGE UNITS OUTSTANDING 10,255 10,126 10,080 =========== =========== =========== The accompanying notes are an integral part of these consolidated statements. 37 INTERSTATE GENERAL COMPANY L.P. CONSOLIDATED BALANCE SHEETS (In thousands) A S S E T S DECEMBER 31, --------------------------- 1995 1994 ------------ ------------ CASH AND SHORT-TERM INVESTMENTS Unrestricted $ 3,476 $ 1,120 Restricted 2,125 5,713 -------- -------- 5,601 6,833 -------- -------- ASSETS RELATED TO COMMUNITY DEVELOPMENT Land and development costs Puerto Rico 33,088 26,103 St. Charles, Maryland 27,826 26,426 Other United States locations 15,522 16,014 Notes receivable on lot sales and other 3,122 1,518 -------- -------- 79,558 70,061 -------- -------- ASSETS RELATED TO HOMEBUILDING PROJECTS Homebuilding construction and land 3,254 4,384 Investment in joint venture 250 -- Receivables and other 315 614 -------- -------- 3,819 4,998 -------- -------- ASSETS RELATED TO INVESTMENT PROPERTIES Investment properties, net of accumulated depreciation of $5,124 and $4,746, as of December 31, 1995 and 1994, respectively 23,348 24,499 Investment in residential rental partnerships 10,922 9,976 Other receivables, net of reserves of $384 and $1,071 as of December 31, 1995 and 1994, respectively 2,452 1,133 -------- -------- 36,722 35,608 -------- -------- OTHER ASSETS Costs in excess of net assets acquired, less accumulated amortization of $888 and $735 as of December 31, 1995 and 1994, respectively 2,147 2,299 Deferred costs regarding waste technology and other 2,975 2,126 Property, plant and equipment, less accumulated depreciation of $2,216 and $1,948 as of December 31, 1995 and 1994, respectively 1,271 1,588 -------- -------- 6,393 6,013 -------- -------- Total assets $132,093 $123,513 ======== ======== The accompanying notes are an integral part of these consolidated balance sheets. 38 INTERSTATE GENERAL COMPANY L.P. CONSOLIDATED BALANCE SHEETS (In thousands) LIABILITIES AND PARTNERS' CAPITAL DECEMBER 31, --------------------------- 1995 1994 ------------ ------------ ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities $ 5,719 $ 3,521 Mortgages and notes payable 301 370 Accrued income tax liability - current 464 2,078 Accrued income tax liability - deferred 4,704 2,475 -------- -------- 11,188 8,444 -------- -------- LIABILITIES RELATED TO COMMUNITY DEVELOPMENT Recourse debt 47,841 36,661 Non-recourse debt 2,034 4,268 Accounts payable, accrued liabilities and deferred income 3,752 2,728 -------- -------- 53,627 43,657 -------- -------- LIABILITIES RELATED TO HOMEBUILDING Recourse debt 981 2,398 Accounts payable and accrued liabilities 2,746 2,506 -------- -------- 3,727 4,904 -------- -------- LIABILITIES RELATED TO INVESTMENT PROPERTIES Recourse debt 1,322 1,559 Non-recourse debt 22,650 22,771 Accounts payable and accrued liabilities 1,670 1,473 -------- -------- 25,642 25,803 -------- -------- Total liabilities 94,184 82,808 -------- -------- PARTNERS' CAPITAL General partners' capital 4,292 4,322 Limited partners' capital-10,257 and 10,215 Units issued and outstanding as of December 31, 1995 and 1994, respectively 33,617 36,383 -------- -------- Total partners' capital 37,909 40,705 -------- -------- Total liabilities and partners' capital $132,093 $123,513 ======== ======== The accompanying notes are an integral part of these consolidated balance sheets. 39 INTERSTATE GENERAL COMPANY L.P. CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993 (In thousands) General Limited Partners' Partners' Capital Capital Total -------- ----------- ----------- BALANCES, December 31, 1992 $ 84 $24,958 $25,042 Net income for the year 71 7,122 7,193 Employee Unit options exercised -- 10 10 ------- ------- ------- BALANCES, December 31, 1993 $ 155 $32,090 $32,245 Net income for the year 66 6,575 6,641 Employee Unit options exercised -- 531 531 Cash distributions to partners (10) (1,010) (1,020) Capital contribution 4,129 -- 4,129 Assets transferred at general partner's basis (18) (1,803) (1,821) ------- ------- ------- BALANCES, December 31, 1994 $ 4,322 $36,383 $40,705 Net loss for the year (30) (2,937) (2,967) Employee and director Unit options exercised -- 171 171 ------- ------- ------- BALANCES, December 31, 1995 $ 4,292 $33,617 $37,909 ======= ======= ======= The accompanying notes are an integral part of these consolidated statements. 40 INTERSTATE GENERAL COMPANY L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) YEARS ENDED DECEMBER 31, -------------------------------------- 1995 1994 1993 ------------ ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $ (2,967) $ 6,641 $ 7,193 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization Residential rental properties 680 640 432 Other 872 703 706 Provision for deferred income taxes 729 1,486 275 Equity in earnings of residential rental partnerships (1,690) (4,250) (1,668) Equity in losses of gaming partnerships 80 -- -- Increase in sponsor and developer fees from partnerships (390) (323) (902) Distribution of note receivable from HDA -- (6,526) -- Cumulative effect of accounting change -- -- (1,500) Increase (decrease) in accounts payable, accrued liabilities and deferred income 3,348 (201) (825) Decrease (increase) in Restricted cash 3,588 (3,126) (2,121) Community development assets (9,497) 8,711 3,775 Homebuilding assets 1,429 2,568 1,044 ------- -------- ------- Net cash (used in) provided by operating activities (3,818) 6,323 6,409 ------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Decrease in assets related to investment properties 452 8,768 7,219 (Acquisitions) dispositions of other assets (1,252) (79) 740 Purchase of residential rental partnership interest (170) (170) (370) Investment in homebuilding joint venture (250) -- -- ------- -------- ------- Net cash (used in) provided by investing activities (1,220) 8,519 7,589 ------- -------- ------- The accompanying notes are an integral part of these consolidated statements. 41 INTERSTATE GENERAL COMPANY L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (In thousands) YEARS ENDED DECEMBER 31, -------------------------------------- 1995 1994 1993 ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Cash proceeds from debt financing 34,643 7,750 14,003 Payment of debt (27,420) (22,992) (37,119) Loans from HDA -- -- 8,853 Cash distributions to partners -- (1,020) -- Employee and director Unit options exercised 171 531 10 ------- -------- ------- Net cash provided by (used in) financing activities 7,394 (15,731) (14,253) ------- -------- ------- NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 2,356 (889) (255) CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR 1,120 2,009 2,264 ------- -------- ------- CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 3,476 $ 1,120 $ 2,009 ======= ======== ======= SUPPLEMENTAL DISCLOSURES Interest paid (net of amount capitalized) $ 2,722 $ 3,787 $ 4,127 Income taxes paid $ 2,250 $ 337 $ -- Non-cash transactions Land received in exchange for land sold $ 134 $ -- $ -- Distribution of notes receivable from partners (1) $ -- $ 10,654 $ -- Acquisition of interest in apartment partnerships, assets $ -- $ -- $22,641 Acquisition of interest in apartment partnerships, liabilities $ -- $ -- $22,532 Deed in lieu of payment of purchase money mortgage $ -- $ 670 $ -- Partnership interests received in satisfaction of accounts and notes receivable from general partner (1) $ -- $ 626 $ -- Accounts and notes receivable, net of reserves, satisfied via transfer of partnership interests from general partner (1) $ -- $ 2,446 $ -- Capital contribution by general partner (1) $ -- $ 4,129 $ -- (1) See Notes 4 and 9 to these consolidated financial statements. The accompanying notes are an integral part of these consolidated statements. 42 INTERSTATE GENERAL COMPANY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (1) BASIS OF PRESENTATION AND PRINCIPLES OF ACCOUNTING On September 26, 1986, Interstate General Company L.P. ("IGC" or "the Company"), a Delaware limited partnership, was formed, and on December 31, 1986, acquired substantially all of the community development, homebuilding, investment properties and management services businesses of Interstate General Business Corporation, Interstate St. Charles, Inc. and a trust for the benefit of the stockholders of Interstate General Business Corporation (the "Predecessors"). The assets relating to these businesses were acquired in exchange for (1) 7,900,000 Units representing assignment of beneficial ownership of limited partnership interest ("Units"), (2) a 1% general partnership interest in IGC and (3) the assumption by IGC of certain indebtedness relating to these businesses. The 1% general partner interest is shared by the managing general partner, Interstate General Management Corporation, and Interstate Business Corporation ("IGMC" and "IBC," respectively, referred to collectively as the "General Partner") as successors to Interstate General Business Corporation and Interstate St. Charles, Inc. Net (loss) income per Unit for the years ended December 31, 1995, 1994 and 1993, is calculated using weighted average Units outstanding. Outstanding options and warrants to purchase Units and Unit Appreciation Rights do not have a material dilutive effect on the calculation of earnings per Unit (see Note 11). The accompanying consolidated financial statements include the accounts of IGC and all of its subsidiaries, after eliminating intercompany transactions. Reference to IGC or the Company refers to the consolidated group of entities or to any one of the individual entities involved. IGC's investments in partnerships in which IGC's interest is 50% or less are accounted for by the equity method of accounting. For purposes of reporting cash flows, cash and short-term investments include cash on hand, unrestricted deposits with financial institutions and short-term investments with original maturities of three months or less. Sales and Profit Recognition Sales revenues and profits from community development and homebuilding are recognized at closing, when sufficient down payments have been obtained, possession and other attributes of ownership have been transferred to the buyer and IGC has no significant continuing involvement. Revenues from Investment Properties Revenues from investment properties include revenues from investments in gaming properties, equity in earnings from partnerships and development fees and apartment rental revenues. Revenues from investment in gaming properties includes equity in earnings from Equus Gaming Company L.P. ("Equus") commencing February 8, 1995 (See Note 4). Equus' earnings include the operations of Housing Development Associates S.E. ("HDA"). Prior to that date, revenues from investment in gaming properties included distributions received by IGC from HDA and equity in earnings (losses) of HDA, including HDA's equity in earnings (losses) of El Comandante Operating Company ("ECOC") through August 1, 1994 43 when HDA's ownership interest in ECOC was terminated. Equity in earnings from partnerships and development fees is comprised of IGC's share of the earnings (losses) of the residential rental apartment project partnerships accounted for under the equity method of accounting, income from sponsor and developer fees, recognition of income resulting from distributions received in excess of the Company's book basis of the investment in the related partnership, and income related to a previous investment in a cable television partnership. Apartment rental revenues include the revenues of three consolidated partnerships owning apartment complexes. Management Fees IGC performs property management services including leasing, maintenance and accounting for properties owned by affiliated entities. Fees are recorded in the period in which the services are rendered and/or paid. Community Development and Homebuilding Inventories The costs of acquiring and developing land and homebuilding construction are allocated and charged to cost of sales as the related inventories are sold. IGC carries land, development and homebuilding costs (including capitalized interest) at the lower of cost or net realizable value. Net realizable value is defined as the estimated amount IGC expects to realize in the ordinary course of business less costs of completion. Capitalization of Interest IGC's interest costs related to homebuilding and land assets were allocated to these assets based on book value. The portion of interest allocated to land, finished building lots and homebuilding construction during the development and construction period is capitalized. Remaining interest costs are expensed. A summary of interest for 1995, 1994 and 1993 is as follows: Years Ended December 31, --------------------------- 1995 1994 1993 ------ ------- ------- (In thousands) Expensed $4,620 $4,369 $3,158 Capitalized 3,213 2,770 2,655 ------ ------ ------- Total interest incurred $7,833 $7,139 $5,813 ====== ======= ======= Investment in Residential Rental Partnerships IGC's investment in residential rental partnerships consists of long-term receivables, nominal capital contributions, working capital loans and IGC's share of unconsolidated partnership income and losses. The working capital loans are collectible from the first 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 44 represents deferred sponsor and developer fees, is netted in the consolidated financial statements against the long-term receivables. For partnerships syndicated prior to December 31, 1985, IGC amortizes the discount over the estimated holding period of the properties and begins to recognize the discount as income at the point when the partnerships have cash flow that reasonably assures realization of 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 IGC and to make cash distributions to IGC and the limited partners when the partnerships' projects are refinanced or sold. Property, Plant and Equipment Property, plant and equipment is carried at cost, less accumulated depreciation. Depreciation is provided principally using the straight-line method for financial reporting purposes and using accelerated methods for tax purposes, generally based on a five year service life. Selling and Marketing Expenses Selling and marketing expenses consist primarily of advertising costs which include costs of printed materials, signs, displays, general marketing costs and costs associated with model homes. Advertising costs are expensed as incurred except for capitalized model home costs which are depreciated over periods ranging from ten to forty years. Model homes are carried at the lower of cost less depreciation, or net realizable value. Income Taxes IGC is not subject to U.S. income taxes under current law. Its partners are taxed directly on their share of IGC's income without regard to distributions, and the partners may generally deduct their share of losses. The corporate subsidiaries of IGC are subject to tax at the applicable corporate rates. Furthermore, IGC is subject to Puerto Rico income tax on its Puerto Rico source income and District of Columbia income tax on its District of Columbia source income. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounting Changes On January 1, 1993, the Company implemented Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No. 109 changes the method of accounting for income taxes under generally accepted accounting principles and requires recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between financial reporting and tax reporting bases of assets and liabilities, and for 45 net operating loss and tax credit carryforwards. As a result of adopting this statement, the Company recognized a cumulative benefit due to the change in accounting principle of $1,500,000 or $.15 per unit as of January 1, 1993. This benefit is included under the caption "Cumulative Effect of Accounting Change" in the Consolidated Statement of Income for the year ended December 31, 1993. In 1995, the Company implemented SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." SFAS No. 107 requires disclosure of the fair value of certain financial instruments, including cash, evidence of ownership interests in other entities and contracts that impose either an obligation to deliver a financial instrument or cash such as loans or notes payable, or a right to receive a financial instrument or cash such as loans or notes receivable. The Company's ownership interests in other entities are accounted for under the equity method of accounting or are consolidated. Investments accounted for under both of these accounting methods are specifically excluded from SFAS No. 107 fair value disclosure requirements. IGC has the following financial instruments: short-term investments, accounts and notes receivables, long-term debt and non-recourse debt. The carrying value of short-term investments approximates the fair value because of the liquid nature of these assets. The notes receivable related to community development approximate fair value. The other receivables related to investment properties are considered part of IGC's investment in the partnerships and are excluded from this requirement. The non-recourse debt in the Investment Properties relates to HUD insured mortgages for three of the partnerships. One of the mortgages was refinanced in December 1994; therefore, management believes the carrying value approximates fair value. The other two mortgages are expected to be refinanced in 1996. However, due to the nature of the programs associated with these partnerships, and current market conditions, the fair market value of the refinanced debt approximates the current book value of the existing debt. The carrying value of the long-term debt that relates to homebuilding, community development and investment properties approximates the fair value, since the notes bear an interest rate based on the current prime rate plus an additional fixed percentage rate. See Note 7 for additional information regarding the long-term debt. In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 establishes standards for identifying impairment for long-lived assets and certain identifiable intangibles to be held and used by an entity. Primarily, if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss has occurred. An adjustment to reflect this impairment would be recorded to the extent that an asset's market value was less than its carrying value. SFAS No. 121 is effective for financial statements for fiscal years beginning after December 15, 1995. The Company plans to adopt SFAS No. 121 by its required effective date and does not expect adoption to have a material affect on its financial statements. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based Compensation". This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. Examples are stock purchase plans, stock options, restricted stock and stock appreciation rights. The accounting and disclosure requirements of this statement are effective for 46 transactions entered into after December 15, 1995. The Company will adopt the disclosure requirements of SFAS No. 123 in fiscal year 1996. Reclassifications Certain amounts presented for 1994 in the Consolidated Balance Sheet and for 1994 and 1993 in the Consolidated Statements of Income and Cash Flows have been reclassified to conform with the 1995 presentation. (2) GOING CONCERN AND RELATED MATTERS In March 1990, the Company received a notice (the "Notice") from the U.S. Army Corps of Engineers (the "Corps") asserting that unauthorized fill materials had been placed in portions of an approximately five-acre parcel in Charles County, Maryland (the "Site") owned by the Company and claimed by the Corps to constitute wetlands subject to regulation pursuant to the Clean Water Act. Following receipt of the Notice, the Company ceased development of the Site and remediated a portion of the Site in accordance with instructions issued by the Corps. The Company also commenced discussions with the Corps regarding mitigation plans that would preserve some commercial value for the Site and filed suit against the Corps claiming that a prohibition of development on the entire Site would constitute a governmental taking for which the Company would be entitled to compensation. In November 1993, the Company believed that it had an agreement in principle with the Corps that would settle the Company's claim and permit commercial development of a portion of the Site. However, in early 1994, the Company became aware that this matter had been referred to the U.S. Attorney for the District of Maryland. After conducting a lengthy investigation of the Company's wetlands practices in St. Charles, in October 1995 a grand jury convened by the U.S. Attorney charged that certain of the Company's practices with respect to four parcels, including the Site, constituted criminal violations of Section 404 of the Clean Water Act. The indictment charged each of IGC, its affiliate, St. Charles Associates, L.P. ("SCA"), and the Company's Chairman, James J. Wilson. During the U.S. Attorney's investigation, the Corps issued additional violation notices relating to filling portions of other parcels claimed by the Corps to be protected wetlands. In October 1995 the government filed a civil action in the U.S. District Court for the District of Maryland charging the Company and Mr. Wilson with violations of the Clean Water Act. Of the approximately 4,400 acres developed by the Company in St. Charles, approximately 70 acres are the subject of the civil and criminal charges. On February 29, 1996, each of IGC, SCA and Mr. Wilson were convicted on four counts of felony violations of Section 404 of the Clean Water Act. Sentencing is expected to occur in June 1996. On March 12, 1996, IGC and SCA received service of process with respect to the civil action. Maximum statutory penalties possible against each of IGC and SCA under the criminal action are $50,000 per day for each of four felony violations or, alternatively, twice the pecuniary gain realized by the Company from any illegal action. The maximum statutory penalty possible under the civil action is $25,000 per day for each of nine separate violations. Because the investigation with regard to the sentencing is ongoing, the Company cannot determine from what point in time these fines could be assessed. In the civil action, the U.S. Attorney also seeks to enjoin the Company from engaging in future illegal wetlands practices. During 1994 and 1995, the Company recognized approximately $4.6 million in legal and consulting expenses relating to these matters. Such expenses include 47 a reserve available to cover future anticipated costs of the criminal and civil actions, including costs of appealing the criminal convictions. The amount of any fine in the current case cannot be estimated with certainty and as such the total costs incurred may exceed the amount reserved. Management believes the Company and Mr. Wilson have many strong arguments to present on appeal of the criminal convictions. Accordingly, the Company and Mr. Wilson will appeal the criminal convictions and will continue to defend vigorously against charges in the civil action. The Company's loan agreements contain certain restrictive covenants, cross default provisions and material adverse change in financial condition clauses. As a result of the Company's conviction on four felony counts of the Clean Water Act, Signet Bank issued a notice of default by the Company of certain loan agreement covenants pertaining to $3.3 million of debt. Negotiations of the terms and conditions of a forbearance agreement are in process. In addition, a $2.2 million payment was due NationsBank on March 31, 1996. Negotiations are in process to modify certain terms and conditions of the loans. Management expects to finalize these amendments and make the principal curtailment in April 1996. As a result of this notice of default, past due payment, and unless and until the criminal convictions are reversed on appeal, $47.3 million of the Company's bank debt could be called into default. The uncertainty with respect to the amount of penalties has hindered the Company's ability to secure financing and bonds necessary for the development of Fairway Village, the third of five villages in the Planned Unit Development of St. Charles, Maryland. The Company's current inventory of finished lots in St. Charles is anticipated to be sold during 1996, therefore, the development of additional lots is necessary to provide inventory for sales in 1997 and beyond. As a result of the uncertainty regarding the magnitude of fines, events of default, multiple loan defaults and uncertainty regarding the ability to obtain future financing, which may cause the Company to have negative cash flow in 1996, there is substantial doubt about the Company's ability to continue as a going concern. The Company has historically met its liquidity requirements principally from cash flow generated by land and home sales, property management fees, distributions from HDA and residential rental partnerships and from bank financing providing funds for development and working capital. As discussed in Note 4, the Company no longer receives distributions from HDA, as a result of the Company's distribution of Equus Units representing a 99% limited partnership interest in Equus to IGC Unitholders in February 1995. In addition, under the terms of IGC's loans, most of the cash generated by U.S. home and lot sales and distributions from partnerships, including distributions from partnership refinancings, will be used to further reduce bank loans and meet debt service requirements. As mentioned above, project financings have been delayed by the inability to determine the penalties related to the Company's felony convictions. Given these factors, the Company's ability to generate cash for overhead, development and other uses is limited. During the first quarter of 1996, four apartment projects in Puerto Rico were sold under the 1990 Low Income Housing Preservation and Resident Homeownership Act ("LIHPRHA"). The Company will retain the management contracts on the four apartments. This sale, after taxes, generated approximately $11.5 of cash. Approximately $10.2 million of cash proceeds is 48 pledged to curtail bank debt and the remainder will be used to pay legal fees related to the wetlands convictions and support operations. As a result of the debt curtailments, the FDIC loan will be paid off and NationsBank will have a first lien on commercial properties in St. Charles which will have the effect of improving the Company's cash flow as the release prices under the NationsBank agreement are less than that of the FDIC. During 1995, the Company negotiated loan extensions with NationsBank and Signet Bank. NationsBank has agreed to extend the maturity of its loans until May 1998. Under the agreement, the extension of the maturity beyond November 30, 1995 was contingent upon a mandatory principal curtailment of $2.2 million which will be made with the proceeds of the LIHPRHA sale. Signet Bank agreed to extend the maturity of its loans until September 1996. The balance of the Signet loans as of December 31, 1995 is $3.3 million. The Company anticipates it will pay off these loans prior to their maturity with the proceeds from the sale of commercial and residential land which secure the loans. (3) INVESTMENT IN RESIDENTIAL RENTAL PARTNERSHIPS As of December 31, 1995, IGC manages and is a general partner in 29 real estate partnerships which own 32 apartment projects in Puerto Rico, Maryland, Virginia and Washington, D.C. IGC is also a limited partner in many of these partnerships. The apartment projects are financed by non-recourse mortgages. Of the 6,559 rental units in the various partnerships, the Federal Housing Administration ("FHA") provides subsidies for low and moderate income tenants in 5,371 units. During 1991, IGC entered into an agreement with the limited partners of Lancaster Apartments L.P. ("Lancaster"), the owner of Lancaster Apartments, to purchase their 99% limited partnership interest over a five-year period, payable in five annual installments of $170,000 which commenced in 1991. In 1993, 1994 and 1995, the Company's limited partnership interest in Lancaster increased by 19.8% each year as a result of this agreement, increasing IGC's ownership interest to 100% at December 31, 1995. IGC's 100% ownership interest consists of a 1% general partnership interest and 98% limited partnership interest held directly by IGC, and a 1% limited partnership interest held by St. Charles Associates Limited Partnership ("SCA"). IGC holds a 99% general partnership interest in SCA, and IBC holds the 1% limited partnership interest. As a result of this agreement, the assets, liabilities and results of operations of Lancaster are consolidated by IGC as of December 31, 1993, 1994 and 1995 and for the years then ended. IGC, IBC and the Resolution Trust Corporation ("RTC") as Receiver for Perpetual Savings Bank F.S.B. were general partners in New Forest General Partnership ("New Forest") and Fox Chase General Partnership ("Fox Chase"). New Forest and Fox Chase each own an apartment project in St. Charles, Maryland. During August 1993, New Forest and Fox Chase bought the RTC's general partnership interest for $200,000. The buy-out was funded by surplus cash in the partnerships and an additional capital contribution from IGC. As a result of this transaction, IGC became a 90% general partner in both New Forest and Fox Chase, and accordingly, the Company's December 31, 1993 consolidated financial statements reflect the operations of Fox Chase and New Forest from August 20, 1993 and assets and liabilities as of December 31, 1993. The assets, liabilities and results of operations of Fox Chase and New Forest are consolidated by IGC as of December 31, 1994 and 1995 and for the years then ended. Prior to these purchases, the Company accounted for these two partnerships using the equity method. 49 On December 30, 1994, IGC executed a purchase and sale agreement with IBC which provided for the transfer of 9.9% general partnership interests in New Forest and Fox Chase and 49.9% limited partnership interests in four other partnerships to IGC in satisfaction of $3,722,000 of accounts and notes receivable due from IBC. The partnerships in which IGC received a 49.9% limited partnership interest included Wakefield Terrace Associates L.P. ("Terrace"), Wakefield Third Age L.P. ("Third Age"), Palmer Apartments L.P. ("Palmer") and Headen House Associates L.P. ("Headen"). The amount of IBC receivables satisfied via this transaction was based on the fair market value of the apartment projects as determined by a third party independent appraisals. As a result of this transaction, IGC became a 99.9% general partner in Fox Chase and New Forest and a 49.9% limited partner in Terrace, Third Age, Palmer and Headen. Fox Chase and New Forest continue to be consolidated by IGC. IGC's interests in Terrace, Third Age, Palmer and Headen are accounted for using the equity method since the rights of the unaffiliated limited partners preclude IGC from controlling these entities. Because IBC and IGC are under common control, the partnership interests received by IGC were recorded at IBC's basis in the partnerships prior to the transfer which was $626,000. The $1.8 million charge to partner's capital represents the difference between IBC's basis in the partnership interests transferred and IGC's book basis for the receivables from IBC which were satisfied via this transaction of $2,446,000, net of reserves. IGC, as 1% general partner, and SCA, as 99% limited partner, formed Lakeside Limited Partnership ("Lakeside") on December 22, 1994 for the purpose of acquiring 1.23 acres of land and developing and operating a 54 unit retirement rental project. Lakeside purchased the land for $440,000 from IBC by paying $88,000 in cash and issuing a note for the remaining $352,000. During 1995, IBC assigned the note receivable to IGC in satisfaction of past due receivables from Coachman's Limited Partnership. The Company collected the $352,000 receivable due from Lakeside during 1995. Lakeside has been awarded low income housing tax credits to assist with costs of developing the property. On December 7, 1995, investors purchased the tax credits in exchange for SCA's 99% interest. At December 31, 1994, the Company's consolidated financial statements include the assets and liabilities of Lakeside. Pursuant to the 1995 purchase of SCA's 99% interest by unaffiliated investors, Lakeside's assets and liabilities are not included in the Company's consolidated financial statements at December 31, 1995, but are accounted for using the equity method. In March 1996, the Company completed the sale of four of the Puerto Rico apartment properties. The properties, totaling 918 rental units, were sold to four affiliates of Producir, Inc., a non-profit organization, with financing provided by HUD through capital grants authorized by the LIHPRHA. The apartment properties are Las Americas I, Las Americas II, Las Lomas and Monacillos. The Company will continue to manage the properties. As a result of this sale, the Company will recognize approximately $14,500,000 of income. The combined assets and liabilities of the properties are $13,400,000 and $15,700,000, respectively, at December 31, 1995. The book value of the Company's investments in these properties was $454,000 at December 31, 1995. 50 The following table summarizes IGC's investment in residential rental partnerships accounted for using the equity method of accounting: DECEMBER 31, ---------------- 1995 1994 ------ ------ (In thousands) Long-term receivables, net of deferred income of $3,414 and $3,778 at December 31, 1995 and 1994, respectively $ 3,331 $ 3,368 Investment in partnerships 7,591 6,608 ------- ------- $10,922 $ 9,976 ======= ======= For the years ended December 31, 1995, 1994 and 1993, IGC recognized $1,610,000, $4,250,000 and $1,668,000, respectively, of equity in earnings from these investments. In January and March of 1994, the Company collected approximately $7.4 million of funds from partnerships in Puerto Rico which refinanced seven apartment projects. These receipts represented the collection of long-term receivables and distributions. In addition, the Company recognized the remaining unamortized sponsor and developer fees of $555,000 from the apartment projects that were refinanced. The combined condensed statements of income and the combined condensed statements of cash flows for the years ended December 31, 1995, 1994 and 1993, and the combined condensed balance sheets as of December 31, 1995 and 1994 are shown below for the partnerships owning residential rental properties: HOUSING PARTNERSHIPS' COMBINED CONDENSED STATEMENTS OF INCOME (Unaudited) YEARS ENDED DECEMBER 31, -------------------------------------- 1995 (1) 1994 (1) 1993 (1) ------------ ----------- ----------- (In thousands) Revenues $40,835 $41,066 $44,767 ------- ------- ------- Operating expenses Depreciation 6,540 6,276 6,011 Other 33,449 33,437 37,303 ------- ------- ------- 39,989 39,713 43,314 ------- ------- ------- Net income $ 846 $ 1,353 $ 1,453 ======= ======= ======= (1) The income and expenses of Fox Chase and New Forest after August 20, 1993 and the income and expenses of Lancaster are excluded from these statements. The income and expenses for these partnerships were $2,068,000 and $2,176,000, respectively, for the 1993 periods, $4,430,000 and $5,050,000, respectively, for the year ended December 31, 1994, and $4,642,000 and $5,025,000, respectively, for the year ended December 31, 1995. The operations of these partnerships are consolidated in the Company's consolidated statements of income for the period August 20, 1993 through December 31, 1993 and for the years ended December 31, 1995 and 1994. 51 HOUSING PARTNERSHIPS' COMBINED CONDENSED BALANCE SHEETS (Unaudited) A S S E T S DECEMBER 31, -------------------------- 1995 (1) 1994 (1) ---------- ---------- (In thousands) Rental apartments, at cost $239,911 $238,969 Accumulated depreciation (100,861) (95,126) -------- -------- 139,050 143,843 -------- -------- Restricted cash and marketable securities: Residual receipt accounts 6,783 6,286 Replacement reserves and escrows 9,258 10,209 -------- -------- Total restricted cash and marketable securities 16,041 16,495 Cash and certificates of deposit 5,766 4,261 -------- -------- Total cash and marketable securities 21,807 20,756 -------- -------- Other assets 4,583 4,826 -------- -------- Total assets $165,440 $169,425 ======== ======== LIABILITIES AND PARTNERS' CAPITAL DECEMBER 31, -------------------------- 1995 (1) 1994 (1) ---------- ---------- (In thousands) Non-recourse mortgage notes and accrued interest $169,161 $172,561 Loans and interest payable to the Company 8,667 8,640 Other liabilities 15,080 14,331 -------- -------- Total liabilities 192,908 195,532 -------- -------- Partners' capital Capital contributions, net of distributions (2,839) (514) Accumulated deficit (24,629) (25,593) -------- -------- Total partners' capital (27,468) (26,107) -------- -------- Total liabilities and partners' capital $165,440 $169,425 ======== ======== (1) The assets, liabilities and partners' capital of Lancaster, Fox Chase and New Forest at December 31, 1995 and 1994 are excluded as they are consolidated in the Company's December 31, 1995 and 1994 financial statements. The total assets and liabilities of these entities were $22,564,000 and $26,177,000, respectively, at December 31, 1995, and $23,153,000 and $26,180,000, respectively, at December 31, 1994. 52 HOUSING PARTNERSHIPS' COMBINED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) YEARS ENDED DECEMBER 31, -------------------------------------- 1995 (2) 1994 (2) 1993 (1) ------------ ----------- ----------- (In thousands) Revenues $40,835 $41,066 $44,767 ------- ------- ------- Cash expenditures Total expenses 39,989 39,713 43,314 Less - Depreciation (6,540) (6,276) (6,011) Other non-cash expenses (375) (470) (706) ------- ------- ------- 33,074 32,967 36,597 Mortgage principal and capital additions 4,121 3,696 2,232 ------- ------- ------- Total cash expenditures 37,195 36,663 38,829 ------- ------- ------- Cash flow before distributions $ 3,640 $ 4,403 $ 5,938 ======= ======= ======= (1) The cash flow activity for Lancaster during the period January 1, 1993 to December 31, 1993 and for Fox Chase and New Forest from August 20, 1993 to December 31, 1993 are excluded from these statements. These activities are reflected on IGC's Consolidated Statement of Cash Flows for the year ended December 31, 1993. (2) Excludes the cash flow activity for Lancaster, Fox Chase and New Forest for the years ended December 31, 1995 and 1994. This activity is reflected in IGC's Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1994. The FHA, Puerto Rico Housing Finance Corporation ("PRHFC"), State and District of Columbia housing agencies and the partnership agreements require that the accumulation of cash in the partnerships be sufficient to liquidate all current liabilities before distributions to partners are permitted. Most of the partnership agreements provide that IGC as general partner receive a zero to 5% interest in profits, losses and cash flow from operations until such time as the limited partners have received cash distributions equal to their capital contributions. Thereafter, IGC generally shares in 50% of cash distributions from operations. During 1995, IGC received $73,085 in unauthorized distributions from Huntington Associates L.P. pursuant to a calculation error. The 1996 distribution was reduced accordingly. (4) OPERATIONS DISTRIBUTED TO UNITHOLDERS On February 6, 1995, IGC distributed to its unitholders its 99% limited partnership interest in Equus (the "Equus Distribution"). IGC and its wholly owned subsidiary, Equus Management Company ("EMC"), retained the 1% general partner interest and will continue to manage Equus. Certain directors and 53 officers of EMC serve as officers and directors of IGMC. For a transitional period following completion of the Equus Distribution, IGC will provide certain administrative services and support to Equus pursuant to a Master Support and Services Agreement (the "Support Agreement"). Equus will reimburse IGC for costs incurred in providing these services. Originally formed in September 1993, Equus was restructured in 1994 as a limited partnership between IGC and EMC for the purpose of succeeding to substantially all of IGC's ownership interest in real estate assets employed in thoroughbred racing and related wagering businesses. Through a series of transactions during 1994, 1995 and 1996, Equus holds an 82% interest in HDA. HDA owns El Comandante Race Track ("El Comandante"), the only licensed thoroughbred racing facility in Puerto Rico, which it leases to El Comandante Operating Company, Inc. ("ECOC"), an unaffiliated Puerto Rico nonstock corporation. ECOC operates El Comandante at its expense and pays rent to HDA based primarily upon the greater of $7,500,000 or 25% of ECOC's share of wagering revenues. A director of IGMC and certain officers of IGC serve as a director and officers of ECOC. Equus retained its 100% ownership of the issued and outstanding stock of Virginia Jockey Club Inc., a Virginia corporation ("VJC"), which applied to the Virginia Racing Commission for licenses to own and operate a thoroughbred horse racing and wagering facility in Virginia (the "Virginia Licenses"). On October 12, 1994, the Virginia Racing Commission awarded the Virginia Licenses to an applicant other than VJC. VJC has appealed this decision. As a result of the Racing Commission's unfavorable decision, the Company wrote off $1.8 million of deferred project costs associated with VJC's application. As part of Equus' acquisition of interests in HDA, in 1994 HDA distributed to its partners, excluding HDAMC, approximately $13.3 million of notes receivable including interest from Land Development Associates S.E. ("LDA"), a partnership in which the Company holds an 80% ownership interest. IGC and IBC received $6.5 million and $4.1 million, respectively, of the notes distributed. IGC recognized the portion which it received as revenue from investments in gaming properties and IBC contributed its portion to Equus, who reflected it as a capital contribution. Equus subsequently transferred its portion of the LDA notes receivable to IGC. IGC also recognized in 1994 as earnings from investments in gaming properties an additional $763,000 of cash distributions received in excess of the Company's basis in HDA. Earnings from investments in gaming properties recognized in 1993 were generally comprised of IGC's share of HDA's earnings and cash distributions received in excess of the Company's basis in HDA. Because IGC is the 1% general partner of Equus, it accounts for its investment on the equity method of accounting as of December 31, 1995. At December 31, 1994 and 1993, IGC's investment in Equus, including Equus' consolidated investment in VJC, was consolidated in the Company's financial statements, since IGC owned a majority interest in Equus during those periods. The Company's investment in HDA was accounted for under the equity method of accounting during 1994 and 1993 since the Company did not hold the controlling interest in HDA during those periods. (5) INTERSTATE WASTE TECHNOLOGIES, INC. IGC, engaged in the pre-development of municipal waste facilities, formed a wholly owned corporation, Interstate Waste Technologies, Inc. ("IWT"), to pursue contracts with municipalities regarding waste treatment. Three 54 individuals representing IWT have filed for patent protection for a process which converts sludge into three useful and saleable products: methanol, sulfur and an aggregate material. An amended patent application was filed in October 1995 in response to additional information requests from the U.S. Patent Office. Comments by the U.S. Patent Office on the October 1995 amended patent application were received in February 1996. Issuance of patents is pending and there is no assurance that patents for such process will be issued. IWT's first project was a sludge reduction facility in Carteret, New Jersey for the Passaic Valley Sewerage Commissioners ("PVSC"). IWT located a site and entered into a contract with the Borough of Carteret to serve, for a fee, as a host community. However, on December 30, 1991, the Borough Council passed a resolution rescinding the Carteret Mayor's authority to enter into the agreement. IWT commenced legal action seeking a declaratory judgment that the contract was valid and enforceable. In February 1993, the contract was ruled valid and enforceable. In May 1994, IWT accepted a cash settlement of $750,000 from the Borough of Carteret and its insurers which was recorded as a recovery of deferred costs. The attempt to invalidate the contract and the lawsuit has required IWT to discontinue its plans to develop the Carteret project. IWT responded to a Request for Proposals from Bridgeport, Connecticut for a regional sludge management facility to dispose of the city's sludge as well as sludge from other communities. In February 1994, IWT was notified that it was identified by the city as the preferred vendor for the regional sludge management facility. In June 1994, IWT and the city executed a host community agreement. The agreement affirms the willingness of Bridgeport to allow the sludge management facility to be built in the city. Before construction can begin on the facility, IWT must acquire long-term sludge disposal service agreements with sludge generators in the New Jersey-New York-New England service region of the facility. Negotiation of a sludge disposal service agreement with the city's wastewater authority is pending the acquisition of other sludge disposal contracts for the facility. In March 1995, IWT submitted a Proposal for Solid Waste Recycling Services to the Solid Waste Management Authority of the Commonwealth of Puerto Rico. The proposed facility is a 2,640 ton per day plant, using a demonstrated solid waste processing technology developed in Europe. Continuing discussions with representatives of the government of Puerto Rico have led to the development of a draft Letter of Intent. During 1993, as a result of the legal action discussed above and its decision to abandon another site, IGC reserved approximately $1,000,000 against the investment. At December 31, 1995 and 1994, deferred costs regarding waste technology, net of reserves, were $2,364,000 and $1,798,000, respectively. (6) FEES FROM SALE OF CABLE TELEVISION SYSTEM IGC is a general and a limited partner in a partnership that owned a cable television system serving Charles County, Maryland. The assets of this partnership were sold on January 6, 1988. IGC earned fees of $207,000, $345,000 and $508,000 during the years ended December 31, 1995, 1994 and 1993, respectively. IGC is entitled to receive certain fees over the next four years. These fees are generally earned as collected and are comprised of the following: Consulting services for a period of five years, 1988 through 1993, at $250,000 per year with no remaining balance due at December 31, 1995. Services for this fee 55 included rendering advice and consultation regarding operations and marketing. Non-compete fees for a period of 10 years at $115,000 per year with a remaining balance at December 31, 1995 of $230,000. Construction management fees and payment for easements in St. Charles, Maryland of $3,660,000 based on payments of $732 per dwelling unit for the first 5,000 dwelling units where cable is placed, and limited to a 12-year period that began January 6, 1988. The remaining balance to which IGC is entitled at December 31, 1995 is $1,866,000. However, based on recent historical building rates, the Company anticipates only moderate growth over the remaining life of the contract, which could reduce the construction management fees received. The Company expects $1,107,000 of construction management fees will be earned prior to the expiration of the contract. These fees are pledged as security for a loan with Citibank. 56 (7) DEBT The Company's outstanding debt is collateralized primarily by land, housing and other land improvements, receivables, and investments in partnerships. The following table summarizes the indebtedness of IGC at December 31, 1995 and 1994: Stated Outstanding Balance at: Maturity Interest December 31, December 31, Description by Lender Date Rate* 1995 1994 - ------------------------- -------------- -------- ------------- ------------ (In thousands) Non-recourse debt: Community Development 12-29-24 to 6.85%-9.875% $22,650 $22,771 Administration (1) 10-01-28 Supra & Co. (8) 08-02-09 P + 1.5% 2,034 4,268 ------- ------- Total non-recourse 24,684 27,039 ------- ------- Recourse debt: Citibank (6,12) Demand (9) 1,334 1,559 NationsBank 03-31-96 P + 1%-1.5% 10,725 13,473 (2,4,11,12,14) Washington Savings From 06-06-96 8%-10% 682 1,153 (2,3,11) to 12-27-96 Riggs National Bank (2) 06-15-96 P + 1.5% 1,205 -- 1st National Bank of 09-14-96 to P + 1.5%-10.25% 765 580 St. Mary's (2,3,13) 12-29-97 Signet Bank (2,3,10) 09-01-96 P + 1.5% 3,325 6,533 FDIC (2,4,11) 09-30-96 P + 1% 6,546 8,995 Virginia First 11-16-96 P + 1.5% 339 484 Savings (3) Wachovia Bank & Trust 11-30-96 to P + .5%-1% 227 428 (2,3,11) 04-26-00 Purchase money 10-28-97 10% 1,000 2,081 mortgage (2) FirstBank (2,12) 12-31-97 P + 1.5% 17,370 -- Banco Central Hispano (2) Paid 8.57% -- 5,175 Banco Popular (2,7,12) 12-05-98 P + 1.5% 4,000 -- General (5) From 10-26-96 7.4%-11.5% 566 527 to 05-16-00 Citibank (2,12) 05-05-96 Eurodollar 2,361 -- + 2.5% ------- ------- Total recourse 50,445 40,988 ------- ------- Total debt $75,129 $68,027 ======= ======= *P = Prime 57 Balance Sheet Classification - ---------------------------- Mortgages and notes payable - Recourse debt $ 301 $ 370 Related to community development - Recourse debt 47,841 36,661 Non-recourse debt 2,034 4,268 Related to homebuilding projects - Recourse debt 981 2,398 Related to investment properties - Recourse debt 1,322 1,559 Non-recourse debt 22,650 22,771 ------- ------- Total debt $75,129 $68,027 ======= ======= (1) Collateralized by apartment projects and secured by FHA or the Maryland Housing Fund. (2) Collateralized by community development assets. (3) Collateralized by homebuilding assets. (4) Collateralized by investment in residential rental partnerships. (5) Collateralized by other assets. (6) Collateralized by letter of credit. (7) Collateralized by a secondary interest in Equus Units owned by IBC. (8) Minority partner in Puerto Rico land development subsidiary. (9) The interest rate is not fixed to maturity and is renegotiated on a periodic basis. The interest rate was 7.05% and 6.70% at December 31, 1995 and December 31, 1994, respectively. (10) As a result of the wetlands litigation verdict, the financial institution issued a notice of default. In addition, the Company had not met a March 1, 1996 mandatory principal curtailment, which was subsequently paid. (11) These loans contain certain covenants requiring the Company to remain in compliance with applicable laws. Unless reversed on appeal, the wetlands litigation verdict would result in a default of these covenants. (12) These loans contain cross default provisions that could be triggered by the events of default resulting from the wetlands litigation verdict. (13) These loans contain a provision allowing the financial institution to call the loan if there has been a material adverse change in the Company's financial condition. (14) A March 31, 1996 principal payment was not met. The funds are available and the payment is expected to be made in April. Information regarding short-term borrowings is summarized as follows: 1995 1994 1993 ------------ ----------- ----------- (In thousands) Principal outstanding At year end $49,233 $25,659 $39,347 Weighted average during the year $32,298 $26,092 $35,338 Maximum during the year $58,728 $50,062 $53,840 Interest Weighted average rate at year end 9.69% 9.63% 7.20% Weighted average rate during the year 9.86% 8.66% 7.12% 58 Debt matures as follows based upon renewal or expiration date: December 31, 1995 -------------- (In thousands) Year of maturity: 1996 $49,233 1997 1,241 1998 171 1999 180 2000 and thereafter 24,304 ------- $75,129 ======= (8) COMMITMENTS AND CONTINGENCIES IGC is guarantor of letters of credit of $4,569,000, on behalf of Chastleton Apartments Associates L.P. ("Chastleton") (see Note 9), and $2,432,000 for completion guarantees regarding land, homebuilding and investment property development. The letters of credit related to Chastleton serves as collateral for public and private borrowing arrangements undertaken by Chastleton. Likewise, the letters of credit related to the land, homebuilding and investment property development serve as collateral for IGC's performance guarantee and support borrowing arrangements. In addition to the letters of credit, IGC shares the general partner interests in two investment property partnerships with IBC which are currently experiencing negative cash flow. Under the terms of the partnership agree- ments, IBC is the primary obligor for funding operating advances. However, should IBC fail to fulfill its funding obligations, IGC is obligated as a general partner to provide financial support. This obligation involves varying degrees of financial exposure in excess of amounts recognized in the consolidated financial statements. The National Association of Home Builders has issued a warning that certain fire-retardant treated plywood commonly used in the roof construction of multi-family homes may contain a product defect causing accelerated deterioration of the plywood. Since 1991, the homeowners association of four projects that IGC had built notified IGC of roof problems that they suspected were related to such fire-retardant plywood. IGC has completed the replacement of roofs at one project of 60 units and at another project of 203 units. IGC is reviewing its records and inspecting the plywood that had been used in the construction of other IGC projects to determine the nature of the plywood treatment and the extent of such use. IGC believes that if the plywood used in any of its projects had been defectively treated, then the liability for repair or replacement rests primarily with the insurance company, manufacturer or the provider of the chemical treatment and others involved in the manufacturing process. 59 (9) RELATED PARTY TRANSACTIONS James J. Wilson, Chief Executive Officer of the Company, has an ownership interest in various entities to which IGC provides management services. These entities and their relationships to IGC are as follows: IBC or Affiliate IGC -------------------- -------------------- Limited Limited and Limited and Limited General Liability General Liability Partner Partner Partner Partner ------- ----------- ------- ----------- Chastleton .99% -- .01% -- Coachman's Limited Partnership ("Coachman's") 1% 49% 1% 49% Santa Maria Associates, S.E. ("Santa Maria") -- 99% -- 1% El Monte Properties, S.E. ("El Monte") -- 99% -- 1% G.L. Limited Partnership ("Rolling Hills") 1% 49% -- -- Village Lake Associates Limited Partnership ("Village Lake") 99% 1% -- -- Capital Park Associates ("Capital Park") (a) -- -- -- Smallwood Village Associates, Limited Partnership ("SVA") 1% 51% -- -- Smallwood Village Office Building Associates Limited Partnership ("SVOBA") 25% -- -- -- IBC, General Partner of IGC (b) -- -- -- -- Equus (c) -- 32% 1% -- (a) An affiliate of IBC holds notes receivable that are secured by the existing general partners' interest in the partnership. (b) IBC, controlled by James J. Wilson, is entitled to representation on IGMC's board of directors. James J. Wilson and two members of his immediate family are currently providing this representation. (c) EMC is the managing general partner of Equus. James J. Wilson resigned from EMC's board of directors and as Chief Executive Officer of Equus during March 1996. Two members of his immediate family represent IBC on EMC's board of directors. 60 Transactions between the above entities and IGC are described in the following tables. The maximum aggregate outstanding balance due from these entities at any one time during 1995 and 1994 was $1,503,000 and $2,636,000, respectively. REVENUE FOR THE YEAR ENDED DECEMBER 31, 1995 (In thousands) --------------------------------------------------------- Income Earned ----------------------------------- Management Developer Adjustment Fees Fees (a) Interest Total to Reserve Collected ---------- --------- -------- ----- ---------- ---------- Chastleton (b,d) $ 73 $-- $ -- $ 73 $ (71) $ 2 Coachman's (b) 26 -- 23 49 279 328 Santa Maria 67 -- -- 67 -- 67 El Monte 100 -- -- 100 -- 100 Rolling Hills (c,k) 83 -- -- 83 352 435 Village Lake (b) 25 -- -- 25 26 51 Capital Park 239 -- -- 239 -- 239 SVA 55 -- -- 55 3 58 SVOBA 6 -- -- 6 -- 6 IBC 30 -- 33 63 -- 63 ------ --- ---- ------ ----- ------ $ 704 $-- $ 56 $ 760 $ 589 $1,349 ====== === ==== ====== ===== ====== RECEIVABLES AT DECEMBER 31, 1995 (In thousands) -------------------------------------------------------------- Outstanding Balance --------------------------------------------- Working Manage- Capital Land/ ment Developer Loans Asset Book Fees Fees (a) (e) Sales Interest Total Reserved Balance ------ --------- ------- ----- -------- ----- -------- ------- Chastleton (h) $347 $-- $ 33 $ -- $ -- $ 380 $(347) $ 33 Coachman's (f) 19 -- 117 -- 18 154 (37) 117 Santa Maria -- -- -- -- -- -- -- -- El Monte 28 -- -- -- -- 28 -- 28 Rolling Hills (k) 280 -- 3 -- -- 283 -- 283 Village Lake 49 -- 2 -- -- 51 -- 51 Capital Park 24 -- 4 -- -- 28 -- 28 SVA 4 -- 1 -- -- 5 -- 5 SVOBA -- -- -- -- -- -- -- -- IBC (i,j) 3 -- 8 302 33 346 -- 346 Equus (l) -- -- 225 -- -- 225 -- 225 ---- --- ---- ---- ---- ------ ----- ------ $754 $-- $393 $302 $ 51 $1,500 $(384) $1,116 ==== === ==== ==== ==== ====== ===== ====== 61 REVENUE FOR THE YEAR ENDED DECEMBER 31, 1994 (In thousands) ------------------------------------------------------- Income Earned ----------------------------------- Management Developer Adjustment Fees Fees (a) Interest Total to Reserve Collected ---------- --------- -------- ----- ---------- ---------- Chastleton (b,d) $ 75 $-- $ -- $ 75 $ (67) $ 8 Coachman's (b) 24 -- 20 44 (44) -- Santa Maria 60 -- -- 60 -- 60 El Monte 99 -- -- 99 -- 99 Rolling Hills (c) 101 -- -- 101 (53) 48 Village Lake (b) 18 -- -- 18 68 86 Capital Park 282 -- -- 282 -- 282 SVA (g) 55 -- 154 209 -- 209 SVOBA 10 -- -- 10 -- 10 IBC 28 -- 26 54 -- 54 ---- --- ---- ---- ----- ---- $752 $-- $200 $952 $ (96) $856 ==== === ==== ==== ===== ==== RECEIVABLES AT DECEMBER 31, 1994 (In thousands) -------------------------------------------------------------- Outstanding Balance --------------------------------------------- Working Manage- Capital Land/ ment Developer Loans Asset Book Fees Fees (a) (e) Sales Interest Total Reserved Balance ------ --------- ------- ----- -------- ----- -------- ------- Chastleton (h) $277 $-- $ 30 $ -- $ -- $ 307 $ (277) $ 30 Coachman's (f) 93 -- 211 -- 160 464 (315) 149 Santa Maria 4 -- -- -- -- 4 -- 4 El Monte 13 -- -- -- -- 13 -- 13 Rolling Hills 352 -- 3 -- -- 355 (352) 3 Village Lake 26 -- 1 -- -- 27 (26) 1 Capital Park 18 -- 7 -- -- 25 -- 25 SVA (g) 3 -- -- -- -- 3 (3) -- SVOBA 1 -- -- -- -- 1 -- 1 IBC (i,j) 2 -- -- 302 -- 304 -- 304 ---- --- ---- ---- ---- ------ ----- ---- $789 $-- $252 $302 $160 $1,503 $(973) $530 ==== === ==== ==== ==== ====== ===== ==== 62 REVENUE FOR THE YEAR ENDED DECEMBER 31, 1993 (In thousands) ------------------------------------------------------- Income Earned ----------------------------------- Management Developer Adjustment Fees Fees (a) Interest Total to Reserve Collected ---------- --------- -------- ----- ---------- ---------- Chastleton (b,d) $ 70 $ -- $ -- $ 70 $ (60) $ 10 Coachman's (b) 22 -- 141 163 (163) -- Santa Maria 54 35 -- 89 -- 89 El Monte 93 102 -- 195 -- 195 Rolling Hills (c) 90 -- -- 90 (90) -- Village Lake (b) 8 64 -- 72 (64) 8 Capital Park 238 -- -- 238 -- 238 SVA (g) 54 -- 154 208 (158) 50 SVOBA 10 -- -- 10 -- 10 IBC 28 -- 63 91 (27) 64 ---- ---- ---- ------ ----- ---- $667 $201 $358 $1,226 $(562) $664 ==== ==== ==== ====== ===== ==== (a) Includes developer and refinancing fees. (b) The management fee was reduced from 5% to 2.5% until the project has positive cash flow and has paid all previously accrued management fees. (c) The management fee was reduced from 4.5% to 2.5% until the project has positive operating cash flow and has paid all previously accrued management fees. (d) Management agreed that it would defer all management fees until Chastleton had sufficient cash flow to fund operations and to subordinate 50% of its management fee until IBC has recovered its operating advances. (e) Working capital loans include operating advances and reimbursements due for common expenses. (f) IBC has the funding obligation for operating deficits. Since IGC equally shares the general and limited partnership interest with IBC, IGC funded a portion of the deficits. (g) During 1990, in satisfaction of outstanding advances of $1.7 million due IGC from IBC, IBC transferred to IGC a $3.8 million note receivable due from SVA. The interest earned on this receivable is reflected above. This note was purchased back by IBC on December 30, 1994, as described below. (h) IBC has the funding obligation for operating deficits. IGC, also a general partner, funded $69,000 of 1993 cash deficits, which was repaid to the Company during 1994. In early 1996, IGC, as general partner, funded $184,000 of cash deficits to be repaid by IBC during 1996. (i) IGC is contingently liable under $4.6 million of letters of credit issued by NationsBank collateralized by land, which secure additional bonds issued for Chastleton. (j) During 1989, IBC purchased 5.01 acres of commercial land. IGC accepted a note receivable for 80% of the $1,092,000 purchase price. The note is collateralized by IBC's ownership interest in Santa Maria and Village Lake. On December 23, 1994, Lakeside, a subsidiary of the Company, purchased the remaining 1.23 acres of this land from IBC for the development of rental units for senior citizens, for its appraised value of $440,000. Lakeside paid $88,000 to IBC and issued a note payable for the remaining $352,000. During the first quarter of 1995, IBC assigned 63 the note receivable due from Lakeside to IGC in satisfaction of past due receivables from Coachman's. The collection of the majority of the Coachman's receivables had previously been questionable and $328,000 had been reserved. This transaction resulted in income recognition of these reserves during 1995. The Company collected the $352,000 receivable due from Lakeside during 1995. (k) The performance of this project has improved and the project is now producing positive cash flow. During the first quarter of 1995, partial payments were made of past due management fees owed to the Company. The collection of the remaining receivable balance is now considered probable and reserves related to this receivable aggregating $335,000 were recognized as income during 1995. (l) IGC provides certain administrative and operational support for Equus pursuant to the Support Agreement. The Company also is reimbursed for administrative support provided to Equus' subsidiaries. The amount charged to Equus pursuant to the Support Agreement was $254,000 for 1995. In addition, as general partner, IGC advanced funds as needed for working capital deficits. Prior to 1995, Equus' assets and liabilities and results of operations were reflected in the Company's consolidated financial statements. On December 30, 1994, as discussed in Note 3, IGC executed a purchase and sale agreement with IBC which provided for the transfer of 9.9% general partnership interests in New Forest and Fox Chase and 49.9% limited partnership interests in Terrace, Third Age, Palmer and Headen. IBC retained a 0.1% interest in Fox Chase and New Forest and a 1.1% interest in Terrace, Third Age, Palmer and Headen. As a result of this transaction, IGC became a 99.9% general partner in Fox Chase and New Forest and a 49.9% limited partner in Terrace, Third Age, Palmer and Headen. Fox Chase and New Forest continue to be consolidated by IGC. IGC's interests in Terrace, Third Age, Palmer and Headen are accounted for using the equity method at December 31, 1995 and 1994, since IGC does not control these entities. Because IBC and IGC are under common control, the partnership interests received by IGC were recorded at IBC's basis in the partnerships prior to the transfer. The $1.8 million charge to partner's capital represents the difference between IBC's basis in the partnership interests transferred and IGC's book basis for the receivables from IBC which were satisfied via this transaction. In addition to the support provided Equus pursuant to the Support Agreement, the Company provides management services and administrative support to Equus' subsidiaries, HDA, Galapagos and S & E, and its major tenant, ECOC. The administrative support is reimbursed as the services are rendered. The management agreement with HDA continues into December 2004. Upon closing of an HDA refinancing in December 1993, the management agreement was amended to reduce the management fee to an annual fee of $250,000, adjusted annually beginning in 1994 by the percentage increase in the Consumer Price Index ("CPI"). Prior to such amendment, IGC received a management fee equal to 5% of the HDA's rental income. The HDA management fees earned in 1995, 1994 and 1993 were $264,000, $257,000 and $593,000, respectively. Pursuant to an agreement with HDA's previous lender, collection of 50% of the fees earned from March 1992 to December 15, 1993 were deferred. IGC collected unpaid fees related to this provision of $499,000 from the proceeds of the 1993 HDA refinancing. Pursuant to a consulting agreement effective December 15, 1993, ECOC has retained as executive management three racing consultants employed by IGC. ECOC reimburses all of IGC's payroll, bonus, fringe benefits and out-of-pocket expenses associated with the employment of the consultants, and reimburses IGC 64 for other personnel who from time to time provide services to ECOC. Such reimbursements are subject to certain limitations on increases in reimbursable costs during the term of the consulting agreement. ECOC uses certain land owned by LDA for a sanitary landfill in connection with its operation of the El Comandante Race Track. LDA has authorized this use, but has reserved the right to terminate such use if it conflicts with future development by LDA. Jorge Colon Nevares, a director of IGMC, also serves as a director of ECOC and Thomas B. Wilson, one of the IBC representatives on IGMC's board of directors, serves as ECOC's president. James J. Wilson, as a general partner of IGP, is entitled to priority distributions made by each housing partnership in which IGP is the general partner. If IGP receives a distribution which represents 1% or less of a partnership's total distribution, Mr. Wilson receives the entire distribution. If IGP receives a distribution which represents more than 1% of a partnership's total distribution, Mr. Wilson receives the first 1% of such total. IGC's Puerto Rico executive office has been located in the Doral Building, owned by El Monte, since November 1991 under a five-year lease providing for a first-year payment of rent of approximately $187,000 and certain escalations for increases in the CPI and pro-rata share of operating expenses in years two through five. Rental expense for the executive office and certain other property in Puerto Rico leased from affiliates was $218,000, $228,000 and $206,000 in 1995, 1994 and 1993, respectively. All leases with affiliated persons are on terms at least as favorable to IGC as that generally available from unaffiliated persons for comparable property. IGC and affiliates lease office space from SVA, another of IBC's commercial properties in which IGC's principal executive offices are located. The lease was modified during 1995 which reduced the total square feet of office space leased by IGC and its affiliates from 23,400 square feet to 17,255 square feet at approximately $205,000 per year, subject to adjustment for inflation. The lease expires in the year 2001 and at IGC's request, IBC has the obligation to sublease the space for the remainder of the lease. In 1995, 1994 and 1993, IGC's annual rentals from its share of the leases are approximately $190,000, $190,000 and $181,000, respectively. American Family Homes, Inc., a wholly owned subsidiary of IGC, leased from IBC, 3,000 square feet of commercial space which was used for one of its sales centers. The lease expired on December 31, 1995. Rent expense associated with this lease was $39,000 and $13,000 in 1995 and 1994, respectively. In March 1995, IGC executed an agreement for the sale of a commercial parcel located in the Parque Escorial project in Puerto Rico to an entity controlled by Jorge Colon Nevares, a director of the Company's managing general partner, for use in its operations. The terms of the agreement provided for a purchase price of $3,453,000, of which $693,000 is payable in cash and the remainder by a mortgage note, collateralized by the land parcel. The terms of the note provide for interest at a rate of 10% per annum commencing at the completion of infrastructure. Payments of principal and interest of $27,000 are due monthly commencing May 1, 1995 with the balance of the note payable at maturity on April 1, 1998. (10) PROFIT SHARING AND RETIREMENT PLANS IGC established a retirement plan (the "Retirement Plan") effective January 1, 1988 for non-union employees of IGC. In 1992, the union employees were added to the plan. Employees are eligible to participate in the 65 Retirement Plan when they have completed a minimum employment period of generally one year. IGC's contributions to the Retirement Plan and U.S. Social Security Plan for eligible employees were equal to 11.65% of basic salaries and wages for 1995, 1994 and 1993 that were not in excess of the U.S. Social Security taxable wage base, plus 8% of salaries which exceeded the U.S. Social Security taxable wage base. Employees' salaries in excess of $150,000, $150,000 and $236,000, for 1995, 1994 and 1993, respectively, were excluded from the calculation of contributions. Payments are also made to the Retirement Plan from IGC contributions to a profit sharing plan, as described below, and from voluntary contributions by employees. In 1987, IGC established an incentive compensation plan (the "Profit Sharing Plan") based on net income of the Company. No contributions were made for 1995, 1994 or 1993. (11) UNIT OPTIONS, WARRANTS AND APPRECIATION RIGHTS IGC maintains Unit option plans for Directors (the "Directors Plan") and employees (the "Employees Plan"). The Directors Plan is for directors of the managing general partner who are not officers or employees of the Company or of any General Partner or affiliate of the Company. The Employees Plan is for employees of IGC, including employees who are Directors of any general partner of IGC or of any affiliate of IGC. Activity during 1995 and 1994 is summarized below: Directors Employees --------- ---------------------- Plan Plan Plan Exercise Exercise Exercise Price $4 Price $4 Price $2.49 -------- -------- ----------- Options outstanding, December 31, 1993 45,000 183,550 -- Awarded -- -- -- Exercised (15,000) (117,700) -- Cancelled -- (800) -- ------- ------- -------- Options outstanding, December 31, 1994 30,000 65,050 -- Awarded (1) -- -- 12,600 Exercised (30,000) (11,450) -- Cancelled (1) -- (17,600) -- ------- ------- -------- Options outstanding, December 31, 1995 -- 36,000 12,600 ======= ======= ======== (1) As a result of the Equus Distribution, as further discussed in Note 4, the exercise price of options outstanding under the Directors and Employees Plans which were exercisable, but not exercised, prior to January 22, 1995 was reduced from $4.00 to $2.49. Such reduction was calculated based on the percentage decrease between the average closing price of the Company's Units as reported by the American Stock Exchange for the twenty trading days immediately preceding the ex-dividend date of February 7, 1995, and the twenty trading days immediately following the distribution date of February 6, 1995. The exercise price of options that were not exercisable until after 66 January 22, 1995 was not adjusted. However, upon exercise, the holders of such options will receive one Equus Unit for every two IGC Units. The Equus Units so issued will not be registered under the federal securities laws and thus not be freely tradeable until three years following issuance. However, the Equus Units will be issued with certain "piggy-back" registration rights, pursuant to which Equus may be obligated to register the Equus units under the federal securities laws within three years from the Equus Distribution date. As of December 31, 1995, the dates that options become exercisable and the expiration dates are as follows: Employees Options ---------------------------------------- Expiring Expiring Expiring 1-1-99 8-1-01 1-1-03 ---------- ---------- ---------- Exercisable: As of December 31, 1995 12,600 8,000 -- January 1, 1996 -- -- 10,000 March 1, 1996 -- 8,000 -- January 1, 1997 -- -- 10,000 ------ ------ ------ 12,600 16,000 20,000 ====== ====== ====== In 1993, warrants to purchase 100,000 limited partnership Units were issued to an investment banking firm in connection with a "highly confident letter" relating to proposed VJC financing. The warrants had an exercise price of $5.30 per warrant and expire on September 30, 2003. The warrants were valued at $75,000. Subsequent to the Equus Distribution, the $5.30 exercise price of the warrants was reduced to $3.60, and the warrant holders were granted 50,000 limited partnership purchase warrants for Equus Units with an exercise price of $1.70. During 1994 and early 1995, IGC adopted amendments to the Directors and Employees Plans which provided for the issuance of Unit Appreciation Rights to directors and employees of the Company. Under the terms of the amended plans, directors and employees may be granted "Unit Appreciation Rights" which entitle the holder to receive upon exercise, an amount payable in cash, Class A Units of the Company, other property or some combination thereof, as determined by a committee of the Directors of the managing general partner, which excludes directors who are eligible to participate in that particular plan (the "Committee"). The amount received upon exercise on or after January 20, 1995, is determined based on the excess of the fair market value of the Company's Units on the exercise date, plus 50% of the fair market value of Equus Units on the exercise date, over the base price of the Unit Appreciation Right specified in the individual rights agreements. Fair market value is defined in each individual rights agreement but is generally the average of the closing prices of Units on the principal exchange on which they are traded for the 20 trading days beginning five trading days before the exercise date and ending on the 14th day after the exercise date. No adjustment was made for Unit Appreciation Rights exercised prior to January 20, 1995, since prior to such date, the Company's market price still reflected the value of the Company's interest in Equus. 67 During 1994, 363,800 Unit Appreciation Rights were awarded to employees of the Company and none were exercised or cancelled. During 1995, 2,000 rights were exercised, 140,000 rights were repriced, and none were exercised or cancelled. No Unit Appreciation Rights were exercised or cancelled during 1994. Compensation expense recognized by the Company in connection with such awards totalled approximately $264,000 in 1994. In 1995, however, $164,000 of the expense was recovered due to a decline in the market price of the Units. No Unit Appreciation Rights have been issued in connection with the Director's Unit Incentive Plan. As of December 31, 1995, the dates that Unit Appreciation Rights become exercisable and their expiration dates are as follows: Rights Expiring ------------------------------------------------ March 1, May 15, September 1, October 18, Units Exercisable at: 2004 2004 2004 2004 - --------------------- -------- ------- ------------ ----------- December 31, 1995 12,000 March 1, 1996 20,000 May 15, 1996 29,760 September 1, 1996 8,000 October 18, 1996 7,000 March 1, 1997 20,000 May 15, 1997 29,760 September 1, 1997 8,000 October 18, 1997 7,000 March 1, 1998 20,000 May 15, 1998 29,760 September 1, 1998 8,000 October 18, 1998 7,000 March 1, 1999 20,000 May 15, 1999 29,760 September 1, 1999 8,000 March 1, 2000 20,000 March 1, 2001 20,000 ------- ------- ------- ------- 120,000 119,040 32,000 33,000 ======= ======= ======= ======= As of December 31, 1995, 155,000 IGC Units are reserved for issuance under the Director's Plan and 1,070,025 Units are reserved for issuance under the Employees' Plan. (12) INCOME TAXES As a U.S. Company doing business in Puerto Rico, IGC is subject to Puerto Rico income tax on its Puerto Rico based income. The taxes reflected below are a result of that liability. As discussed in Note 1, the Company adopted SFAS No. 109 as of January 1, 1993, and the cumulative effect of this change is reported in the Consolidated Statement of Income for the year ended December 31, 1993. Prior years' financial statements have not been restated to apply the provisions of SFAS No. 109. The provision for income taxes amounted to (95.8%), 34.6% and 10.4% of the income after minority interest and before taxes for the years ended December 68 31, 1995, 1994 and 1993, respectively. The primary reason for the differences between these rates and the statutory federal income tax rate is due to partnership income not being taxable at the entity level, noted as follows: December 31, ------------------------------------------------- 1995 1994 1993 --------------- -------------- -------------- (In thousands, except amounts in %) % of % of % of Amount Income Amount Income Amount Income ------ ------ ------ ------ ------ ------ Provision (benefit) for income taxes at the statutory Federal income tax rate $1,812 31.5% $5,039 49.6% $2,501 39.3% Reduction of (benefits) for partnership income not taxable to Company (210) (3.6%) (1,110) (10.9%) (1,756) (27.6%) Other items (150) (2.6%) (418) (4.1%) (80) (1.3%) ------ ------ ------ ------ ------- ----- $1,452 25.3% $3,511 34.6% $ 665 10.4% ====== ====== ====== ====== ======= ===== The provision for income taxes consists of the following: YEARS ENDED DECEMBER 31, -------------------------------------- 1995 1994 1993 ------------ ----------- ----------- (In thousands) Currently payable United States $ -- $ -- $ -- Puerto Rico 723 2,025 390 Deferred 729 1,486 275 ------ ------ ---- $1,452 $3,511 $665 ====== ====== ==== The components of deferred taxes payable include the following: AT DECEMBER 31, ------------------------ 1995 1994 ----------- ----------- (In thousands) Tax on amortization of deferred income related to long-term receivables from partnerships operating in Puerto Rico $2,135 $ 531 Tax on equity in earnings of partnerships operating in Puerto Rico 562 1,342 Carryforward of Puerto Rico losses -- -- Changes in tax rates and other items -- 602 Tax on land development costs capitalized for book purposes but deducted currently for tax purposes 1,924 -- Tax on interest income, payable when collected 83 -- ------ ------ $4,704 $2,475 ====== ====== 69 The reconciliation between book income and taxable loss (excluding built-in gain allocable to Predecessors) is as follows: December 31, ------------------------------------------------- 1995 1994 1993 --------------- -------------- -------------- (In thousands, except per Unit amounts) Per Per Per Total Unit Total Unit Total Unit ------ ------ ------ ------ ------ ------ Net (loss) income per books $(2,967) $(.29) $ 6,641 $ .66 $7,194 $ .71 Cumulative effect of change in accounting principle -- -- -- -- (1,500) (.15) Built-in gain allocable to Predecessors: Current (1,369) (.13) (1,747) (.17) (301) (.03) Deferred (364) (.04) (323) (.03) (900) (.09) Difference in income or losses from subsidiary partnerships 1,141 .11 (9,828) (.97) (5,427) (.53) Losses from corporation subsidiaries not deductible by the partnership 2,002 .20 2,221 .22 1,418 .14 Capitalization of general and administrative expenses under the Uniform Capitalization Rules 315 .03 18 -- 49 -- Deferred income recognized currently for tax purposes 349 .03 417 .04 1,057 .10 Difference in cost of sales due to interest related to the acquisition of land, deducted for tax purposes 505 .05 1,663 .16 (1,347) (.13) Deferred income taxes 729 .07 1,486 .15 275 .03 Losses from restructuring (245) (.02) (1,691) (.17) (1,409) (.14) Wetland litigation costs not deducted currently 2,000 .19 -- -- -- -- Other book to tax reconciling items, none of which is individually significant (650) (.06) (606) (.06) (607) (.06) ------- ----- ------- ----- ------- ----- Net taxable income (loss) per partnership federal return $ 1,446 .14 $(1,749) $(.17) $(1,498) $(.15) ======= ====== ======= ===== ======= ===== 70 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. In determining the impact of SFAS No. 109, which was adopted by the Company during 1993, certain carry-forwards related to Puerto Rico operations were benefitted as there are no existing uncertainties associated with their realization. The benefit of implementing SFAS No. 109 has been reported as a $1.5 million cumulative effect of a change in accounting principle in the accompanying Consolidated Statement of Income for the year ended December 31, 1993. During the year ended December 31, 1994, the Company realized the benefit of those carryforward losses. On December 22, 1987, the Omnibus Budget Reconciliation Act of 1987 ("the 1987 Act") was signed into law. It contained several provisions relating to the tax treatment of publicly traded partnerships. Among other things, the 1987 Act provides that publicly traded partnerships will be taxed as corporations unless at least 90% of their gross income is derived from qualifying "passive-type" sources. Income qualifying for this purpose includes interest, dividends, real property income and gains from the sale of real property. IGC, as an existing partnership publicly traded as of December 17, 1987, has been grandfathered for a 10-year transition period. As such, IGC will not be taxed as a corporation until 1998 even if it does not meet the qualifying gross income test, unless a substantial new line of business is added. IGC expects to be able to comply with the qualifying income test. Proposed regulations define a new line of business as substantial if the partnership derives more than 15% of its gross income from that line of business or if more than 15% (by value) of the partnership's total assets are used in that line of business. Management believes that its acquisitions subsequent to the 1987 Act do not constitute new lines of business. Furthermore, it is management's intention not to enter into any new lines of business that may impair IGC's tax status as a partnership. (13) QUARTERLY SUMMARY (UNAUDITED) IGC's quarterly results are summarized as follows: Year Ended December 31, 1995 ---------------------------------------------- 1st 2nd 3rd 4th Total for Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- --------- (In thousands, except per Unit amounts) Revenues $10,931 $10,750 $ 7,296 $ 8,723 $37,700 Income (loss) before taxes and minority interest 976 1,137 (2,311) (853) (1,051) Net income (loss) 320 1,071 (2,498) (1,860) (2,967) Per Unit: Net income (loss) .03 .10 (.24) (.18) (.29) 71 Year Ended December 31, 1994 ---------------------------------------------- 1st 2nd 3rd 4th Total for Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- --------- (In thousands, except per Unit amounts) Revenues $12,658 $22,723 $16,768 $11,373 $63,522 Income before taxes and minority interest 3,091 4,209 3,208 360 10,868 Net income (loss) 2,093 1,672 3,065 (189) 6,641 Per Unit: Net income (loss) .21 .16 .30 (.02) .66 (14) SUPPLEMENTARY INCOME STATEMENT INFORMATION Depreciation and amortization expense of intangible assets, pre-operating costs and similar deferrals totalled $519,000, $388,000 and $358,000 for the years ended December 31, 1995, 1994 and 1993, respectively. 72 INTERSTATE GENERAL COMPANY L.P. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1995 INITIAL AND SUBSEQUENT COSTS AND ENCUMBRANCES (In thousands) Bldgs. & Improve- Subsequent Description Encumbrances Land ments Costs - -------------------- ------------ -------- ----------- ---------- Bannister Apartments $ 3,752 $ 410 $ 4,180 $ 374 Garden Apartments St. Charles, MD Palmer Apartments 4,311 471 4,788 345 Garden Apartments St. Charles, MD Brookmont Apartments 2,379 162 2,677 209 Garden Apartments St. Charles, MD Brookside Gardens Apartments 1,493 156 2,487 45 Garden Shared Housing St. Charles, MD Headen Apartments 4,909 205 4,765 930 Garden Apartments St. Charles, MD Huntington Apartments 7,762 350 8,513 1,492 Garden Apartments St. Charles, MD Crossland Apartments 2,209 350 2,697 247 Garden Apartments St. Charles, MD Terrace Apartments 5,100 497 5,377 455 Garden Apartments St. Charles, MD Lancaster Apartments 4,392 484 4,292 118 Garden Apartments St. Charles, MD Fox Chase Apartments 6,361 745 7,014 65 Garden Apartments St. Charles, MD New Forest Apartments 11,897 1,229 12,102 305 Garden Apartments St. Charles, MD 73 INTERSTATE GENERAL COMPANY L.P. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1995 INITIAL AND SUBSEQUENT COSTS AND ENCUMBRANCES (continued) (In thousands) Bldgs. & Improve- Subsequent Description Encumbrances Land ments Costs - -------------------- ------------ -------- ----------- ---------- Coachman's Landing Apt. 5,912 572 6,421 (70) Garden Apartments St. Charles, MD Chastleton Apartments 21,081 2,630 23,624 1,255 High Rise Apartments Washington, D.C. Essex Village Apts. 16,317 2,667 21,381 798 Garden Apartments Richmond, VA Alturas Del Senorial 3,316 345 4,185 105 Highrise Apts. Rio Piedras, PR Bayamon Gardens 9,621 1,153 12,050 90 Highrise/Garden Apts. Bayamon, PR De Diego 6,973 601 6,718 194 Highrise Apts. Rio Piedras, PR Monserrate II 11,275 731 11,172 175 Highrise Apts. Carolina, PR Santa Juana 7,312 509 6,748 100 Highrise Apts. Caguas, PR Torre De Las Cumbres 5,742 466 5,954 111 Highrise Apts. Rio Piedras, PR Colinas De San Juan 8,572 900 10,742 244 Highrise Apts. Carolina, PR Jardines De Caparra 5,139 546 5,719 1,000 Garden Apartments Bayamon, PR 74 INTERSTATE GENERAL COMPANY L.P. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1995 INITIAL AND SUBSEQUENT COSTS AND ENCUMBRANCES (continued) (In thousands) Bldgs. & Improve- Subsequent Description Encumbrances Land ments Costs - -------------------- ------------ -------- ----------- ---------- Las Lomas 1,835 344 2,715 302 Highrise Apts. Guaynabo, PR Monacillos Park 4,399 473 5,720 928 Highrise Apts. Guaynabo, PR Monserrate I 2,565 543 10,436 136 Highrise Apts. Carolina, PR Monte De Oro 954 562 5,217 801 Highrise Apts. Rio Piedras, PR New Center 1,020 589 5,702 272 Highrise Apts. San Juan, PR Piedras Americas 4,086 550 5,474 507 Highrise Apts. San Juan, PR Rio Piedras 4,269 571 4,778 496 Highrise Apts. San Juan, PR San Anton 3,050 313 3,525 682 Highrise Apts. Carolina, PR Valle Del Sol 11,131 992 14,017 114 Highrise Apts. Bayamon, PR Vistas Del Turabo 2,035 354 2,508 465 Highrise Apts. Caguas, PR Office Condo 211 0 284 0 East Whitiland Township Pennsylvania 75 INTERSTATE GENERAL COMPANY L.P. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1995 INITIAL AND SUBSEQUENT COSTS AND ENCUMBRANCES (continued) (In thousands) Bldgs. & Improve- Subsequent Description Encumbrances Land ments Costs - -------------------- ------------ -------- ----------- ---------- Fredericksburg, VA 190 158 95 5 Model Park 1 Model Raleigh, NC 0 0 75 6 2 Models ----------- ---------- ----------- ---------- Total Properties $ 191,570 $ 21,628 $ 234,152 $ 13,301 =========== ========== =========== ========== 76 INTERSTATE GENERAL COMPANY L.P. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1995 TOTAL CAPITALIZED COSTS AND ACCUMULATED DEPRECIATION (In thousands) Bldgs. & Accumulated Description Land Improvements Total Depreciation - -------------------- ---- ------------ ----- ------------ Bannister Apartments $ 410 $ 4,553 $ 4,963 $ 3,584 Garden Apartments St. Charles, MD Palmer Apartments 471 5,133 5,604 3,881 Garden Apartments St. Charles, MD Brookmont Apartments 162 2,886 3,048 2,220 Garden Apartments St. Charles, MD Brookside Gardens Apartments 156 2,533 2,689 109 Garden Shared Housing St. Charles, MD Headen Apartments 205 5,694 5,899 3,819 Garden Apartments St. Charles, MD Huntington Apartments 350 10,006 10,356 4,797 Garden Apartments St. Charles, MD Crossland Apartments 350 2,945 3,295 1,816 Garden Apartments St. Charles, MD Terrace Apartments 497 5,832 6,329 4,387 Garden Apartments St. Charles, MD Lancaster Apartments 484 4,410 4,894 1,182 Garden Apartments St. Charles, MD Fox Chase Apartments 745 7,078 7,823 1,574 Garden Apartments St. Charles, MD New Forest Apartments 1,229 12,407 13,636 2,358 Garden Apartments St. Charles, MD 77 INTERSTATE GENERAL COMPANY L.P. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1995 TOTAL CAPITALIZED COSTS AND ACCUMULATED DEPRECIATION (continued) (In thousands) Bldgs. & Accumulated Description Land Improvements Total Depreciation - -------------------- ---- ------------ ----- ------------ Coachman's Landing Apt. 572 6,351 6,923 1,036 Garden Apartments St. Charles, MD Chastleton Apartments 2,630 24,879 27,509 6,089 High Rise Apartments Washington, D.C. Essex Village Apts. 2,667 22,179 24,846 13,974 Garden Apartments Richmond, VA Alturas Del Senorial 345 4,290 4,635 1,759 Highrise Apts. Rio Piedras, PR Bayamon Gardens 1,153 12,141 13,294 4,441 Highrise/Garden Apts. Bayamon, PR De Diego 601 6,913 7,514 2,777 Highrise Apts. Rio Piedras, PR Monserrate II 731 11,347 12,078 4,548 Highrise Apts. Carolina, PR Santa Juana 509 6,848 7,357 2,763 Highrise Apts. Caguas, PR Torre De Las Cumbres 466 6,065 6,531 2,475 Highrise Apts. Rio Piedras, PR Colinas De San Juan 900 10,986 11,886 4,086 Highrise Apts. Carolina, PR Jardines De Caparra 546 6,719 7,265 2,704 Garden Apartments Bayamon, PR 78 INTERSTATE GENERAL COMPANY L.P. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1995 TOTAL CAPITALIZED COSTS AND ACCUMULATED DEPRECIATION (continued) (In thousands) Bldgs. & Accumulated Description Land Improvements Total Depreciation - -------------------- ---- ------------ ----- ------------ Las Lomas 344 3,016 3,360 1,695 Highrise Apts. Guaynabo, PR Monacillos Park 473 6,647 7,120 3,662 Highrise Apts. Guaynabo, PR Monserrate I 543 10,573 11,116 4,462 Highrise Apts. Carolina, PR Monte De Oro 562 6,019 6,581 2,775 Highrise Apts. Rio Piedras, PR New Center 589 5,974 6,563 2,711 Highrise Apts. San Juan, PR Piedras Americas 550 5,982 6,532 3,430 Highrise Apts. San Juan, PR Rio Piedras 571 5,274 5,845 4,208 Highrise Apts. San Juan, PR San Anton 313 4,207 4,520 1,973 Highrise Apts. Carolina, PR Valle Del Sol 992 14,131 15,123 4,544 Highrise Apts. Bayamon, PR Vistas Del Turabo 354 2,971 3,325 976 Highrise Apts. Caguas, PR Office Condo 0 284 284 50 East Whitiland Township Pennsylvania 79 INTERSTATE GENERAL COMPANY L.P. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1995 TOTAL CAPITALIZED COSTS AND ACCUMULATED DEPRECIATION (continued) (In thousands) Bldgs. & Accumulated Description Land Improvements Total Depreciation - -------------------- ---- ------------ ----- ------------ Fredericksburg, VA 158 100 258 19 Model Park 1 Model Raleigh, NC 0 81 81 16 2 Models ---------- ----------- ----------- ---------- Total Properties $ 21,628 $ 247,454 $ 269,082 $ 106,900 ========== =========== =========== ========== NOTE TO TOTAL CAPITALIZED COSTS: THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES FOR U.S. AND P.R. PROPERTIES IS $231,092 80 INTERSTATE GENERAL COMPANY L.P. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1995 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 Yrs St. Charles, MD Palmer Apartments 3/31/80 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5 Yrs St. Charles, MD Brookmont Apartments 5/18/79 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5 Yrs St. Charles, MD Brookside Gardens Apartments 11/10/94 Bldg - 40 Yrs Garden Shared Housing Constructed Bldg Equip - 5 Yrs St. Charles, MD Headen Apartments 10/30/80 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5 Yrs St. Charles, MD Huntington Apartments 10/7/80 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5 Yrs St. Charles, MD Crossland Apartments 1/13/78 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5 Yrs St. Charles, MD Terrace Apartments 11/1/79 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5 Yrs St. Charles, MD Lancaster Apartments 12/31/85 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5 Yrs St. Charles, MD Fox Chase Apartments 3/31/87 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5 Yrs St. Charles, MD New Forest Apartments 6/28/88 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5 Yrs St. Charles, MD 81 INTERSTATE GENERAL COMPANY L.P. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1995 DATE CONSTRUCTED OR ACQUIRED AND DEPRECIABLE LIVES (continued) Date Constructed Description or Acquired Depreciable Life - -------------------- ----------- --------------------- Coachman's Landing Apt. 9/5/89 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5 Yrs St. Charles, MD Chastleton Apartments 11/7/86 Bldg - 40 Yrs High Rise Apartments Constructed Bldg Equip - 5/10 Yrs Washington, D.C. Essex Village Apts. 1/31/82 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5 Yrs Richmond, VA Alturas Del Senorial 11/17/79 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5 Yrs Rio Piedras, PR Bayamon Gardens 7/6/81 Bldg - 40 Yrs Highrise/Garden Apts. Constructed Bldg Equip - 5 Yrs Bayamon, PR De Diego 3/20/80 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5 Yrs Rio Piedras, PR Monserrate II 1/30/80 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5 Yrs Carolina, PR Santa Juana 2/8/80 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5 Yrs Caguas, PR Torre De Las Cumbres 12/6/79 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5 Yrs Rio Piedras, PR Colinas De San Juan 3/20/81 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5 Yrs Carolina, PR Jardines De Caparra 4/1/80 Bldg - 40 Yrs Garden Apartments Constructed Bldg Equip - 5 Yrs Bayamon, PR 82 INTERSTATE GENERAL COMPANY L.P. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1995 DATE CONSTRUCTED OR ACQUIRED AND DEPRECIABLE LIVES (continued) Date Constructed Description or Acquired Depreciable Life - -------------------- ----------- ------------------ Las Lomas 4/5/74 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5 Yrs Guaynabo, PR Monacillos Park 8/1/74 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5 Yrs Guaynabo, PR Monserrate I 5/1/79 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5 Yrs Carolina, PR Monte De Oro 12/1/77 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5 Yrs Rio Piedras, PR New Center 3/15/78 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5 Yrs San Juan, PR Piedras Americas 8/1/73 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5 Yrs San Juan, PR Rio Piedras 9/1/72 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5 Yrs San Juan, PR San Anton 12/10/74 Bldg - 40 Yrs Highrise Apts. Acquired Bldg Equip - 5 Yrs Carolina, PR Valle Del Sol 3/15/83 Bldg - 40 Yrs Highrise Apts. Constructed Bldg Equip - 5 Yrs Bayamon, PR Vistas Del Turabo 12/30/83 Bldg - 40 Yrs Highrise Apts. Acquired Bldg Equip - 5 Yrs Caguas, PR Office Condo 5/14/90 31.5 Yrs East Whitiland Township Acquired Pennsylvania 83 INTERSTATE GENERAL COMPANY L.P. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1995 DATE CONSTRUCTED OR ACQUIRED AND DEPRECIABLE LIVES (continued) Date Constructed Description or Acquired Depreciable Life - -------------------- ----------- --------------------- Fredericksburg, VA 2/23/90 Bldg 5 - 40 Yrs Model Park 1 Model Acquired Raleigh, NC 2/23/90 Bldg 5 - 40 Yrs Model Park 2 Models Acquired 84 INTERSTATE GENERAL COMPANY L.P. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1995 (In thousands) Real Estate at December 31, 1994 $ 271,344 Additions for 1995: Improvements 1,999 ----------- Total Additions 1,999 ----------- Deductions for 1995: Dispositions 917 Other 3,344 ----------- Total Deductions 4,261 ----------- Real Estate at December 31, 1995 $ 269,082 =========== 85 INTERSTATE GENERAL COMPANY L.P. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1995 (In thousands) Accumulated depreciation at December 31, 1994 $ 86,572 Additions for 1995: Depreciation expense 21,125 Deductions for 1995: Dispositions (797) ----------- Accumulated depreciation at December 31, 1995 $ 106,900 =========== 86 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 87 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The table below sets forth the name, age and positions with IGC, Interstate General Management Corporation ("IGMC" or the "Managing General Partner") and Interstate Business Corporation ("IBC" or the "General Partner") of each director and executive officer of the Managing General Partner, and each executive officer and certain key employees of IGC. Positions with IGC, and Name Age General Partners - ---- --- ------------------------------------- James J. Wilson 62 Chairman and Chief Executive Officer of IGC; Chief Executive Officer and Director of Managing General Partner and Chairman and Director of IBC Gregory G. Kreizenbeck 49 President and Chief Operating Officer of IGC; Director and President and Chief Operating Officer of Managing General Partner Donald G. Blakeman 63 Executive Vice President of IGC; Director, Executive Vice President and Assistant Secretary of Managing General Partner John E. Hans 47 Senior Vice President and Chief Financial Officer of IGC; Director, Senior Vice President, Chief Financial Officer and Secretary of Managing General Partner Edwin L. Kelly 54 Senior Vice President of IGC; Senior Vice President and Assistant Secretary of Managing General Partner Jorge Colon-Nevares 60 Director of Managing General Partner Joel H. Cowan 59 Director of Managing General Partner Francisco Arrivi Cros 48 Senior Vice President of IGC; Senior Vice President and Assistant Secretary of Managing General Partner Donald L. Drew 54 Senior Vice President of IGC Paul A. Resnik 48 Senior Vice President of IGC and Managing General Partner Carlos R. Rodriguez 50 Vice President of IGC Thomas B. Wilson 33 Director of Managing General Partner and Executive Vice President of IBC Barbara A. Wilson 59 Director of Managing General Partner and Secretary/Treasurer of IBC 88 Under the IGC Partnership Agreement, IBC has the right to designate one- third of the directors of the Managing General Partner so long as IBC continues to be a General Partner. To the extent practicable, an additional one-third must be selected from among persons who are neither affiliates of IGC nor then existing officers or employees of IGC, any General Partner or any of their affiliates. The remaining directors must be selected from among persons who are officers of IGC. Directors are elected annually in April by action of the directors then holding office. Messrs. Colon-Nevares and Cowan currently serve as the unaffiliated directors. Messrs. James J. and Thomas B. Wilson and Mrs. Barbara A. Wilson serve as the IBC director designates, and Messrs. Blakeman, Hans, and Kreizenbeck serve as the directors selected from among the executive officers of IGC. The unaffiliated directors do not constitute a majority of IGMC's Board of Directors. Directors of the Managing General Partner and IBC serve for a term of one year and thereafter until their successors have been elected. The board of directors of the Managing General Partner is empowered to elect its successors. Officers of the Managing General Partner and IBC are elected by their respective boards of directors to serve at the discretion of such boards of directors. Officers of IGC are appointed by the Managing General Partner to serve at its discretion. Certain additional information concerning the above persons, including their business experience is set forth below. James J. Wilson became Chairman and Chief Executive Officer of IGC in April 1994. Prior to that time, he served as President and Chief Executive Officer of IGC. He has been President and Chairman of the Board of the Managing General Partner since its formation in 1986. He is the founder of IBC and its predecessor companies, and has served as Chairman of the Board, President and Chief Executive Officer of those companies since 1957. As stated in Item I of this document and the accompanying financial statements, Mr. Wilson was named in a litigation matter with the U.S. Army Corps of Engineers. On February 29, 1996, Mr. Wilson, along with IGC and SCA, was convicted on four felony counts of violating Section 404 (wetlands) of the U.S. Clean Water Act. Mr. Wilson intends to appeal the conviction. Sentencing is expected to occur in June 1996. Gregory G. Kreizenbeck has been President and Chief Operating Officer of IGC and Director since March 1994 and President and Chief Operating Officer of the Managing General Partner since December 1995. From 1990 to March 1994, he was founder and principal of The Kreizenbeck Group, a real estate consulting firm. From 1986 to 1990, he was President and Chief Executive Officer of Transcontinental Properties. From 1970 to 1986, he served in various management positions with J.A. Terteling & Sons, Inc., a San Francisco-based private investment firm, including President and Chief Executive Officer of Terteling Ventures, Inc. from 1984 to 1986. He is also a member of the advisory board of Findings, Inc., a New Hampshire-based jewelry manufacturer, sales and distribution company. Mr. Kreizenbeck is also a Director and Senior Vice President and Secretary of EMC, and Senior Vice President and Secretary of Equus. Donald G. Blakeman has been Executive Vice President of IGC and a Director and Executive Vice President of the Managing General Partner since their formation in 1986. He served as Secretary of the Managing General Partner from December 1990 to December 1995, when he was named Assistant Secretary. He was a Director of IBC and its predecessor companies from 1970 to 1990 and served in 89 various executive positions in those companies since 1968. Mr. Blakeman was named President of Equus and of EMC in February 1996 and has served as a Director for EMC since its formation in 1994. Mr. Blakeman is also Director and President of El Comandante Capital Corp. ("ECCC"), a wholly owned subsidiary of HDA, and has served in such capacity since December 1993. John E. Hans has been Senior Vice President and Chief Financial Officer of IGC since September 1994. In December 1995, he was named Director, Senior Vice President, Chief Financial Officer and Secretary of the Managing General Partner. Previously, he served as Senior Vice President and Assistant Secretary of the Managing General Partner since September 1994. He is also a Director, Senior Vice President and Secretary/Treasurer of American Family Homes, and Director, Senior Vice President and Chief Financial Officer of both Equus and EMC. Prior to joining IGC, Mr. Hans served as Chief Operating and Chief Financial Officer of NB Engineering. Mr. Hans also was employed by Riggs National Bank of Washington, D.C. for 24 years, including three years as its Chief Financial Officer, Executive Vice President and a member of its Board of Directors. Edwin L. Kelly has been Senior Vice President and Treasurer of IGC and Senior Vice President of the Managing General Partner since their formation in 1986. He has served in various executive positions with IGC and its predecessor companies since 1974, including as a Director of the Managing General Partner from 1986 to 1995. Jorge Colon-Nevares has been a Director of the Managing General Partner since May 1989. He also serves as Director of El Comandante Operating Company ("ECOC"). Since 1978, he has been President and Chief Executive Officer of Wendco of Puerto Rico, Inc., the franchisee of Wendy's for Puerto Rico. He is an officer and Director of Multisystems Restaurants Inc. and Twenty First Century Restaurants Inc., the franchisee for Sizzler and T.G.I. Friday's in Puerto Rico. He is a Director of the Foundation for the University of Puerto Rico and Chairman of the Board of Trustees for Universidad Central del Caribe School of Medicine. Joel H. Cowan has been a Director of the Managing General Partner since its formation in 1986. He was also a Director of predecessors of IGC from 1968 to 1986. He has been President of Cowan & Associates, a real estate investment company owned by him since 1976. Since 1984, he has been Chairman of The Habersham Group, an international business owned by him whose activities include real estate development, trade and merchant banking. Since 1993, he has been a Director of Continental Airlines, Inc. He was formerly a Director of IRT Property Company from 1978 to 1992 and has served as a member of the Board of Regents to the University System of Georgia from 1990 to 1995. Francisco Arrivi Cros has been Senior Vice President of IGC since October 1990 and Senior Vice President and Assistant Secretary of the Managing General Partner since February 1991. He also serves as Director, Senior Vice President and Assistant Secretary of EMC; Director, Vice President, Secretary and Treasurer of ECCC, and Vice President, Treasurer and Assistant Secretary of HDAMC. He was Vice President of the Chase Manhattan Bank N.A. in Puerto Rico from 1977 to September 1990, and manager of its Real Estate Finance Division from 1987 to 1990. Donald L. Drew has been Senior Vice President of IGC since February 1992. From 1987 to 1991, he was President of Ak-Sar-Ben Racetrack in Nebraska. He was President of Ladbroke North American Racing Operations from 1985 to 1987. Mr. Drew is also Senior Vice President of EMC and serves as one of its Directors. 90 Paul A. Resnik has been Senior Vice President of IGC since February 1993 and Vice President of the Managing General Partner since January 1989. Previously, he served as Vice President of IGC since September 1987. Carlos R. Rodriguez has been Vice President of IGC since February 1989. From 1984 to 1989, he was Senior Vice President/Construction Manager of SORO Construction Control, Inc., a construction management company in Houston, Texas. Thomas B. Wilson was elected as a Director of the Managing General Partner in December 1995. He also serves as President of ECOC and Executive Vice President of IBC. Mr. Wilson is the son of Mr. James J. Wilson. Barbara A. Wilson was elected as a Director of the Managing General Partner in December 1995. She also serves as Director of EMC, Director and Secretary/Treasurer of IBC, and Director of HDA Management Corporation. Mrs. Wilson is the wife of Mr. James J. Wilson. Raymond L. Crace was named President and Chief Operating Officer of American Family Homes, Inc., a wholly-owned subsidiary of IGC, effective March 1996. Prior to joining IGC, Mr. Crace was the Virginia Area President of Patwil Homes, a subsidiary of Miles Homes. He also worked for Pulte Homes for 15 years where he served in a variety of capacities. He had his own business, Crace Communities, where he served as President for 7-1/2 years. Late Filings Donald Drew filed one Form 4 disclosing the sale of 30,000 Units one day late in 1995. 91 ITEM 11. EXECUTIVE COMPENSATION The 1995, 1994 and 1993 compensation for the CEO and four most highly compensated officers are summarized on the following table: Long-Term Compensation ------------ Annual Compensation Awards --------------------------------- ------------ Securities Other Underlying Annual Options/ All Other Name & Principal Year Salary Bonus Compensation SAR's Compensation Position ($) ($) ($) (2) # ($) (1) ---------------- ---- ------- ------ ------------ ---------- ------------ 1. James J. Wilson Chairman & CEO 1995 474,325 0 0 0 9,552 1994 440,240 0 0 0 9,576 1993 416,192 0 0 0 16,563 2. Donald Drew Senior VP 1995 347,200 169,942 30,000 0 9,552 1994 347,200 98,730 90,000 0 9,576 1993 340,200 34,288 0 50,000 16,563 3. Gregory G. Kreizenbeck President & COO 1995 287,700 0 33,308 (3) 140,000 9,552 1994 227,804 0 0 140,000 0 4. Donald G. Blakeman Exec VP & 1995 285,200 0 0 0 9,552 Secretary 1994 263,200 6,000 14,000 46,500 9,576 1993 230,200 13,300 0 3,500 16,563 5. John E. Hans Senior VP & CFO 1995 190,200 10,000 0 0 0 1994 55,417 0 0 40,000 0 (1) Reflects IGC's contributions to Retirement Plan discussed below. (2) Represents the difference between the price paid for shares of the Company's stock obtained by exercising stock options and the fair market value of the stock at the date of purchase. (3) Represents perquisites and other personal benefits, consisting mostly of $29,556 for relocation expenses. Employment Agreements. Messrs. Wilson and Kreizenbeck entered into amended three year employment agreements with IGC commencing January 1, 1996. Mr. Wilson's agreement provides for a base salary of $473,000, to be modified annually, certain fringe benefits, and death or disability benefits. The agreement may be terminated without cause upon 90 days notice, and provides for a severance pay of base salary for the unexpired term of the contract. Mr. Kreizenbeck's agreement provides for a base salary of $287,500, to be modified annually, and certain fringe benefits. The agreement may be terminated without cause upon 90 days notice, and provides for a severance package of two years' base salary plus moving expenses unpaid by the subsequent employer. Mr. Drew 92 entered into a five year employment agreement effective as of January 1, 1993 providing for an annual base salary of $340,000 and a bonus based on the amount of rent received by HDA from ECOC. ECOC has reimbursed the Company for Mr. Drew's compensation paid since July 1992. Mr. Drew's employment agreement further provides for the termination of his employment contract if the race track is sold. Mr. Blakeman entered into an employment agreement with IGC commencing as of December 31, 1986 for successive one year terms, provided that neither party can terminate the agreement without a 90 day written notice. Mr. Hans entered into an employment agreement with IGC commencing September 1, 1994 for successive one year terms, provided that neither party can terminate the agreement without a 60 day written notice. The agreement provides for a base salary of $190,000, to be modified annually, a one-time signing bonus of $10,000, certain fringe benefits, death or disability benefits, and a severance package of 90 days salary and benefits. Directors. Directors of the Managing General Partner who are neither affiliates of IBC nor existing officers or employees of the Company, any General Partner, or any of their affiliates, receive directors' fees established by the Board of Directors of the Managing General Partner. Messrs. Cowan and Colon-Nevares earned such directors fees during 1995. The outside directors of the managing general partner, IGMC, are compensated at a rate of $5,000 per quarter, $1,400 per meeting and out of pocket travel reimbursements for meeting attendance. In 1995, the director's fees and expenses totaled $62,000. Director fees for 1995 that are unpaid as of December 31, 1995 totaled $28,000. IBC indemnifies the directors of the Managing General Partner against any liability (including legal fees and expenses) arising out of their serving in such capacities, except for liabilities arising out of the gross negligence or willful misconduct of such directors. 93 Stock Options and Stock Appreciation Rights. IGC's employees, including its directors and officers, are eligible to participate in the Unit Incentive Plan (the "Employees Plan"). Under the Employees Plan, a committee composed of the independent directors of IGMC (the "Committee") awards Unit options or Unit Appreciation Rights to employees and officers on the basis of their performance. The Unit Appreciation Rights entitle the holder to receive upon exercise, an amount payable in cash, Class A units of the Company, other property or some combination thereof, as determined by the Committee. The amount received upon exercise is determined based on the excess of the fair market value of the Company's Units on the exercise date, plus 50% of the fair market value of Equus Units on the exercise date, over the base price of the Unit Appreciation Right specified in the individual rights agreements. The 1995 activity under these plans for the CEO and four most highly compensated officers are summarized on the following tables: UNIT APPRECIATION RIGHTS GRANTED DURING 1995 Percent of Total Unit Number of Appreciation Unit Rights Granted Appreciation to Employees Base Rights in 1995 Price Expiration Granted (%) ($) Date ------------ ------------- ----- ---------- James J. Wilson -- -- -- -- Donald Drew -- -- -- -- Gregory G. Kreizenbeck (1) 140,000 100% 6.33 3-01-04 Donald G. Blakeman -- -- -- -- John E. Hans -- -- -- -- Potential Realizable Value at Assumed Annual Rate of Unit Price Appreciation for Unit Appreciation Rights Term -------------------------------------- 5% 10% ($) ($) --------- --------- James J. Wilson -- -- Donald Drew -- -- Gregory G. Kreizenbeck (1) 557,326 1,412,375 Donald G. Blakeman -- -- John E. Hans -- -- (1) On March 16, 1995, Mr. Kreizenbeck's Unit Appreciation Rights Agreement was amended and the base price of his rights was increased to $6.33. In January 1996 an additional amendment decreased the base price of his rights to $4.94. 94 AGGREGATED OPTION/UNIT APPRECIATION RIGHTS EXERCISES IN 1995 AND DECEMBER 31, 1995 OPTION/UNIT APPRECIATION RIGHTS VALUES Number of Securities Value of Underlying Unexercised Unexercised in-the-money Options Options and and Unit Unit Appreciation Appreciation Rights at Rights at December 31, December 31, 1995 1995 ------------------------------ Units Value Exercisable/ Exercisable/ Acquired On Realized Unexercisable Unexercisable Name Exercise (#) ($) (#) ($) - ------------------- ------------ -------- ------------- -------------- James J. Wilson -- -- --/-- --/-- Donald Drew 10,000 30,000 --/20,000 --/-- Gregory G. Kreizenbeck(1) -- -- 20,000/120,000 --/-- Donald G. Blakeman -- -- 9,300/37,200 7,886/31,546 John E. Hans -- -- 8,000/32,000 822/3,288 (1) On March 16, 1995, Mr. Kreizenbeck's Unit Appreciation Rights Agreement was amended and the base price of his rights was increased to $6.33 from $4.00. In January, 1996 an additional amendment decreased the base price to $4.94. Long-Term Incentive Plan. IGC has established an incentive compensation plan (the "Profit Sharing Plan") pursuant to which IGC awards annual cash bonuses to officers and employees in reasonable amounts reflecting their contributions to the Company. The persons to receive bonuses and the amounts of such bonuses are approved by the unaffiliated directors of IGMC. Under the Profit Sharing Plan, a portion of each bonus, keyed by the compensation committee to a percentage of the employees' salary, is contributed on behalf of the employee to the retirement plan discussed below. No contributions were made to the Profit Sharing Plan during 1995, 1994 or 1993. Retirement Plan. IGC maintains a retirement plan (the "Retirement Plan") for eligible employees of the Company. Employees are generally eligible to participate when they complete one year of service. Contributions to the Retirement Plan in 1995, 1994 and 1993 were 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 $150,000) that exceeded that wage base. Additional contributions to the Retirement Plan are made pursuant to the Profit Sharing Plan. Contributions to the Retirement Plan in 1995 on behalf of Messrs. Wilson, Drew, Kreizenbeck, Blakeman and Hans were $9,552, $9,552, $9,552, $9,552 and $0, respectively. 95 ITEM 12. SECURITY OWNERSHIP OF CERTAIN UNITHOLDERS AND MANAGEMENT The following table sets forth certain information regarding the Units that were beneficially owned on February 29, 1996 (i) by each person who is known by the general partners to beneficially own more than 5% of the outstanding units of the Company, (ii) by named executive officer of a general partner, and (iii) by all executive officers of the Company and directors of the general partners as a group. Except where noted, the address for the beneficial owner is 222 Smallwood Village Center, St. Charles, Maryland, 20602. Beneficial Ownership (1) ------------------------ Number of Name of Beneficial Owner IGC Units Percent - ------------------------ ------------- ------- James J. Wilson (2) 4,051,311 39.35 Donald Drew 10,000 .10 Gregory G. Kreizenbeck 7,000 .07 Donald G. Blakeman 377,389 3.67 John E. Hans -- -- All executive officers of IGC and directors of IGMC as a group (13 persons) (3) 4,827,965 46.89 Bessemer Interstate Corporation 522,208 5.07 245 Peachtree Center Avenue #804 Atlanta, GA 30303 Interstate Business Corporation 3,327,894 32.32 222 Smallwood Village Center St. Charles, MD 20602 Wilson Securities Corporation 1,172,203 11.39 222 Smallwood Village Center St. Charles, MD 20602 (1) The beneficial ownership of Units is determined on the basis of Units directly and indirectly owned by executive officers of IGC and directors of IGMC and Units to be issued to IGC officers under options which are exercisable within the next 60 days. (2) Includes 2,360,915 IGC Units (22.93%) attributable to IBC shares held by Mr. Wilson and his wife, Barbara A. Wilson, as trustees of a voting trust. Also includes 518,093 IGC units (5.03%) attributable to IBC shares held by Mr. Wilson. The beneficiaries of the trust are Mr. Wilson and his children. The trust terminates on September 30, 1997, or upon the death of the trustees. Also includes 1,172,203 IGC Units (11.39%) held by Wilson Securities Corporation which is owned by another voting trust in which Mr. Wilson and his wife are trustees. The beneficiaries of this trust are Mr. Wilson and his children. The trust terminates on June 30, 1996 or upon the death of the trustees. Includes 30,579 and 100 Units directly held by Mr. Wilson and Mrs. Wilson, respectively. Does not 96 include 1,280,971 IGC Units (12.44%) held by the children of Mr. Wilson or attributable to IBC shares held by the children. (3) Includes IGC Units subject to options exercisable under the IGC Employees and Directors Plans of 26,000 Units for all thirteen executive officers of IGC and directors of IGMC as a group. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information responding to this item appears in Note 9 to the Company's Consolidated Financial Statements included in Item 8 of this report. 97 PART IV 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, 1995, 1994 and 1993 Consolidated Balance Sheets as of December 31, 1995 and 1994 Consolidated Statements of Changes in Partners' Capital for the years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements for the years ended December 31, 1995, 1994 and 1993 2. Financial Statement Schedules The following financial statements schedules are contained herein: Report of Independent Public Accountants Schedule XI -- Real Estate and Accumulated Depreciation 98 3. Exhibits Exhibits required by Securities and Exchange Commission Section 601 of Regulation S-K. Exhibit No. Description of Exhibit Reference - ------- ----------------------------------------- -------------------------- 3(a) Third Amended and Restated Agreement of Exhibit 3(a) to Amendment Limited Partnership of Interstate General No. 3 to Registration Company L.P. Statement No. 33-10636 on Form S-1, filed February 11, 1987 (Form "S-1") (b) First Amendment to Third Amended and Exhibit 3(b) to 1987 10-K Restated Agreement of Limited Partnership of Interstate General Company L.P. (c) Second Amendment to Third Amended and Exhibit 3(c) to 1988 10-K Restated Agreement of Limited Partnership of Interstate General Company L.P. (d) Amended and Restated Certificate of Exhibit 3(b) to Form S-1 Limited Partnership of Interstate General Company L.P. (e) Certificate of Incorporation of Exhibit 3(c) to Form S-1 Interstate General Management Corporation (f) Bylaws of Interstate General Management Exhibits 3(d) and 3(1) to Corporation, as amended Form S-1 (g) Certificate of Incorporation of Exhibit 3(g) to Form S-1 Interstate Business Corporation (formerly Interstate St. Charles, Inc.) as amended (h) Bylaws of Interstate Business Corporation Exhibit 3(h) to Form S-1 (formerly Interstate St. Charles, Inc.) as amended February 4, 1986 (i) Amendment to Bylaws of Interstate Exhibit 3(i) to 1988 10-K General Management Corporation dated November 10, 1988 4(a) Form of beneficial assignment Exhibit 4(a) to Form S-1 certificate representing Units (b) Form of certificate evidencing limited Exhibit 4(b) to Form S-1 partnership interest (c) Certificate of Incorporation of Exhibit 4(c) to Form S-1 Interstate Management Title Company dated September 19, 1986 (d) Bylaws of Interstate Management Title Exhibit 4(d) to Form S-1 Company dated September 25, 1986 99 (e) Amendment to Certificate of Incorporation Exhibit 4(e) to Form S-1 of Interstate Management Title Company dated December 31, 1986 10. Material Contracts (a) Employment Agreement with James J. Wilson Exhibit 10(a) to Form S-1 (b) Employment Agreement with Exhibit 10(b) to Form S-1 Donald G. Blakeman (c) Employment Agreement with Exhibit 10(a) to Form 10-Q Gregory G. Kreizenbeck for the quarter ended March 31, 1994 (d) First Amendment to Employment Agreement Exhibit 10(d) to 1994 10-K with Gregory G. Kreizenbeck (e) Amended and Restated Employment Agreement Filed herewith between Interstate General Properties L.P. and Gregory G. Kreizenbeck dated January 15, 1996 (f) Employment Agreement with Exhibit 10(a) to Form 10-Q John E. Hans for the quarter ended September 30, 1994 (g) Employment Agreement with Exhibit 10(a) to Form 10-Q Edwin L. Kelly for the quarter ended June 30, 1994 (h) Amendment to Employment Agreement between Exhibit 10(a) to Form 10-Q Interstate General Company L.P. and for the quarter ended Edwin L. Kelly dated May 20, 1994 June 30, 1995 (i) Employment Agreement with Exhibit 10(e) to 1993 10-K Donald Drew (j) Employment Agreement between Interstate Filed herewith General Company L.P. and James J. Wilson dated January 15, 1996 (k) Indemnity Agreement among Interstate Exhibit 10(f) to Form S-1 General Business Corporation, Interstate St. Charles, Inc. and each director and officer of Interstate General Management Corporation (l) Unit Incentive Plan for Directors, Exhibit 10(i) to 1994 10-K Amended and Restated, dated March 17, 1995 (m) Unit Incentive Plan for Employees, Exhibit 10(j) to 1994 10-K Amended and Restated, dated March 17, 1995 100 (n) Amended and Restated Certificate and Exhibit 10(11) to Form S-1 Agreement of Limited Partnership of St. Charles Associates Limited Partnership dated March 14, 1985 (o) Amended and Restated Certificate and Exhibit 10(j) to Form S-1 Agreement of Limited Partnership of Interstate General Properties Limited Partnership dated December 31, 1986 (p) Second Amended and Restated Certificate Exhibit 10(kk) to Form S-1 and Agreement of Limited Partnership of Interstate General Properties Limited Partnership dated as of December 31, 1986 (q) Fourth Amendment to Second Amendment Exhibit 10(lll) to and Restated Certificate and Agreement 1991 10-K of Interstate General Properties Limited Partnership S.P., dated June 29, 1981 (r) Fifth Amendment to Second Amendment and Exhibit 10(mmm) to Restated Certificate and Agreement of 1991 10-K Interstate General Properties Limited Partnership S.P., dated June 29, 1981 (s) Third Amended and Restated Certificate Exhibit 10(kk) to and Agreement of Limited Partnership of 1989 10-K Interstate General Properties Limited Partnership dated as of December 31, 1986 (t) Partnership agreement for Fox Chase Exhibit 10(p) to Form S-1 Apartments General Partnership as amended January 29, 1986 (u) Amendment to Partnership Agreement for Exhibit 10(mm) to Form S-1 Fox Chase Apartments General Partnership dated February 10, 1987 (v) Withdrawal, Mutual Release and Exhibit 10(q) to 1993 10-K Indemnification Agreement and Amendment to Fox Chase General Partnership Agreement dated August 20, 1993 (w) Partnership agreement for Wakefield Third Exhibit 10(r) to Form S-1 Age Associates Limited Partnership dated July 1, 1985 (x) Partnership agreement for Wakefield Exhibit 10(t) to Form S-1 Terrace Associates Limited Partnership dated July 1, 1985 (y) Partnership agreement for Headen House Exhibit 10(v) to Form S-1 Associates Limited Partnership dated July 1, 1985 101 (z) Partnership agreement for Palmer Exhibit 10(w) to Form S-1 Apartments Associates Limited Partnership dated July 1, 1985 (aa) Partnership agreement for Chastleton Exhibit 10(dd) to Form S-1 Apartments Associates dated May 1, 1986 (bb) Partnership agreement for New Forest Exhibit 10(ff) to Form S-1 Apartments General Partnership dated November 18, 1986 (cc) First Amendment to the General Exhibit 10(ii) to Partnership Agreement of New Forest 1988 10-K Apartments General Partnership dated February 24, 1987 (dd) Second Amendment to the General Exhibit 10(hh) to Partnership Agreement of New Forest 1988 10-K Apartments General Partnership dated December 19, 1988 (ee) Withdrawal, Mutual Release and Exhibit 10(z) to 1993 10-K Indemnification Agreement and Amendment to New Forest Apartments General Partnership Agreement dated August 20, 1993 (ff) Limited Partnership Agreement and Exhibit 10(zz) to Amended and Restated Limited Partnership 1988 10-K Certificate of Coachman's Limited Partnership dated June 2, 1988 (gg) Management Services Agreements between Exhibit 10(k) to Form S-1 Interstate General Properties Limited Partnership and National General Corporation (3 separate agreements) (hh) Property Management Agreement between Exhibit 10(oo) to Form S-1 National General Corporation and Interstate General Corporation and Interstate General Properties Limited Partnership as amended March 30, 1986 (ii) Property management agreement between Exhibit 10(n) to Form S-1 Smallwood Village Associates Limited Partnership and Interstate General Properties Limited Partnership as contained in the Smallwood Village Associates Limited Partnership Amended and Restated Certificate and Agreement of Limited Partnership dated July 1, 1985 102 (jj) Property management agreement between Exhibit 10(o) to Form S-1 Smallwood Village Office Building Associates Limited Partnership and Interstate General Properties and Interstate General Properties Limited Partnership as contained in the Smallwood Village Office Building Associates Amended and Restated Certificate and Agreement of Limited Partnership dated July 1, 1985 (kk) Management service agreement between Exhibit 10(jj) to Interstate General Company L.P. and 1989 10-K Coachman's Limited Partnership dated May 2, 1988 (ll) Amendment to Management Service Exhibit 10(hh) to Agreement between Interstate General 1993 10-K Company L.P. and Coachman's Limited Partnership dated January 1, 1993 (mm) Management Agreement by and between Exhibit 10(zzzz) to Interstate Properties and Interstate 1992 10-K St. Charles, Inc. (El Monte), dated January 5, 1987 (nn) First Amendment to Management Agreement Exhibit 10(aaaaa) to by and between Interstate Properties and 1992 10-K Interstate Business Corporation (El Monte), dated January 4, 1988 (oo) Second Amendment to Management Agreement Exhibit 10(bbbbb) to by and between Interstate Properties and 1992 10-K Interstate Business Corporation (El Monte), dated December 31, 1992 (pp) Management Agreement by and between Exhibit 10(ccccc) to Interstate General Properties and 1992 10-K Interstate St. Charles, Inc. (Santa Maria Shopping Center), dated January 5, 1987 (qq) First Amendment to Management Agreement Exhibit 10(ddddd) to by and between Interstate General 1992 10-K Properties Limited Partnership and Interstate Business Corporation (Santa Maria Shopping Center), dated January 4, 1988 (rr) Second Amendment to Management Agreement Exhibit 10(eeeee) to by and between Interstate General 1992 10-K Properties Limited Partnership S.E. and Interstate Business Corporation and Santa Maria Associates S.E., dated December 28, 1990 103 (ss) Two (2) Property management agreements Exhibit 10(aa) to Form S-1 between Interstate General Properties Limited Partnership and Capitol Park Associates as amended December 31, 1984 (tt) Lease for office space between Interstate Exhibit 10(r) to Form S-1 General Business Corporation and Smallwood Village Associates Limited Partnership dated May 21, 1981 (uu) Lease for office space between Interstate Exhibit 10(m) to Form S-1 General Business Corporation and Smallwood Village Associates Limited Partnership dated June 15, 1981 (vv) Lease Amendment to Lease for commercial Exhibit 10(c) to Form 10-Q space between Smallwood Village Associates for the quarter ended and Interstate General Company L.P. September 30, 1995 dated October 1, 1991 (ww) Lease Amendment II to Lease for commercial Exhibit 10(d) to Form 10-Q space between Smallwood Village Associates for the quarter ended and Interstate General Company L.P. September 30, 1995 dated September 5, 1995 (xx) Store Lease between Interstate General Exhibit 10(fff) to Business Corporation and Smallwood 1991 10-K Village Associates Limited Partnership dated April 1, 1988 (yy) Store Lease between Smallwood Village Exhibit 10(e) to Form 10-Q Associates and Interstate General for the quarter ended Company L.P. dated December 1, 1987 September 30, 1995 (zz) Lease Amendment to Store Lease between Exhibit 10(f) to Form 10-Q Smallwood Village Associates and for the quarter ended Interstate General Company L.P. dated September 30, 1995 February 1, 1989 (aaa) Lease Amendment II to Store Lease Exhibit 10(g) to Form 10-Q between Smallwood Village Associates for the quarter ended and Interstate General Company L.P. September 30, 1995 dated December 1, 1992 (bbb) Lease Amendment III to Store Lease Exhibit 10(h) to Form 10-Q between Smallwood Village Associates for the quarter ended and Interstate General Company L.P. September 30, 1995 dated September 30, 1994 (ccc) Lease Amendment IV to Store Lease Exhibit 10(i) to Form 10-Q between Smallwood Village Associates for the quarter ended and Interstate General Company L.P. September 30, 1995 dated September 5, 1995 (ddd) Office Lease between Smallwood Village Exhibit 10(a) to Form 10-Q Associates and Interstate General Company for the quarter ended L.P. for Smallwood Village Center dated September 30, 1995 August 25, 1995 104 (eee) Amendment to Office Lease between Exhibit 10(b) to Form 10-Q Smallwood Village Associates and for the quarter ended Interstate General Company L.P. for September 30, 1995 Smallwood Village Center dated September 5, 1995 (fff) Lease Agreement between Interstate Filed herewith Business Corporation and American Family Homes for Office Building dated June 28, 1994 (ggg) Fourth Amendment to Interstate General Exhibit 10(yyyy) to Company L.P. Retirement Plan, dated 1992 10-K July 1, 1992 (hhh) Fifth Amendment to Interstate General Exhibit 10(b) to Form 10-Q Company L.P. Retirement Plan dated for the quarter ended June 5, 1995 June 30, 1995 (iii) Agreement Regarding Partnership Interest Exhibit 10(nn) to Form S-1 in Chastleton Apartment Associates dated January, 1987 (jjj) Stockholders Agreement among Interstate Exhibit 10(pp) to Form S-1 and certain stockholders of Interstate St. Charles, Inc. dated as of December 1, 1986 (kkk) License Agreement between Interstate Exhibit 10(qq) to Form S-1 General Company L.P., Interstate General Business Corporation and Interstate St. Charles, Inc., dated as of December 31, 1986 (lll) Amendment to License Agreement between Exhibit 10(rr) to Form S-1 Interstate General Company L.P., Interstate General Business Corporation and Interstate General Company L.P., dated as of February 9, 1987 (mmm) Unitholders Agreement among Interstate Exhibit 10(ss) to Form S-1 General Business Corporation, Interstate St. Charles, Inc., and Interstate Properties Trust dated as of February 9, 1987 (nnn) Agreement dated March 15, 1990 among Exhibit 10(ddd) to Interstate General Company L.P., 1990 10-K Interstate Business Corporation and Interstate General Properties (ooo) Management service agreement between Exhibit 10(ee) to Form S-1 Interstate General Business Corporation Amendment Exhibit 10(ee) and Chastleton Apartments Associates to 1989 10-K as amended February 26, 1987 105 (ppp) Amendment to February 26, 1987 Exhibit 10(bbb) to Management Service Agreement between 1993 10-K Interstate General Business Corporation and Chastleton Apartment Associates dated January 1, 1993 (qqq) Property management agreement between Exhibit 10(z) to Form S-1 Interstate General Properties Limited Amendment Exhibit 10(z) to Partnership and G.L. Limited Partnership 1989 10-K as amended September 30, 1985 and as amended March 1, 1989 (rrr) Amendment to Property Management Exhibit 10(ddd) to Agreement between Interstate General 1993 10-K Properties Limited Partnership and G. L. Limited Partnership dated January 1, 1993 (sss) Second Amendment and Restatement of Exhibit 10(eee) to Purchase Agreement by and between Land 1993 10-K Development Associates S.E. and Wal-Mart Puerto Rico, Inc., dated November 30, 1993 (ttt) Sale and Purchase Agreement between Exhibit 10(hhhhh) to Interstate General Company L.P. and 1992 10-K K. Hovnanian at Montclair, Inc., dated September 30, 1992 (uuu) First Amendment to Sale and Purchase Exhibit 10(ggg) to Agreement by and between Interstate 1993 10-K General Company L.P. and K. Hovnanian at Montclair, Inc., dated October 16, 1992 (vvv) Second Amendment to Sale and Purchase Exhibit 10(hhh) to Agreement by and between Interstate 1994 10-K General Company L.P. and K. Hovnanian at Montclair, Inc., dated August 18, 1994 (www) Third Amendment to Sale and Purchase Exhibit 10(iii) to Agreement by and between Interstate 1994 10-K General Company L.P. and K. Hovnanian at Montclair, Inc., dated December 16, 1994 (xxx) Amended and Restated Lease Agreement Exhibit 10.8 to the between Housing Development Associates Registration Statement on S.E. and El Comandante Operating Company, S-4 of El Comandante dated December 15, 1993 Capital Corp. and Housing Development Associates S.E. Registration # 33-75284 (the "S-4") (yyy) Third Amended and Restated Partnership Exhibit 3.3 to the S-4 Agreement for Housing Development Associates, S.E. dated December 15, 1993 106 (zzz) Fourth Amended and Restated Partnership Exhibit 10(b) to Form 10-Q Agreement of Housing Development for the quarter ended Associates, S.E. dated July 21, 1994 June 30, 1994 (aaaa) Fifth Amended and Restated Partnership Exhibit 10(c) to Form 10-Q Agreement of Housing Development for the quarter ended Associates, S.E. dated August 1, 1994 June 30, 1994 (bbbb) Sixth Amended and Restated Partnership Exhibit 2.2 to the Report Agreement of Housing Development on Form 8-K of Equus Associates, S.E. dated March 8, 1995 Gaming Company L.P. dated March 23, 1995, File No. 000-25306 (the "Equus 8-K") (cccc) Seventh Amended and Restated Partnership Exhibit 10.37 to the Agreement of Housing Development Report on Form 10-K of Associates, S.E. dated February 7, 1996 Equus Gaming Company L.P. dated April 1, 1996, File No. 54-1719877 (dddd) Conversion Agreement dated February 3, Exhibit 2.3 to the 1995 and First Amendment thereto dated Equus 8-K March 6, 1995 (eeee) Indenture dated December 15, 1993 among Exhibit 4.1 to the S-4 El Comandante Corp., Housing Development Associates S.E. and Banco Popular De Puerto Rico (ffff) Warrant Agreement between HDA Management Exhibit 10.3 to the S-4 Corporation, Housing Development Associates S.E. and Banco Popular De Puerto Rico as Warrant Agent dated December 15, 1993 (gggg) Limited Partnership Agreement of Equus Exhibit 10(d) to Form 10-Q Gaming Company L.P. dated August 1, 1994 for the quarter ended June 30, 1994 (hhhh) First Amendment to the Limited Exhibit 10(e) to Form 10-Q Partnership Agreement of Equus Gaming for the quarter ended Company L.P. dated August 1, 1994 June 30, 1994 (iiii) Second Amendment to the Limited Exhibit 10(f) to Form 10-Q Partnership Agreement of Equus Gaming for the quarter ended Company L.P. dated August 1, 1994 June 30, 1994 (jjjj) Third Amendment to the Limited Exhibit 3.4 to Partnership Agreement of Equus Gaming to Registration Statement Company L.P. on Form S-11 of Equus Gaming Company L.P. Registration # 33-82750 (the "Equus S-11") 107 (kkkk) Amended and Restated Distribution Exhibit 2.1 to the Equus Agreement dated November 22, 1994, S-11 between Equus Gaming Company L.P. (the "Company") and Interstate General Company L.P. ("IGC") (llll) Registration Rights Agreement with Exhibit 10.4 to the S-4 respect to the Warrants dated December 15, 1993, among HDAMC, HDA, Oppenheimer & Co., Inc. and The Argosy Securities Group L.P. (mmmm) Amended and Restated Management Exhibit 10.6 to the S-4 Agreement dated December 15, 1993, between Interstate General Properties Limited Partnership S.E. ("IGP") and HDA (nnnn) Master Support and Services Agreement Exhibit 10.20 to the dated December 9, 1994, between IGC Equus S-11 and Equus Gaming Company L.P. (oooo) Consulting Agreement dated December 15, Exhibit 10.21 to the 1993, between El Comandante Operating Equus S-11 Company and Interstate General Properties Limited Partnership (pppp) First Supplemental Indenture dated Exhibit 10.27 to the December 22, 1994, to the Indenture Equus S-11 dated December 15, 1993 among El Comandante Corp., Housing Development Associates S.E. and Banco Popular de Puerto Rico (qqqq) Second Supplemental Indenture dated Exhibit 10.28 to the December 22, 1994, to the Indenture Equus S-11 dated December 15, 1993 among El Comandante Corp., Housing Development Associates S.E. and Banco Popular de Puerto Rico (rrrr) Amended and Restated Registration Rights Exhibit 10.29 to the Agreement with Respect to the Warrants Equus S-11 dated December 12, 1994, among HDAMC, HDA, Oppenheimer & Co., Inc., the Argosy Securities Group L.P. and Equus Gaming Company L.P. (ssss) Agreement of Purchase and Sale between Exhibit 10(dddd) to Interstate General Company L.P. and 1994 10-K Interstate Business Corporation dated December 30, 1994 for the Partnership Interests in: New Forest Apartments General Partnership Headen House Associates Limited Partnership Fox Chase Apartments General Partnership Palmer Apartments Associates Wakefield Terrace Associates Wakefield Third Age Associates 108 (tttt) Agreement of Sale between Land Development Exhibit 10(j) to Form 10-Q Associates S.E. and Twenty First Century for the quarter ended Homes S.E. dated September 8, 1995 September 30, 1995 (uuuu) Option Agreement between Land Development Exhibit 10(k) to Form 10-Q Associates S.E. and Compri Caribe for the quarter ended Hospitality Corp. dated March 31, 1995 September 30, 1995 (vvvv) Amendment to Option Agreement between Exhibit 10(l) to Form 10-Q Land Development Associates S.E. and for the quarter ended Compri Caribe Hospitality Corp. dated September 30, 1995 November 13, 1995 (wwww) Employment Agreement for Donald Drew Exhibit 10(eeee) to dated December 14, 1993 1994 10-K 21. List of Subsidiaries of Interstate Filed herewith General Company L.P. (b) Reports on Form 8-K None (c) Exhibits See (a) 2, above. (d) Financial Statement Schedules See (a) 2, above. 109 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, there-unto duly authorized. INTERSTATE GENERAL COMPANY L.P. By: Interstate General Management Corporation Managing General Partner Dated: March 29, 1996 By: /s/ James J. Wilson --------------------- ----------------------------- James J. Wilson Chairman and Chief Executive Officer 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/ James J. Wilson March 29, 1996 - ---------------------- Chairman, Chief Executive --------------- James J. Wilson Officer and Director /s/ Gregory G. Kreizenbeck March 29, 1996 - ---------------------- President, Chief Operating --------------- Gregory G. Kreizenbeck Officer and Director /s/ Donald G. Blakeman March 29, 1996 - ---------------------- Executive Vice President --------------- Donald G. Blakeman and Director /s/ John E. Hans March 28, 1996 - ---------------------- Senior Vice President, --------------- John E. Hans Chief Financial Officer and Director /s/ Jorge Colon-Nevares March 29, 1996 - ---------------------- Director --------------- Jorge Colon-Nevares /s/ Joel H. Cowan March 27, 1996 - ---------------------- Director --------------- Joel H. Cowan /s/ Thomas B. Wilson March 29, 1996 - ---------------------- Director --------------- Thomas B. Wilson /s/ Barbara A. Wilson March 27, 1996 - ---------------------- Director --------------- Barbara A. Wilson 110 INDEX TO EXHIBITS Exhibit No. Description of Exhibit Reference - ------- ----------------------------------------- -------------------------- 3(a) Third Amended and Restated Agreement of Exhibit 3(a) to Amendment Limited Partnership of Interstate General No. 3 to Registration Company L.P. Statement No. 33-10636 on Form S-1, filed February 11, 1987 (Form "S-1") (b) First Amendment to Third Amended and Exhibit 3(b) to 1987 10-K Restated Agreement of Limited Partnership of Interstate General Company L.P. (c) Second Amendment to Third Amended and Exhibit 3(c) to 1988 10-K Restated Agreement of Limited Partnership of Interstate General Company L.P. (d) Amended and Restated Certificate of Exhibit 3(b) to Form S-1 Limited Partnership of Interstate General Company L.P. (e) Certificate of Incorporation of Exhibit 3(c) to Form S-1 Interstate General Management Corporation (f) Bylaws of Interstate General Management Exhibits 3(d) and 3(1) to Corporation, as amended Form S-1 (g) Certificate of Incorporation of Exhibit 3(g) to Form S-1 Interstate Business Corporation (formerly Interstate St. Charles, Inc.) as amended (h) Bylaws of Interstate Business Corporation Exhibit 3(h) to Form S-1 (formerly Interstate St. Charles, Inc.) as amended February 4, 1986 (i) Amendment to Bylaws of Interstate Exhibit 3(i) to 1988 10-K General Management Corporation dated November 10, 1988 4(a) Form of beneficial assignment Exhibit 4(a) to Form S-1 certificate representing Units (b) Form of certificate evidencing limited Exhibit 4(b) to Form S-1 partnership interest (c) Certificate of Incorporation of Exhibit 4(c) to Form S-1 Interstate Management Title Company dated September 19, 1986 (d) Bylaws of Interstate Management Title Exhibit 4(d) to Form S-1 Company dated September 25, 1986 111 (e) Amendment to Certificate of Incorporation Exhibit 4(e) to Form S-1 of Interstate Management Title Company dated December 31, 1986 10. Material Contracts (a) Employment Agreement with James J. Wilson Exhibit 10(a) to Form S-1 (b) Employment Agreement with Exhibit 10(b) to Form S-1 Donald G. Blakeman (c) Employment Agreement with Exhibit 10(a) to Form 10-Q Gregory G. Kreizenbeck for the quarter ended March 31, 1994 (d) First Amendment to Employment Agreement Exhibit 10(d) to 1994 10-K with Gregory G. Kreizenbeck (e) Amended and Restated Employment Agreement Filed herewith between Interstate General Properties L.P. and Gregory G. Kreizenbeck dated January 15, 1996 (f) Employment Agreement with Exhibit 10(a) to Form 10-Q John E. Hans for the quarter ended September 30, 1994 (g) Employment Agreement with Exhibit 10(a) to Form 10-Q Edwin L. Kelly for the quarter ended June 30, 1994 (h) Amendment to Employment Agreement between Exhibit 10(a) to Form 10-Q Interstate General Company L.P. and for the quarter ended Edwin L. Kelly dated May 20, 1994 June 30, 1995 (i) Employment Agreement with Exhibit 10(e) to 1993 10-K Donald Drew (j) Employment Agreement between Interstate Filed herewith General Company L.P. and James J. Wilson dated January 15, 1996 (k) Indemnity Agreement among Interstate Exhibit 10(f) to Form S-1 General Business Corporation, Interstate St. Charles, Inc. and each director and officer of Interstate General Management Corporation (l) Unit Incentive Plan for Directors, Exhibit 10(i) to 1994 10-K Amended and Restated, dated March 17, 1995 (m) Unit Incentive Plan for Employees, Exhibit 10(j) to 1994 10-K Amended and Restated, dated March 17, 1995 112 (n) Amended and Restated Certificate and Exhibit 10(11) to Form S-1 Agreement of Limited Partnership of St. Charles Associates Limited Partnership dated March 14, 1985 (o) Amended and Restated Certificate and Exhibit 10(j) to Form S-1 Agreement of Limited Partnership of Interstate General Properties Limited Partnership dated December 31, 1986 (p) Second Amended and Restated Certificate Exhibit 10(kk) to Form S-1 and Agreement of Limited Partnership of Interstate General Properties Limited Partnership dated as of December 31, 1986 (q) Fourth Amendment to Second Amendment Exhibit 10(lll) to and Restated Certificate and Agreement 1991 10-K of Interstate General Properties Limited Partnership S.P., dated June 29, 1981 (r) Fifth Amendment to Second Amendment and Exhibit 10(mmm) to Restated Certificate and Agreement of 1991 10-K Interstate General Properties Limited Partnership S.P., dated June 29, 1981 (s) Third Amended and Restated Certificate Exhibit 10(kk) to and Agreement of Limited Partnership of 1989 10-K Interstate General Properties Limited Partnership dated as of December 31, 1986 (t) Partnership agreement for Fox Chase Exhibit 10(p) to Form S-1 Apartments General Partnership as amended January 29, 1986 (u) Amendment to Partnership Agreement for Exhibit 10(mm) to Form S-1 Fox Chase Apartments General Partnership dated February 10, 1987 (v) Withdrawal, Mutual Release and Exhibit 10(q) to 1993 10-K Indemnification Agreement and Amendment to Fox Chase General Partnership Agreement dated August 20, 1993 (w) Partnership agreement for Wakefield Third Exhibit 10(r) to Form S-1 Age Associates Limited Partnership dated July 1, 1985 (x) Partnership agreement for Wakefield Exhibit 10(t) to Form S-1 Terrace Associates Limited Partnership dated July 1, 1985 (y) Partnership agreement for Headen House Exhibit 10(v) to Form S-1 Associates Limited Partnership dated July 1, 1985 113 (z) Partnership agreement for Palmer Exhibit 10(w) to Form S-1 Apartments Associates Limited Partnership dated July 1, 1985 (aa) Partnership agreement for Chastleton Exhibit 10(dd) to Form S-1 Apartments Associates dated May 1, 1986 (bb) Partnership agreement for New Forest Exhibit 10(ff) to Form S-1 Apartments General Partnership dated November 18, 1986 (cc) First Amendment to the General Exhibit 10(ii) to Partnership Agreement of New Forest 1988 10-K Apartments General Partnership dated February 24, 1987 (dd) Second Amendment to the General Exhibit 10(hh) to Partnership Agreement of New Forest 1988 10-K Apartments General Partnership dated December 19, 1988 (ee) Withdrawal, Mutual Release and Exhibit 10(z) to 1993 10-K Indemnification Agreement and Amendment to New Forest Apartments General Partnership Agreement dated August 20, 1993 (ff) Limited Partnership Agreement and Exhibit 10(zz) to Amended and Restated Limited Partnership 1988 10-K Certificate of Coachman's Limited Partnership dated June 2, 1988 (gg) Management Services Agreements between Exhibit 10(k) to Form S-1 Interstate General Properties Limited Partnership and National General Corporation (3 separate agreements) (hh) Property Management Agreement between Exhibit 10(oo) to Form S-1 National General Corporation and Interstate General Corporation and Interstate General Properties Limited Partnership as amended March 30, 1986 (ii) Property management agreement between Exhibit 10(n) to Form S-1 Smallwood Village Associates Limited Partnership and Interstate General Properties Limited Partnership as contained in the Smallwood Village Associates Limited Partnership Amended and Restated Certificate and Agreement of Limited Partnership dated July 1, 1985 114 (jj) Property management agreement between Exhibit 10(o) to Form S-1 Smallwood Village Office Building Associates Limited Partnership and Interstate General Properties and Interstate General Properties Limited Partnership as contained in the Smallwood Village Office Building Associates Amended and Restated Certificate and Agreement of Limited Partnership dated July 1, 1985 (kk) Management service agreement between Exhibit 10(jj) to Interstate General Company L.P. and 1989 10-K Coachman's Limited Partnership dated May 2, 1988 (ll) Amendment to Management Service Exhibit 10(hh) to Agreement between Interstate General 1993 10-K Company L.P. and Coachman's Limited Partnership dated January 1, 1993 (mm) Management Agreement by and between Exhibit 10(zzzz) to Interstate Properties and Interstate 1992 10-K St. Charles, Inc. (El Monte), dated January 5, 1987 (nn) First Amendment to Management Agreement Exhibit 10(aaaaa) to by and between Interstate Properties and 1992 10-K Interstate Business Corporation (El Monte), dated January 4, 1988 (oo) Second Amendment to Management Agreement Exhibit 10(bbbbb) to by and between Interstate Properties and 1992 10-K Interstate Business Corporation (El Monte), dated December 31, 1992 (pp) Management Agreement by and between Exhibit 10(ccccc) to Interstate General Properties and 1992 10-K Interstate St. Charles, Inc. (Santa Maria Shopping Center), dated January 5, 1987 (qq) First Amendment to Management Agreement Exhibit 10(ddddd) to by and between Interstate General 1992 10-K Properties Limited Partnership and Interstate Business Corporation (Santa Maria Shopping Center), dated January 4, 1988 (rr) Second Amendment to Management Agreement Exhibit 10(eeeee) to by and between Interstate General 1992 10-K Properties Limited Partnership S.E. and Interstate Business Corporation and Santa Maria Associates S.E., dated December 28, 1990 115 (ss) Two (2) Property management agreements Exhibit 10(aa) to Form S-1 between Interstate General Properties Limited Partnership and Capitol Park Associates as amended December 31, 1984 (tt) Lease for office space between Interstate Exhibit 10(r) to Form S-1 General Business Corporation and Smallwood Village Associates Limited Partnership dated May 21, 1981 (uu) Lease for office space between Interstate Exhibit 10(m) to Form S-1 General Business Corporation and Smallwood Village Associates Limited Partnership dated June 15, 1981 (vv) Lease Amendment to Lease for commercial Exhibit 10(c) to Form 10-Q space between Smallwood Village Associates for the quarter ended and Interstate General Company L.P. September 30, 1995 dated October 1, 1991 (ww) Lease Amendment II to Lease for commercial Exhibit 10(d) to Form 10-Q space between Smallwood Village Associates for the quarter ended and Interstate General Company L.P. September 30, 1995 dated September 5, 1995 (xx) Store Lease between Interstate General Exhibit 10(fff) to Business Corporation and Smallwood 1991 10-K Village Associates Limited Partnership dated April 1, 1988 (yy) Store Lease between Smallwood Village Exhibit 10(e) to Form 10-Q Associates and Interstate General for the quarter ended Company L.P. dated December 1, 1987 September 30, 1995 (zz) Lease Amendment to Store Lease between Exhibit 10(f) to Form 10-Q Smallwood Village Associates and for the quarter ended Interstate General Company L.P. dated September 30, 1995 February 1, 1989 (aaa) Lease Amendment II to Store Lease Exhibit 10(g) to Form 10-Q between Smallwood Village Associates for the quarter ended and Interstate General Company L.P. September 30, 1995 dated December 1, 1992 (bbb) Lease Amendment III to Store Lease Exhibit 10(h) to Form 10-Q between Smallwood Village Associates for the quarter ended and Interstate General Company L.P. September 30, 1995 dated September 30, 1994 (ccc) Lease Amendment IV to Store Lease Exhibit 10(i) to Form 10-Q between Smallwood Village Associates for the quarter ended and Interstate General Company L.P. September 30, 1995 dated September 5, 1995 (ddd) Office Lease between Smallwood Village Exhibit 10(a) to Form 10-Q Associates and Interstate General Company for the quarter ended L.P. for Smallwood Village Center dated September 30, 1995 August 25, 1995 116 (eee) Amendment to Office Lease between Exhibit 10(b) to Form 10-Q Smallwood Village Associates and for the quarter ended Interstate General Company L.P. for September 30, 1995 Smallwood Village Center dated September 5, 1995 (fff) Lease Agreement between Interstate Filed herewith Business Corporation and American Family Homes for Office Building dated June 28, 1994 (ggg) Fourth Amendment to Interstate General Exhibit 10(yyyy) to Company L.P. Retirement Plan, dated 1992 10-K July 1, 1992 (hhh) Fifth Amendment to Interstate General Exhibit 10(b) to Form 10-Q Company L.P. Retirement Plan dated for the quarter ended June 5, 1995 June 30, 1995 (iii) Agreement Regarding Partnership Interest Exhibit 10(nn) to Form S-1 in Chastleton Apartment Associates dated January, 1987 (jjj) Stockholders Agreement among Interstate Exhibit 10(pp) to Form S-1 and certain stockholders of Interstate St. Charles, Inc. dated as of December 1, 1986 (kkk) License Agreement between Interstate Exhibit 10(qq) to Form S-1 General Company L.P., Interstate General Business Corporation and Interstate St. Charles, Inc., dated as of December 31, 1986 (lll) Amendment to License Agreement between Exhibit 10(rr) to Form S-1 Interstate General Company L.P., Interstate General Business Corporation and Interstate General Company L.P., dated as of February 9, 1987 (mmm) Unitholders Agreement among Interstate Exhibit 10(ss) to Form S-1 General Business Corporation, Interstate St. Charles, Inc., and Interstate Properties Trust dated as of February 9, 1987 (nnn) Agreement dated March 15, 1990 among Exhibit 10(ddd) to Interstate General Company L.P., 1990 10-K Interstate Business Corporation and Interstate General Properties (ooo) Management service agreement between Exhibit 10(ee) to Form S-1 Interstate General Business Corporation Amendment Exhibit 10(ee) and Chastleton Apartments Associates to 1989 10-K as amended February 26, 1987 117 (ppp) Amendment to February 26, 1987 Exhibit 10(bbb) to Management Service Agreement between 1993 10-K Interstate General Business Corporation and Chastleton Apartment Associates dated January 1, 1993 (qqq) Property management agreement between Exhibit 10(z) to Form S-1 Interstate General Properties Limited Amendment Exhibit 10(z) to Partnership and G.L. Limited Partnership 1989 10-K as amended September 30, 1985 and as amended March 1, 1989 (rrr) Amendment to Property Management Exhibit 10(ddd) to Agreement between Interstate General 1993 10-K Properties Limited Partnership and G. L. Limited Partnership dated January 1, 1993 (sss) Second Amendment and Restatement of Exhibit 10(eee) to Purchase Agreement by and between Land 1993 10-K Development Associates S.E. and Wal-Mart Puerto Rico, Inc., dated November 30, 1993 (ttt) Sale and Purchase Agreement between Exhibit 10(hhhhh) to Interstate General Company L.P. and 1992 10-K K. Hovnanian at Montclair, Inc., dated September 30, 1992 (uuu) First Amendment to Sale and Purchase Exhibit 10(ggg) to Agreement by and between Interstate 1993 10-K General Company L.P. and K. Hovnanian at Montclair, Inc., dated October 16, 1992 (vvv) Second Amendment to Sale and Purchase Exhibit 10(hhh) to Agreement by and between Interstate 1994 10-K General Company L.P. and K. Hovnanian at Montclair, Inc., dated August 18, 1994 (www) Third Amendment to Sale and Purchase Exhibit 10(iii) to Agreement by and between Interstate 1994 10-K General Company L.P. and K. Hovnanian at Montclair, Inc., dated December 16, 1994 (xxx) Amended and Restated Lease Agreement Exhibit 10.8 to the between Housing Development Associates Registration Statement on S.E. and El Comandante Operating Company, S-4 of El Comandante dated December 15, 1993 Capital Corp. and Housing Development Associates S.E. Registration # 33-75284 (the "S-4") (yyy) Third Amended and Restated Partnership Exhibit 3.3 to the S-4 Agreement for Housing Development Associates, S.E. dated December 15, 1993 118 (zzz) Fourth Amended and Restated Partnership Exhibit 10(b) to Form 10-Q Agreement of Housing Development for the quarter ended Associates, S.E. dated July 21, 1994 June 30, 1994 (aaaa) Fifth Amended and Restated Partnership Exhibit 10(c) to Form 10-Q Agreement of Housing Development for the quarter ended Associates, S.E. dated August 1, 1994 June 30, 1994 (bbbb) Sixth Amended and Restated Partnership Exhibit 2.2 to the Report Agreement of Housing Development on Form 8-K of Equus Associates, S.E. dated March 8, 1995 Gaming Company L.P. dated March 23, 1995, File No. 000-25306 (the "Equus 8-K") (cccc) Seventh Amended and Restated Partnership Exhibit 10.37 to the Agreement of Housing Development Report on Form 10-K of Associates, S.E. dated February 7, 1996 Equus Gaming Company L.P. dated April 1, 1996, File No. 54-1719877 (dddd) Conversion Agreement dated February 3, Exhibit 2.3 to the 1995 and First Amendment thereto dated Equus 8-K March 6, 1995 (eeee) Indenture dated December 15, 1993 among Exhibit 4.1 to the S-4 El Comandante Corp., Housing Development Associates S.E. and Banco Popular De Puerto Rico (ffff) Warrant Agreement between HDA Management Exhibit 10.3 to the S-4 Corporation, Housing Development Associates S.E. and Banco Popular De Puerto Rico as Warrant Agent dated December 15, 1993 (gggg) Limited Partnership Agreement of Equus Exhibit 10(d) to Form 10-Q Gaming Company L.P. dated August 1, 1994 for the quarter ended June 30, 1994 (hhhh) First Amendment to the Limited Exhibit 10(e) to Form 10-Q Partnership Agreement of Equus Gaming for the quarter ended Company L.P. dated August 1, 1994 June 30, 1994 (iiii) Second Amendment to the Limited Exhibit 10(f) to Form 10-Q Partnership Agreement of Equus Gaming for the quarter ended Company L.P. dated August 1, 1994 June 30, 1994 (jjjj) Third Amendment to the Limited Exhibit 3.4 to Partnership Agreement of Equus Gaming to Registration Statement Company L.P. on Form S-11 of Equus Gaming Company L.P. Registration # 33-82750 (the "Equus S-11") 119 (kkkk) Amended and Restated Distribution Exhibit 2.1 to the Equus Agreement dated November 22, 1994, S-11 between Equus Gaming Company L.P. (the "Company") and Interstate General Company L.P. ("IGC") (llll) Registration Rights Agreement with Exhibit 10.4 to the S-4 respect to the Warrants dated December 15, 1993, among HDAMC, HDA, Oppenheimer & Co., Inc. and The Argosy Securities Group L.P. (mmmm) Amended and Restated Management Exhibit 10.6 to the S-4 Agreement dated December 15, 1993, between Interstate General Properties Limited Partnership S.E. ("IGP") and HDA (nnnn) Master Support and Services Agreement Exhibit 10.20 to the dated December 9, 1994, between IGC Equus S-11 and Equus Gaming Company L.P. (oooo) Consulting Agreement dated December 15, Exhibit 10.21 to the 1993, between El Comandante Operating Equus S-11 Company and Interstate General Properties Limited Partnership (pppp) First Supplemental Indenture dated Exhibit 10.27 to the December 22, 1994, to the Indenture Equus S-11 dated December 15, 1993 among El Comandante Corp., Housing Development Associates S.E. and Banco Popular de Puerto Rico (qqqq) Second Supplemental Indenture dated Exhibit 10.28 to the December 22, 1994, to the Indenture Equus S-11 dated December 15, 1993 among El Comandante Corp., Housing Development Associates S.E. and Banco Popular de Puerto Rico (rrrr) Amended and Restated Registration Rights Exhibit 10.29 to the Agreement with Respect to the Warrants Equus S-11 dated December 12, 1994, among HDAMC, HDA, Oppenheimer & Co., Inc., the Argosy Securities Group L.P. and Equus Gaming Company L.P. (ssss) Agreement of Purchase and Sale between Exhibit 10(dddd) to Interstate General Company L.P. and 1994 10-K Interstate Business Corporation dated December 30, 1994 for the Partnership Interests in: New Forest Apartments General Partnership Headen House Associates Limited Partnership Fox Chase Apartments General Partnership Palmer Apartments Associates Wakefield Terrace Associates Wakefield Third Age Associates 120 (tttt) Agreement of Sale between Land Development Exhibit 10(j) to Form 10-Q Associates S.E. and Twenty First Century for the quarter ended Homes S.E. dated September 8, 1995 September 30, 1995 (uuuu) Option Agreement between Land Development Exhibit 10(k) to Form 10-Q Associates S.E. and Compri Caribe for the quarter ended Hospitality Corp. dated March 31, 1995 September 30, 1995 (vvvv) Amendment to Option Agreement between Exhibit 10(l) to Form 10-Q Land Development Associates S.E. and for the quarter ended Compri Caribe Hospitality Corp. dated September 30, 1995 November 13, 1995 (wwww) Employment Agreement for Donald Drew Exhibit 10(eeee) to dated December 14, 1993 1994 10-K 21. List of Subsidiaries of Interstate Filed herewith General Company L.P. 27. Financial Data Schedule Filed herewith EX-10.1 2 EMPLOYMENT AGREEMENT-EXHIBIT 10(E) 1 EXHIBIT 10(e) AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this 15th day of January, 1996, by and between Interstate General Company L.P., a Delaware limited partnership (the "Company"), and Gregory G. Kreizenbeck. In consideration of the mutual covenants herein contained, the parties agree to be bound by the following terms and conditions: RECITALS WHEREAS, the Company and the President/COO entered into an Employment Agreement dated as of March 1, 1994 and amended by a First Amendment thereto dated as of March 1995 (the "Prior Agreement"); and WHEREAS, in connection with a promotion of the President/COO, the Company and the President/COO wish to amend and restate the Prior Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties agree to be bound by the following terms and conditions: I. POSITION AND AUTHORITY Gregory G. Kreizenbeck (the "President/COO") will hold the title of President and Chief Operating Officer of the Company and President of Interstate General Management Corporation ("IGMC"). The President/COO shall report to the Chief Executive Officer of the Company and the Board of Directors of IGMC (the "Board of Directors"). The extent of the President/COO's authority to act on behalf of the Company is set forth in a document entitled "Delegation of Authority to the President and Chief Operating Officer," which is attached hereto as Exhibit A, and which may be amended from time to time subject to approval by the Board of Directors. II. TERM The term of employment of the President/COO by the Company hereunder (the "Term") shall begin on January 1, 1996, and shall expire, unless renewed, on December 31, 1998. Following expiration of this Agreement at the end of the Term, the Company shall continue to pay the President/COO as a severance benefit an amount equal to his base salary over a two-year period commencing upon expiration of the Term. However, notwithstanding the Term, the President/COO's employment may terminate prior to expiration of the Term if one or more of the following circumstances occur: A. If the President/COO dies or becomes Disabled (as defined below) the President/COO's employment and this Agreement shall terminate automatically upon such date of death or Disability. In the event the President/COO dies during the term of this Agreement, the President/COO's estate shall be entitled to Company benefits per Company policies and procedures, including life insurance benefits, plus an amount equal to six (6) months of the President/COO's base salary payable in accordance with the terms hereof. In the event that the President/COO becomes Disabled during the term of this Agreement, during the six (6) months following the date he becomes Disabled, 2 the Company shall pay the President/COO an amount, if any, which when added to any other disability benefits to be received by the President/COO during such period under the Company's benefit plans, would equal six (6) months of the President/COO's base salary. For purposes of this Agreement, the President/COO shall become "Disabled" at such time as the President/COO has a physical or mental condition, verified by a physician designated by the Company, which in the judgment of the Board of Directors prevents the President/COO from carrying out one or more of the material aspects of his assigned duties for at least 270 consecutive days and termination of President/COO's employment on such grounds would not be in violation of the Americans with Disabilities Act or other applicable law. The President/COO agrees, upon request of the Board of Directors, at a time convenient to the President/COO during a 30-day period designated by the Board of Directors, to submit to any medically reasonable examination by a physician designated by the Company. B. The Company may, at its election, terminate the President/COO's employment and this Agreement for cause. For purposes hereof, "cause" shall be defined as (1) conviction of a felony, other crime involving theft or fraud, or other crime of moral turpitude involving the Company, and/or (2) engaging in fraud or conduct with the intent of causing substantial harm to the Company. In the event the Company elects to terminate the President/COO's employment for cause, such termination may be made effective immediately, and no advance notice shall be required. The decision to terminate the President/COO's employment for cause must be approved by the Board of Directors. C. Either the President/COO may elect to terminate the employment relationship or the Company may elect to terminate such employment without cause. In such a case, advance written notice of termination shall be delivered by the terminating party to the non-terminating party at least ninety (90) days prior to the date of termination. In addition, if the Company terminates the employment without cause or the President/COO terminates the employment for a Good Reason (defined below), the Company agrees (1) to continue paying the President/COO his base salary for a two-year period commencing on the date such written notice of termination is delivered to the non-terminating party, and (2) to pay his reasonable moving expenses within the continental United States to the extent not paid by his new employer. The decision to terminate the President/COO's employment without cause must be approved by the Board of Directors. For purposes of this section II.C., the President/COO shall have terminated the employment for a Good Reason if: (a) the President/COO terminates the employment relationship within 2 years following the occurrence of (i) a transaction or series of transactions which result in the transfer of fifty percent (50%) or more of the current voting control of the Company; or (ii) a transfer of all or substantially all of the assets of the Company or the merger of the Company into another entity other than an entity the voting control of which is held by the Wilson family; or (b) the President/COO terminates the employment relationship within 6 months following the occurrence of (i) the Company materially reducing, diminishing, terminating or otherwise impairing the President/COO's duties, titles and/or responsibilities without the President/COO's consent, or without cause; (ii) the Company instructing the President/COO despite his written objection delivered to the Board of Directors to take any action which is in violation of any law, ordinance or regulation or would require any act of 3 dishonesty or moral turpitude; or (iii) the Company committing a material breach of any of the provisions of this Agreement. D. After termination of employment, regardless of the ground or basis therefor, the Company shall pay the President/COO any accrued benefits to which he is entitled (including unpaid bonus, if any, for performance by the President/COO of the preceding completed year) according to Company policies and procedures. III. COMPANY RULES AND REGULATIONS The President/COO agrees to comply with all directives of the Board of Directors and the Chairman of the Board/Chief Executive Officer and all written rules, policies, and regulations of the Company, including, but not limited to, those set forth in the Employee Handbook, and to carry out and perform such directives, policies, and mandates of the Company as set forth herein. In the event of an express conflict between the terms of this Agreement and the written rules, policies, and regulations of the Company, as set forth in the Employee Handbook the terms of this Agreement shall govern. IV. LOCATION OF EMPLOYMENT The President/COO's office location will be at the Company's principal executive offices which currently are in St. Charles, Maryland. V. DUTIES AND RESPONSIBILITIES A. The President/COO's duties and responsibilities associated with his position with the Company are set forth in a document entitled "Job Description," which is attached hereto as Exhibit B and which may be amended from time to time subject to approval by a vote of the Board of Directors. B. The President/COO agrees to devote his entire professional time, energy, and ability to the proper and efficient performance of professional services for the Company. Without the prior express written authorization of the Company, the President/COO shall not, directly or indirectly, during his employment with the Company render services of a professional nature to any other person or firm whether for compensation or otherwise. C. During the period of his employment hereunder, and for a period of three (3) years thereafter, the President/COO shall not, without the written consent of the Board of Directors or a person authorized by the Board of Directors, disclose to any person other than as required by law or court order, or other than to an authorized employee of the Company or its affiliates, or to a person to whom disclosure is necessary or appropriate in connection with the performance by the President/COO of his duties as an executive of the Company (e.g., disclosure to the Company's or its affiliates' outside accountants or bankers of financial data properly requested by such persons and approved by an authorized officer of the Company), any confidential information obtained by him while in the employ of the Company with respect to any of the Company's or its affiliates' products, services, customers, suppliers, marketing techniques, methods or future plans; provided, however, that confidential information shall not include any information known generally to the public (other than as a result of unauthorized disclosure by the President/COO) or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that conducted by the Company. The President/COO shall be allowed to disclose confidential information to his attorney solely for the purpose of ascertaining whether such information is 4 confidential within the intent of this Agreement; provided, however, that the President/COO (a) discloses to his attorney the provisions of this subsection C and (b) agrees not to waive the attorney-client privilege with respect thereto. D. While the President/COO is employed by the Company hereunder, the President/COO shall use his best efforts to make available to the Company business opportunities that come to his attention or to the attention of persons (other than natural persons) under his control. E. While the President/COO is employed by the Company hereunder and for a period of two (2) years thereafter (the "Non-Compete Period"), the President/COO agrees that he shall not compete with the Company or any of its affiliates without the prior written consent of the Board of Directors. For purposes of this Agreement, the term "compete" shall mean (i) participating as a more than five (5%) percent stockholder, an officer, a director, an employee, a partner, an agent, a consultant, or in any other individual or representative capacity in any business entity engaged in the business of scattered site home building in the same metropolitan statistical area or rural statistical area in which the Company or any of its affiliates is engaged in such business during the non-compete period (unless the President/COO's duties, responsibilities and activities including supervisory activities, for or on behalf of such business entity are not related to home building); or (ii) employing or soliciting for employment any employees of the Company or any of its affiliates. In the event the restrictions against engaging in a competitive activity contained in this subsection E shall be determined by any court of competent jurisdiction to be unenforceable by reason of their extending for too great a period of time or over too great a geographical area or by reason of their being too extensive in any other respect, this subsection E shall be interpreted to extent only over the maximum period of time for which it may be enforceable and over the maximum geographical area as to which it may be enforceable and to the maximum extent in all other respects as to which it may be enforceable, all as determined by such court in such action. The President/COO acknowledges that a breach of the restrictions against engaging in a competitive activity contained in this subsection E may cause irreparable damage to the Company or its affiliates, the exact amount of which will be difficult to ascertain, and that the remedies at law for any such breach will be inadequate. Accordingly, the President/COO and the Company agree that if the President/COO breaches the restrictions against engaging in a competitive activity contained in this subsection E, then the Company or its affiliates shall be entitled to equitable relief, including but not limited to injunctive relief, without posting bond or other security. VI. COMPENSATION The President/COO shall be compensated by the Company with an annual base salary of $287,500 payable semi-monthly. The President/COO's compensation will be reviewed for modification on an annual basis and will be reviewed for modification by March 1, 1996, with any modification to be made retroactive to January 1, 1996. The Board of Directors (excluding Company management personnel, but including the Chief Executive Officer) will evaluate the President/COO's performance on an annual basis and discuss its evaluation with the President/COO by no later than the end of April of each year commencing in 1996. VII. FRINGE BENEFITS In addition to the compensation as defined above, the President/COO shall be entitled to the following fringe benefits: 5 A. The President/COO shall be eligible to participate in the Company's health plans and life and disability insurance programs available to senior executive employees in accordance with the terms and provisions thereof. B. The President/COO will be eligible to participate in all other employee benefits available to senior executive employees including vacations, retirement plans, bonus plans (including a Bonus Plan substantially as summarized in Exhibit C hereto to be submitted to the Board of Directors), and equity-based incentive compensation plans in accordance with the terms and provisions thereof. C. The President/COO's position requires business and social entertainment to advance the Company's business and image in the market place. Accordingly, during the term of this Agreement the Company shall pay all of the President/COO's country club dues and initiation membership fees to a country club selected by the President/COO and not disapproved by the Board of Directors. D. The President/COO's position requires continuing education and idea exchanges to keep abreast with emerging trends. Accordingly, during the term of this Agreement the Company shall pay all of the President/COO's dues and membership fees to the Young Presidents Organization (YPO) (or comparable organization following retirement from YPO) up to a maximum of $20,000 per year. E. Upon commencement of the employment relationship, the Company will provide the President/COO with a middle-of-the-line automobile, such as a Ford Explorer, Buick Park Avenue, etc. The Company shall bear all costs and expenses, such as insurance premiums and necessary repairs, associated with this automobile. Upon termination of the employment relationship, the President/COO shall return the automobile to the Company or, if such automobile is owned by the Company, the President/COO may purchase such automobile from the Company for a price equal to its current fair market value determined by reference to a nationally published reference of used car values. If such automobile is leased by the Company, upon termination of the employment relationship and request of the President/COO, the Company will use reasonable efforts to transfer the lease, to the extent permitted thereunder, to the President/COO. F. Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company hereunder to the President/COO or his estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provisions for payment of taxes and withholdings as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold compensation have been satisfied. VIII. INDEMNIFICATION The Company agrees to indemnify the President/COO, with respect to his performance of his duties described herein, to the maximum extent permitted by law, subject to the terms of the Third Amended and Restated Limited Partnership Agreement of the Company. 6 IX. ARBITRATION A. Any dispute or controversy arising between the President/COO and the Company relating to this Agreement shall be submitted to private, binding arbitration, upon the written request of either the President/COO or the Company, before a panel of three arbitrators, under the administration of and in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). In the event of such dispute or controversy, the Company and the President/COO shall independently and simultaneously select and identify one arbitrator each, both of whom must have no past or present familial or business relationships with the parties and must possess expertise in the area of compensation of senior management employees in the real estate industry. In the event that a party has not selected its arbitrator within 60 days of initiation of the arbitration, the AAA shall select such arbitrator. These two arbitrators shall jointly agree upon and select a third arbitrator who also possesses such credentials. These three arbitrators shall hear and decide the dispute or controversy by majority vote, and their decision and award shall be final and conclusive upon the parties, and their heirs, administrators, executors, successors, and assigns. The arbitrators shall have no power or authority to add to, subtract from, or otherwise modify the terms of this Agreement. Wherever the Commercial Arbitration Rules of the AAA conflict with the procedures set forth in this section, the terms of this section shall govern. The President/COO and the Company agree that the arbitration must be initiated by personally delivering a statement of claim to the AAA and to the party against whom the claim is asserted no later than ninety (90) days after the basis of the claim becomes known, or reasonably should have been known or discovered, by the party asserting the claim. In the event arbitration is not initiated within such ninety (90) day period, such claim, dispute, or controversy shall be irrevocably time-barred. A judgment based upon such arbitration award may be entered in any court having jurisdiction thereof. B. Notwithstanding the foregoing, any action brought by the Company seeking a temporary restraining order, temporary and/or permanent injunction, and/or a decree of specific performance of the terms of this Agreement may be brought in a court of competent jurisdiction without the obligation to proceed first to arbitration. X. ASSIGNABILITY AND BINDING EFFECT The President/COO may not assign this Agreement, or any obligation or rights hereunder, to any other person or entity without the express written consent of the Company. This Agreement shall be binding upon the President/COO and his heirs, executors, administrators, and successors. XI. GOVERNING LAW This Agreement shall be governed by the laws of the State of Delaware (excluding the choice-of-law rules thereof). XII. CAPTIONS All captions contained in this Agreement are for convenience only and in no way define or describe the intent of the parties or specific terms hereof. 7 XIII. SEVERABILITY If any provision of this Agreement shall to any extent be held invalid or unenforceable, the remaining terms and provisions shall not be affected thereby. XIV. ENTIRE AGREEMENT Except for the Amended and Restated Unit Appreciation Rights Agreement dated as of March 1995, as amended by the first amendment thereto of even date herewith, this Agreement contains the entire agreement between the parties relating to the subject matter hereof. All prior negotiations or stipulations concerning any matter which preceded or accompanied the execution hereof are conclusively deemed to be superseded hereby. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the President/COO and such officer or director as may be specifically designated by the Board of Directors. XV. NOTICES; MISCELLANEOUS For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be duly given when delivered by hand or facsimile transmission or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: Interstate General Company L.P. 222 Smallwood Village Center St. Charles, Maryland 20602 Attention: James J. Wilson If to the President/COO: Mr. Gregory G. Kreizenbeck 7460 Sedwick Court St. Leonard, Maryland 20685 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 8 IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first set forth below, and the parties represent that they have the capacity and authorization, whether it be personal or by the Board of Directors of the managing general partner of the Company, to execute this Agreement. INTERSTATE GENERAL COMPANY L.P. BY: INTERSTATE GENERAL MANAGEMENT CORPORATION, its managing general partner Date: January 18, 1996 /s/ James J. Wilson ---------------- ---------------------------------------- By: James J. Wilson President Date: January 18, 1996 /s/ Gregory G. Kreizenbeck ---------------- ---------------------------------------- Gregory G. Kreizenbeck EX-10.2 3 EMPLOYMENT AGREEMENT-EXHIBIT 10(J) 1 EXHIBIT 10(j) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this 15th day of January, 1996, by and between Interstate General Company L.P., a Delaware limited partnership (the "Company"), and James J. Wilson (the "Executive"). RECITALS WHEREAS, the Executive has served the Company and its predecessors as Chief Executive Officer for over thirty years and thereby possesses unique and valuable expertise pertaining to the operational and strategic needs of the Company and its affiliates; and WHEREAS, the Company has been engaged in efforts to ensure the availability of qualified executive management to guide the Company for the foreseeable future; and WHEREAS, the Company wishes to secure the continued services of the Executive and availability of his unique and valuable expertise, particularly with respect to development of business strategies and strategic opportunities; and WHEREAS, the Company also wishes to acknowledge and reward the valuable contributions made by the Executive throughout the Company's entire history; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties agree to be bound by the following terms and conditions: I. POSITION AND AUTHORITY The Executive will hold the title of Chairman and Chief Executive Officer of the Company and Chairman of the Board of Interstate General Management Corporation ("IGMC"). The Executive shall report to the Board of Directors of IGMC (the "Board of Directors") and shall render such services to the Company as are customarily rendered by the Chief Executive Officer, and the Executive shall be deemed to satisfy such obligations so long as he continues to hold the titles set forth above. Without limitation of the foregoing, subject to the direction of the Board of Directors, the Executive shall have general supervision over the business and affairs of the Company and over its officers and agents and general management and control of all of its properties. II. TERM The term of employment of the Executive by the Company hereunder (the "Term") shall begin on January 1, 1996, and shall continue thereafter through the Expiration Date. The Expiration Date shall be December 31, 1998. However, notwithstanding the Term, the Executive's employment may terminate prior to the Expiration Date if one or more of the following circumstances occur: A. If the Executive dies or becomes Disabled (as defined below) the Executive's employment and this Agreement shall terminate automatically upon such date of death or Disability. In the event the Executive dies during the term of this Agreement, the Executive's estate shall be entitled to Company benefits per Company policies and procedures, including life insurance 2 benefits, plus an amount equal to six (6) months of the Executive's base salary payable in accordance with the terms hereof. In the event that the Executive becomes Disabled during the term of this Agreement, during the six (6) months following the date he becomes Disabled, the Company shall pay the Executive an amount, if any, which when added to any other disability benefits to be received by the Executive during such period under the Company's benefit plans, would equal six (6) months of the Executive's base salary. For purposes of this Agreement, the Executive shall become "Disabled" at such time as the Executive has a physical or mental condition, verified by a physician designated by the Company, which in the judgment of the Board of Directors prevents the Executive from carrying out one or more of the material aspects of his assigned duties for at least 270 consecutive days and termination of Executive's employment on such grounds would not be in violation of the Americans with Disabilities Act or other applicable law. The Executive agrees, upon request of the Board of Directors, at a time convenient to the Executive during a 30-day period designated by the Board of Directors, to submit to any medically reasonable examination by a physician designated by the Company. B. The Company may, at its election, terminate the Executive's employment and this Agreement for cause. For purposes hereof, "cause" shall be defined as (1) engaging in fraud or conduct with the intent of causing substantial harm to the Company and/or (2) conviction of a felony, other crime involving theft or fraud, or other crime of moral turpitude involving the Company; provided, that "cause" shall not include any conviction of charges pending as of the date of this Agreement. In the event the Company elects to terminate the Executive's employment for cause, such termination may be made effective immediately, and no advance notice shall be required. The decision to terminate the Executive's employment for cause must be approved by the Board of Directors. C. Either the Executive may elect to terminate the employment relationship or the Company may elect to terminate such employment without cause. In such a case, advance written notice of termination shall be delivered by the terminating party to the non-terminating party at least ninety (90) days prior to the date of termination. In addition, if the Company terminates the employment without cause or the Executive terminates the employment for a Good Reason (defined below), the Company agrees to pay the Executive his base salary for the balance of the Term. The decision to terminate the Executive's employment without cause must be approved by the Board of Directors. For purposes of this section II.C., the Executive shall have terminated the employment for a Good Reason if the Executive terminates the employment relationship within 6 months following the occurrence of (i) the Company materially reducing, diminishing, terminating or otherwise impairing the Executive's duties, titles and/or responsibilities without the Executive's consent, or without cause; (ii) the Company instructing the Executive despite his written objection delivered to the Board of Directors to take any action which is in violation of any law, ordinance or regulation or would require any act of dishonesty or moral turpitude; or (iii) the Company committing a material breach of any of the provisions of this Agreement. After termination of employment, regardless of the ground or basis therefor, the Company shall pay the Executive any accrued benefits to which he is entitled (including unpaid bonus, if any, for performance by the Executive of the preceding completed year) according to Company policies and procedures. 3 III. COMPANY RULES AND REGULATIONS The Executive agrees to comply with all directives of the Board of Directors and all written rules, policies, and regulations of the Company, including, but not limited to, those set forth in the Employee Handbook, and to carry out and perform such directives, policies, and mandates of the Company as set forth herein. In the event of an express conflict between the terms of this Agreement and the written rules, policies, and regulations of the Company, as set forth in the Employee Handbook the terms of this Agreement shall govern. IV. DUTIES AND RESPONSIBILITIES A. During the period of his employment hereunder, and for a period of three (3) years thereafter, the Executive shall not, without the written consent of the Board of Directors or a person authorized by the Board of Directors, disclose to any person other than as required by law or court order, or other than to an authorized employee of the Company or its affiliates, or to a person to whom disclosure is necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company (e.g., disclosure to the Company's or its affiliates' outside accountants or bankers of financial data properly requested by such persons and approved by an authorized officer of the Company), any confidential information obtained by him while in the employ of the Company with respect to any of the Company's or its affiliates' products, services, customers, suppliers, marketing techniques, methods or future plans; provided, however, that confidential information shall not include any information known generally to the public (other than as a result of unauthorized disclosure by the Executive) or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that conducted by the Company. The Executive shall be allowed to disclose confidential information to his attorney solely for the purpose of ascertaining whether such information is confidential within the intent of this Agreement; provided, however, that the Executive (a) discloses to his attorney the provisions of this subsection A and (b) agrees not to waive the attorney-client privilege with respect thereto. B. While the Executive is employed by the Company hereunder, the Executive shall use his best efforts to make available to the Company business opportunities that come to his attention or to the attention of persons (other than natural persons) under his control. C. Nothing in this Agreement shall be deemed to restrict the Executive from pursuing or engaging in other business activities provided that such activities do not unreasonably interfere with the performance of his responsibilities hereunder. V. COMPENSATION The Executive shall be compensated by the Company with an annual base salary of $473,000 payable semi-monthly. The Executive's compensation will be reviewed for modification on an annual basis and will be reviewed for modification by March 1, 1996, with any modification to be made retroactive to January 1, 1996. VI. FRINGE BENEFITS In addition to the compensation as defined above, the Executive shall be entitled to the following fringe benefits: 4 A. The Executive shall be eligible to participate in the Company's health plans and life and disability insurance programs available to senior executive employees in accordance with the terms and provisions thereof. B. The Executive will be eligible to participate in all other employee benefits available to senior executive employees including vacations, retirement plans, bonus plans, and equity-based incentive compensation plans in accordance with the terms and provisions thereof. C. The Executive's position requires continuing education and idea exchanges to keep abreast with emerging trends. Accordingly, during the term of this Agreement the Company shall pay all of the Executive's dues and membership fees to the Chief Executive Organization. D. The Company will provide the Executive with an executive sedan. The Company shall bear all costs and expenses, such as insurance premiums and necessary repairs, associated with this automobile, including costs and expenses of a driver. Upon termination of the employment relationship, the Executive shall return the automobile to the Company or, if such automobile is owned by the Company, the Executive may purchase such automobile from the Company for a price equal to its current fair market value determined by reference to a nationally published reference of used car values. If such automobile is leased by the Company, upon termination of the employment relationship and request of the Executive, the Company will use reasonable efforts to transfer the lease, to the extent permitted thereunder, to the Executive. E. Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Executive or his estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provisions for payment of taxes and withholdings as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold compensation have been satisfied. VII. INDEMNIFICATION The Company agrees to indemnify the Executive, with respect to his performance of his duties described herein, to the maximum extent permitted by law, subject to the terms of the Third Amended and Restated Limited Partnership Agreement of the Company. VIII. ARBITRATION A. Any dispute or controversy arising between the Executive and the Company relating to this Agreement shall be submitted to private, binding arbitration, upon the written request of either the Executive or the Company, before a panel of three arbitrators, under the administration of and in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). In the event of such dispute or controversy, the Company and the Executive shall independently and simultaneously select and identify one arbitrator each, both of whom must have no past or present familial or business relationships with the parties and must possess expertise in the area of compensation of senior management employees in the real estate industry. In the event that a party has not selected its arbitrator within 60 days of initiation of the arbitration, the AAA shall select such arbitrator. These two 5 arbitrators shall jointly agree upon and select a third arbitrator who also possesses such credentials. These three arbitrators shall hear and decide the dispute or controversy by majority vote, and their decision and award shall be final and conclusive upon the parties, and their heirs, administrators, executors, successors, and assigns. The arbitrators shall have no power or authority to add to, subtract from, or otherwise modify the terms of this Agreement. Wherever the Commercial Arbitration Rules of the AAA conflict with the procedures set forth in this section, the terms of this section shall govern. The Executive and the Company agree that the arbitration must be initiated by personally delivering a statement of claim to the AAA and to the party against whom the claim is asserted no later than ninety (90) days after the basis of the claim becomes known, or reasonably should have been known or discovered, by the party asserting the claim. In the event arbitration is not initiated within such ninety (90) day period, such claim, dispute, or controversy shall be irrevocably time-barred. A judgment based upon such arbitration award may be entered in any court having jurisdiction thereof. B. Notwithstanding the foregoing, any action brought by the Company seeking a temporary restraining order, temporary and/or permanent injunction, and/or a decree of specific performance of the terms of this Agreement may be brought in a court of competent jurisdiction without the obligation to proceed first to arbitration. IX. ASSIGNABILITY AND BINDING EFFECT The Executive may not assign this Agreement, or any obligation or rights hereunder, to any other person or entity without the express written consent of the Company. This Agreement shall be binding upon the Executive and his heirs, executors, administrators, and successors. X. GOVERNING LAW This Agreement shall be governed by the laws of the State of Delaware (excluding the choice-of-law rules thereof). XI. CAPTIONS All captions contained in this Agreement are for convenience only and in no way define or describe the intent of the parties or specific terms hereof. XII. SEVERABILITY If any provision of this Agreement shall to any extent be held invalid or unenforceable, the remaining terms and provisions shall not be affected thereby. XIII. ENTIRE AGREEMENT This Agreement contains the entire agreement between the parties relating to the subject matter hereof. All prior negotiations or stipulations concerning any matter which preceded or accompanied the execution hereof are conclusively deemed to be superseded hereby. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer or director as may be specifically designated by the Board of Directors. 6 XIV. NOTICES; MISCELLANEOUS For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be duly given when delivered by hand or facsimile transmission or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: Interstate General Company L.P. 222 Smallwood Village Center St. Charles, Maryland 20602 Attention: President If to the Executive: Mr. James J. Wilson Dresden Farm 39997 Snickersville Turnpike Middleburg, Virginia 22117 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first set forth below, and the parties represent that they have the capacity and authorization, whether it be personal or by the Board of Directors of the managing general partner of the Company, to execute this Agreement. INTERSTATE GENERAL COMPANY L.P. BY: INTERSTATE GENERAL MANAGEMENT CORPORATION, its managing general partner Date: January 19, 1996 /s/ Donald G. Blakeman ---------------- ----------------------------------------- Donald G. Blakeman Executive Vice President Date: /s/ James J. Wilson ---------------- ---------------------------------------- James J. Wilson EX-10.3 4 AFH LEASE-EXHIBIT 10(FFF) 1 Exhibit 10(fff) LEASE AGREEMENT LANDLORD INTERSTATE BUSINESS CORPORATION 222 SMALLWOOD VILLAGE CENTER ST. CHARLES, MARYLAND 20601 TELEPHONE: 843-8600 and TENANT AMERICAN FAMILY HOMES FOR OFFICE BUILDING AT SMALLWOOD DRIVE AND ROUTE 925 ST. CHARLES, MARYLAND 20601 2 EXHIBITS and ATTACHMENTS 1. EXHIBIT A Site Plan 2. EXHIBIT B Intentionally Left Blank 3. EXHIBIT C Intentionally Left Blank 4. EXHIBIT D Rules and Regulations 5. EXHIBIT E Lease Guaranty 6. EXHIBIT F Architectural Covenants Declaration of Easements, Covenants, Conditions and Restrictions 3 INDEX Article Title Page 1 Demised Premises 1 2 Ingress and Parking 1 3 Tenant Pans 1 4 Lease Term 1 5 Fixed Minimum Rent 1 6 Percentage Rent 2 7 Deposit 3 8 Gross Sales Report 3 9 Audit 3 10 Definition of Gross Sales 4 11 Taxes and Assessments 4 12 Laws and Ordinances 5 13 Furniture and Fixtures 6 14 Repairs 6 15 Alterations 6 16 Damage 6 17 Eminent Domain 7 18 Roof Rights 7 19 Business Purpose 7 20 Signs 8 21 Hours of Lighting 8 22 Parking and Common Use Areas 8 23 Utilities: General 9 24 Utilities: Separate Meter 9 25 Trash 9 26 Keep Clean 9 27 Hold Harmless 9 28 Property at Tenant's Risk 9 29 Insurance Risk 10 30 Landlord Access 10 '31 Bankruptcy 10 32 Repossession 11 33 Reletting 11 34 Hold-Over 12 35 Rental Sign 12 36 Subordination 12 37 Notices 12 38 Assigns and Successors 12 39 Subletting and Assignment 12 40 Not Partners 13 41 Promotional Service 13 42 Continuous Occupancy 14 43 Maintenance and Operation of Common Areas 15 44 Cost of Maintenance and Operation of Common Areas 15 45 Insurance 15 46 Additional Rent 16 47 Quiet Enjoyment 16 48 Transfer of Landlord's Interest 16 49 No Waiver 17 50 Partial Invalidity 17 51 Rules and Regulations 17 52 Applicable Law 17 53 Captions and Headings 17 54 Joint and Several Liability 17 55 Modification 17 4 56 No Discrimination 17 57 Delay 17 58 Store Front 17 59 Estoppel Certificates 17 60 Outparcel 17 61 Waiver of Jury Trial 18 62 No Option 18 63 Security Deposit 18 64 Broker's Commission 18 65 Master Lease/Addenda 18 66 Landlord's Right to Change or Alter Business 18 67 Late Charges 27 5 LEASE THIS LEASE, made this 28th day of June, 1994, by and between INTERSTATE BUSINESS CORPORATION, 222 Smallwood Village Center, St. Charles, Maryland 20601, hereinafter designated "Landlord," and INTERSTATE GENERAL COMPANY L.P. hereinafter designated "Tenant". WITNESSETH: DEMISED PREMISES. 1. In consideration of all Tenant's undertakings hereinafter set forth, including payment of rent as hereinafter specified, Landlord hereby leases to Tenant the building area located at Smallwood Drive and Route 925 (herein called the "Building"), St. Charles, Maryland containing approximately 3,000 square feet, as shown outlined in red on drawing marked Exhibit "A" and made a part hereof (herein called the "demised premises"). INGRESS & PARKING 2. Together with the building herein demised, the Landlord grants to the Tenant a right of ingress and egress and free parking of vehicles of the Tenant's invitees in the parking areas, and including a right for ingress and egress to and from the adjoining public streets, highways and/or service area. FIT-UP REQUIREMENTS 3. The premises are accepted in "as-is" condition. Any additional Tenant requirements and costs will be the responsibility of and at the expense of the Tenant. LEASE TERM 4a. The term of this Lease shall commence on the date hereof, and shall end six (6) months after the "Rent Commencement Date," as hereinafter defined. The "Rent Commencement Date" shall be the 1st day of August, 1994, and the term of this Lease shall run for a period extending six (6) months from the first day of the calendar month following the Rent Commencement Date. Notwithstanding the above, the rent commencement date shall be the date the U & O is received. FIXED MINIMUM RENT 5. Commencing with the Rent Commencement Date, Tenant shall pay as fixed minimum annual rental for the premises the sum of Thirty- nine Thousand & 00/100 Dollars ($39,000.00) per annum, payable in equal monthly installments of Three Thousand Two Hundred Fifty & 00/100 Dollars ($3,250.00) each. All such monthly installments of the fixed minimum rental shall be payable to Landlord, in advance, without previous notice or demand therefor, and without diminution, counterclaim, deduction or set-off whatsoever, with the first monthly installment to be due and payable upon execution hereof, and each subsequent monthly installment to be due and payable on the first day of each and every month following the Rent Commencement Date during the term hereof. If the Rent Commencement Date is a date other than the first day of a month, rent for the period commencing with and including the Rent Commencement Date until the first day of the following month shall be prorated at the rate of one- thirtieth (1/30th) of the fixed monthly rental. PERCENTAGE RENT 6(a). Intentionally left blank. 6(b). Intentionally left blank. 6 6(c). Intentionally left blank. 6(d). Intentionally left blank. 6(e). At the expiration of said lease year, the Fixed Minimum Annual Rental herein provided for shall be adjusted by the Consumer Price Index as defined in Article 6(f). Any such adjustment shall be accomplished by multiplying the Fixed Minimum Annual Rental then in effect by a fraction, the numerator of which shall be the Consumer Price Index as of the most recent date prior to the date of such adjustment, and the denominator of which shall be the Consumer Price Index as of the date nearest the beginning of such lease year (but in no event shall the Fixed Minimum Annual Rent be reduced as a result of any such adjustment below the Fixed Minimum Annual Rent specified in Article 5 hereof), and the increased Fixed Minimum Annual Rental thereby established shall continue in effect as the Fixed Minimum Annual Rental until again adjusted as herein provided. The term "sufficient percentage rental" as used herein is defined as such Percentage Rent for any lease year, whether or not actually paid or payable, which, when added to the Fixed Minimum Annual Rental set forth in Article 5 would equal or exceed such Fixed Minimum Annual Rental if adjusted to the Consumer Price Index (applied as aforesaid) at the end of such lease year to reflect changes therein since the beginning of such lease year. For example, if the Consumer Price Index increases by 4% in the first lease year, then "sufficient percentage rental" for that lease year would be an amount equal to or in excess of 4% of the Fixed Minimum Annual Rental. If the Fixed Minimum Annual Rental set forth in Article 5, or otherwise in this lease shall provide for different fixed sums to be paid during certain lease years, or portions thereof (other than as may result from the application of this Section 6(e) hereof), then in each and every instance that the Fixed Minimum Annual Rental shall be adjusted pursuant to this Section 6(e), all other fixed sums payable as Fixed Minimum Annual Rental at some future time thereafter shall likewise be adjusted in the same proportion. 6(f). For all purposes of the Lease Agreement, the "Consumer Price Index" is hereby defined to be the index for the Washington, D.C.-Maryland-Virginia area, now known as the United States Bureau of Labor Statistics, Consumer Price Index, for Urban Wage Earners and Clerical Workers (revised) - U.S. City Average, and selected areas (1982/84 = 100), all items; and if the Consumer Price Index shall be discontinued or altered, then any successor Consumer Price Index of the United States Bureau of Labor Statistics or successor agency thereto, for the Washington, D.C. Metropolitan area, shall be used, and if there is no such successor Consumer Price Index, Landlord and Tenant shall attempt to agree upon a substitute index or formula, and if said parties are not able to agree upon such substitute, the matter shall be referred to binding arbitration in accordance with the rules of the American Arbitration Association in the State of Maryland then prevailing. 6(g). No payment by Tenant or receipt by Landlord of a lesser amount than the monthly installment of rent or other charges herein stipulated shall be deemed to be other than on account of the earliest stipulated rent or other charges, nor shall any endorsement or statement of any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check for payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this lease provided. 6(h). The Tenant also agrees to pay and the Landlord agrees to accept as additional rental for each lease year of the term of any real estate or other taxes as defined in Article 11. 7 DEPOSIT 7. Prepayment of the first months' rental is waived by the Landlord. GROSS SALES REPORT 8. Intentionally left blank. AUDIT 9. Intentionally left blank. DEFINITION OF GROSS 10. Intentionally left blank. SALES TAXES AND ASSESSMENTS 11(a). For the purposes of this paragraph, the term "Real Estate Taxes" means all taxes, rate and assessments, general and special, levied or imposed with respect to the land, buildings and improvements located at Smallwood Drive & Rt. 925, including all taxes, rates and assessments, general and special levied or imposed for school, public betterment, general or local improvements and operations and taxes imposed in connection with any special taxing district. If the system of Real Estate Taxation shall be altered or varied and any new tax or levy shall be levied or imposed on said land, buildings and improvements, and/or Landlord in substitution for Real Estate Taxes presently levied or imposed on immovables in the jurisdiction where the demised premises is located, then any such new tax or levy shall be included within the term "Real Estate Taxes." Should any governmental taxing authority acting under any regulation, levy, assess, or impose a tax, excise and/or assessment, however described (other than an income or franchise tax) upon, against, on account of, or measured by, in whole or in part, the rent expressly reserved hereunder, or upon the rent expressly reserved under any other leases or leasehold interest in the Building, as a substitute (in whole or in part) or in addition to any existing Real Estate Taxes on land and buildings and otherwise, such tax or excise on rents shall be included within the term "Real Estate Taxes." 11(b). The term "Base Year" means the 1994 real estate tax year. The term "Real Estate Tax Year" means each successive twelve (12) month period following and corresponding to the Base Year, irrespective of the period or periods which may from time-to-time in the future be established by competent authority for the purposes of levying or imposing Real Estate Taxes. 11(c). Each Real Estate Tax Year after the Base Year, Tenant shall pay to Landlord within ten (10) days after demand in writing thereof (accompanied by a statement showing the computation of same) as additional rent and in addition to Fixed Minimum Rental, Percentage Rent and all other payments provided for herein, Tenant's Percentage Share (hereafter defined) of the amount by which (i) the Real Estate Taxes for such tax year exceed (ii) the Real Estate Taxes for the Base Year. The term "Tenant's Percentage Share," for all purposes of this Lease, is hereby defined to be that percentage representing the proportion that the total gross rentable square feet contained within the leased premises bears to the total gross rentable square feet contained within the leased premises bears to the total gross rentable square feet contained within the Building. 11(d). Reasonable expenses, consisting of attorneys' fees, expert witness fees and similar costs, incurred by Landlord in obtaining or attempting to obtain a reduction of any Real Estate Taxes shall be added to and included in the amount of any such Real Estate Taxes. Real Estate Taxes 8 which are being contested by Landlord shall nevertheless be included for purposes of the computation of the liability of Tenant under the above paragraph, provided, however, that in the event that Tenant shall have paid any amount of increased rent pursuant to this Article 11 and the Landlord shall thereafter receive a refund of any portion of any Real Estate Taxes on which such payment shall have been based, Landlord shall pay to Tenant the appropriate portion of such refund. Landlord shall have no obligation to contest, object or litigate the levying or imposition of any Real Estate Taxes and may settle, compromise, consent to, waive or otherwise determine in its discretion to abandon any contest with respect to the amount of any Real Estate Taxes without consent or approval of the Tenant. Nothing contained in this section shall be construed at any time to reduce the monthly installments of rent payable hereunder below the amount specified in Articles 5 and 6 of this Lease. If the termination date of this Lease shall not coincide with the end of a Real Estate Tax fiscal year, then in computing the amount payable under this Article 11 for the period between the commencement of the applicable Real Estate Tax fiscal year in question and the termination date of this Lease, Tenant's Percentage Share of the Real Estate Taxes for the applicable Real Estate Tax fiscal year shall be equitably apportioned (on a per diem basis) so that Tenant shall pay only such portion of such Real Estate Taxes as is attributable to the portion of such Real Estate Tax fiscal year occurring during the term of this Lease. Tenant's obligation to pay Real Estate Taxes under this Article 11 for the final period of the Lease shall survive the expiration of the term of this Lease. A tax bill or true copy thereof, together with any explanatory statement of the area or property covered thereby submitted by Landlord to Tenant shall be conclusive evidence of the amount of taxes assessed or levied, as well as of the items taxes. If any real property tax or assessment levied against the land, building or improvements covered hereby or the rents reserved therefrom, shall be evidenced by improvement bonds or other bonds, or in any other form, which may be paid in annual installments, only the amount paid or payable in any real estate tax fiscal year shall be included as Real Estate Taxes for that real estate tax year for the purposes of this Article 11. LAWS AND ORDINANCES 12. At the time when Landlord tenders possession, in accordance with its obligations under this Lease, to Tenant, Landlord shall certify in writing that said premises and all of the work Landlord has performed therein is in accordance with all state, county, and municipal building and safety requirements. From that point forward, Tenant will, at its own costs, promptly comply with and carry out all orders, requirements or conditions now or hereafter imposed upon it by the ordinances, laws and/or regulations of the municipality, county and/or state in which the premises are located, whether required of the Landlord or otherwise, in the conduct of Tenant's business, except that Landlord shall comply with any orders affecting structural walls and columns unless due to Tenant's particular business or use of the premises. Tenant will indemnify and save Landlord harmless from all penalties, claims, and demands resulting from Tenant's failure or negligence in this respect. FURNITURE AND FIXTURES 13. Tenant shall have the privilege o{ installing, subject to the written approval of the Landlord which shall not be unreasonably withheld, any furniture, fixtures and machinery necessary to the conduct of its 9 business and the same shall remain the property of the Tenant, provided they be removed by the Tenant before the expiration of its tenancy, and further provided that in the event any damage is done to said premises in the removal of said furniture, fixtures or machinery, Tenant will promptly reimburse Landlord for the cost of such repairs as are necessary to restore said premises to their original condition. In the event of failure of Tenant to remove said furniture, fixtures and machinery from said premises before expiration of this Lease, it is agreed that Tenant is abandoning said furniture, fixtures and machinery and same shall become the property of Landlord, who shall have the right to use, remove or dispose of said furniture, fixtures and machinery at the Tenant's expense. REPAIRS 14. The Tenant agrees to maintain the premises in good repair during the term of this Lease, at his own expense, including the floors, walls, ceiling, inside plumbing, heating, ventilating, air conditioning and other equipment and fixtures installed by the Landlord. Landlord agrees within a reasonable time after receipt of written notice from the Tenant to make all repairs necessary to the structural portion and roof, including gutters and downspouts of the demised premises. The Tenant also agrees, at his own expense, to replace all plate glass in the demised premises which shall be damaged or broken from any cause, except where due to building settlement. The Tenant also agrees at his own cost and expense to maintain exterior sign face, sign box and sign lighting. The Tenant also agrees at his own cost and expense to keep in effect during the term of this Lease and any extension or renewal thereof a full parts and labor maintenance contract on the heating, ventilating and air conditioning equipment, servicing the demised premises with a contractor licensed in this area, approved by the Landlord, which approval shall not be unreasonably withheld. The Tenant agrees to provide the Landlord with a copy of this contract upon request. ALTERATIONS 15. Tenant shall not do any construction work or make any alterations, modifications or changes to any part of the demised premises either exterior or interior, without Landlord's written consent which shall not be unreasonably withheld. Landlord may condition its consent upon Tenant's delivery to Landlord of a policy or policies of workmen's compensation, liability and property damage insurance, naming Landlord as additional insured, in limits and with companies acceptable to the Landlord. In the event of any such approved work or changes, Tenant shall have all work done at its own expense. Request for such consent shall be accompanied by plans stating in detail precisely what is to be done. Tenant and Tenant's contractors (who shall be licensed) shall comply with the building codes, regulations and laws now or hereafter to be made or enforced in the municipality, county and/or state in which said premises are located and which pertain to such work. Any additions, improvements, alterations and/or installations made by Tenant (except only movable store and office furniture and fixtures) shall become and remain a part of the building and be and remain Landlord's property upon the termination of Tenant's occupancy of said premises; provided, however, that if Landlord gives written notice to Tenant at the expiration or prior termination of this Lease to such effect, it may require Tenant to restore said premises to their original condition. Tenant shall save Landlord harmless from and against all expenses, liens, claims or damages to either property or person which may or might arise by reason of the making of any such additions, improvements, alterations and/or installations. DAMAGE 16. If the demised premises shall be partially or totally damaged or destroyed by any risk covered by Landlord's insurance as provided for in Article 45(a) of this Lease, then Landlord shall diligently and as soon as practicably after such damage occurs (taking into account the time 10 necessary to effectuate a satisfactory settlement with any insurance company, and reasonable delay on account of "labor troubles" or any other cause beyond Landlord's control) repair or rebuild the demised premises, provided, however, that in no event shall Landlord be obligated to expend in such repair or rebuilding any sums in excess of the amount of insurance proceeds paid to Landlord in connection therewith. The foregoing notwithstanding, in no event shall Landlord be required to repair, restore or rebuild any portions of the demised premises constituting a part of Tenant's leasehold improvements or other tenant work, trade fixtures, equipment and personal property. If the demised premises are rendered wholly or partially untenantable by such damage or destruction, and such damage and destruction was without the fault or neglect of the Tenant, his servants, employees, agents, visitors or licensees, then the rent payable by Tenant under this Lease during the period in which the demised premises are so untenantable shall be equitably abated. Except as set forth in this Article, Landlord shall not be liable for any damages (including without limitation, business interruption) that may be suffered by Tenant by reason of any casualty to the demised premises and/or Landlord's repairing or rebuilding thereof and/or the deprivation of Tenant's use and possession of the demised premises. All of the foregoing provisions of this Article 16 notwithstanding, if the demised premises are rendered wholly untenantable by fire or other cause, and the Landlord shall decide not to rebuild the same, or if the Building be so damaged that the Landlord shall decide to demolish it or not to rebuild it, then, or in any of such events, the Landlord may, at its option, cancel and terminate this Lease by giving to the Tenant, within sixty (60) days from the date of such damage, notice in writing of its intention to cancel this Lease, whereupon the term of this Lease shall cease and determine upon the tenth day after such notice is given, and the Tenant shall vacate the demised premises and surrender the same to the Landlord. EMINENT DOMAIN 17. If the Building or any part thereof shall be taken by any governmental or quasi-governmental authority pursuant to the power of eminent domain or deed in lieu thereof, Tenant agrees to make no claim for compensation in the proceedings and hereby assigns to Landlord any rights which Tenant may have to any portion of any award made as a result of such taking, and this Lease shall terminate as to the portion of the premises taken by the condemning authority and rental shall be adjusted to such date. The foregoing notwithstanding, Tenant shall be entitled to claim, prove and receive in the condemnation proceedings such awards as may be allowed for relocation expenses and for fixtures and other equipment installed by it which shall not, under the terms of this Lease, be or become the property of Landlord at the termination hereof, but only if such awards shall be made by the condemnation court in addition to and stated separately from the award made by it for the land and the building or part thereof so taken. If the nature, location or extent of any proposed condemnation affecting the Building is such that the Landlord elects in good faith to demolish said building, then the Landlord may terminate this Lease by giving at least sixty (60) days' written notice of termination to the Tenant at any time after such condemnation and this Lease shall terminate on the date specified in such notice. ROOF RIGHTS 18. Landlord shall have the exclusive right to use all or any portion of the roof of the leased premises for any purposes, and shall have the right to erect additional stories or other structures over all or any part of said premises. 11 BUSINESS PURPOSE 19(a). The demised premises shall be used only for the purpose of operating a real estate sales. Tenant shall not use all or any portion of the demised premises for any other purpose. 19(b). Tenant affirmatively agrees and represents that it understands and accepts the following as terms of this Lease. 1. The use of the demised premises solely for the above-mentioned purpose was critical to Landlord's decision to enter into this Lease. Landlord, in reaching its decision concerning the use of the demised premises, considered and was influenced by the tenant mix in the Building and the socio-economic status of the community in which the demised premises are located. Such decision by Landlord would not have been made if Tenant intended to use any portion of the demised premises for any purpose other than that specified herein. 2. Landlord is acutely aware of its standing and reputation in the community, and any use of the demised premises reflects on that standing and reputation. For this reason also, use of the demised premises was critical to Landlord's decision to enter into this Lease and to Landlord's continued good standing and reputation in the community. 3. No deviation whatsoever from the use specified herein shall be allowed for any portion of the demised premises without the prior written consent of Landlord, which consent may be withheld for any reason, or without reason, in the sole, absolute, and arbitrary discretion of Landlord. 4. The terms of this Article 19 including, but not limited to, any questions concerning the use for which all or any portion of the demised premises are being employed, shall be strictly enforced and any questions arising hereunder shall be resolved by Landlord in its sole and absolute discretion 19(c). In addition to the provisions of Article 19(a) and (b) above, and in no way in limitation thereof, Tenant agrees not to commit waste on the demised premises and not to use the demised premises for any unlawful purpose, or in violation of any certificate of occupancy, nor suffer any dangerous article to be brought on the demised premises unless safeguarded as required by law. Moreover, no nuisances, public or private, shall be allowed on the demised premises nor shall any use be allowed which is a source of annoyance or embarrassment to Landlord or the other Tenants of the Building, or which is deemed by Landlord as not in keeping with the character of the neighborhood, nor shall the demised premises be used for any unlawful, immoral or improper purpose. Without limiting the generality of the foregoing, in no event shall all or any portion of the demised premises be used as a so-called "adult bookstore" selling obscene or pornographic books or magazines, or for the sale of drug paraphernalia or related items, nor operate in the Demised Premises any coin or token operated vending machines or similar device for sale of any merchandise service (including pay lockers, pay toilets, scales. amusement devices and machines for the sale of beverages, foods, candy or other commodities) except that one cigarette vending machine may be installed in the Demised Premises unless otherwise approved by the Landlord in writing. 19(d) In addition to, and not in limitation of, the foregoing subparagraphs of this Article 19 comply with and observe all restrictive covenants of record (as outlined in Exhibit "E" attached hereto and hereby made a part hereof) which affect or are applicable to the Demised 12 Premises and/or the common areas, provided the same do not prohibit Tenant's permitted use of the Demised Premises specified in Section 19 hereof. SIGNS 20. Tenant shall provide signs of such size, design and character, and in such location(s) only, as Landlord shall approve in writing in its sole discretion. Tenant hereby agrees that such sign shall, unless otherwise expressly permitted, also comply in all respects with the provisions and requirements of the sign regulations hereinafter adopted from time to time by Landlord. Tenant shall obtain and pay for all permits and license's required in connection with such sign and shall be responsible for the proper installation thereof. It is further understood that all signs placed by Tenant on the demised premises shall be erected and maintained in accordance with the County, State and/or other ordinances in force or effect at the time, and at the sole cost and expense of Tenant. Tenant agrees to maintain all signs in good condition and repair at all times to the reasonable satisfaction of Landlord. Except as expressly permitted by Landlord, no other signs, lights, lettering or other forms of inscription of advertising of display devices shall be displayed on the exterior of the demised premises or on or in immediate proximity to the inner or outer face of the show windows, entrances, doors or transoms nor shall the same be displayed in any other location within the demised premises from which said signs, lights, or other forms of inscription or advertising or display devices may readily be seen from outside the demised premises without prior written approval of Landlord as to size, material, design and neatness thereof. It is further agreed that Tenant shall not use sidewalks, parking areas, and alleys for displays, wares, or signs of any kind. The Landlord shall determine during what hours the Building and any signs shall be lit. Any tenant directory provided by Landlord shall be at the sole cost and expense of Landlord. HOURS OF LIGHTING 21. Intentionally left blank. PARKING AND COMMON USE AREAS 22. Intentionally left blank. UTILITIES: GENERAL 23. Tenant shall, at its sole cost and expense, pay all charges when due for water, sewer, gas, electricity, heat, air-conditioning and any other utility or energy charges and taxes incurred by Tenant in the use of the demised premises. UTILITIES: SEPARATE METER 24(a). Tenant shall pay to Landlord, within 10 days after rendition of a bill therefor by Landlord of the Charles County Department of Public Works, or successor, in addition to all other charges provided herein and as additional rent, a sum equal to the amount of any water or sewer rent or charge, or any other tax, rent, fee, levy or charge, imposed in connection with Tenant's use, consumption of supply of water, or Tenant's water system, or Tenant's sewerage connection or system. 24(b). Intentionally left blank. 24(c). Intentionally left blank. 25. Tenant will keep the premises in a clean, orderly and sanitary condition and free of insects, rodents, vermin, other pests, trash and dirt accumulations and shall furnish adequate and proper receptacles for 13 trash and garbage in location designated by the Landlord. Landlord shall maintain and keep in good repair the parking lot, pedestrian walkways and driveways, keeping them clean, free of snow and ice, orderly, properly lighted and marked. Landlord will provide garbage and trash collection service for the demised premises. KEEP CLEAN 26. The Tenant agrees to keep the sidewalks abutting the demised premises in a clean and orderly fashion, and agrees not to use any space, other than within the walls of the demised premises, for the sale or storage of merchandise or for service of any kind. HOLD HARMLESS 27. Tenant agrees that it will indemnify and save the Landlord harmless from any and all liabilities, damages, causes of action, suits, claims, judgements, costs and expenses of any kind (including attorneys' fees) (i) relating to or arising from or in connection with the possession, use, occupation, management, repair, maintenance or control of the demised premises, or any portion thereof, or (ii) arising from or in connection with any act or omission of Tenant or Tenant's agents, employees or invitees, or (iii) resulting from any default, violation or nonperformance of this Lease by Tenant, or (iv) resulting in injury to person or property or loss of life sustained in or about the demised premises. To assure such indemnity, Tenant shall carry and keep in full force and effect at all times during the term of this Lease for the protection of the Landlord and Tenant herein, public liability insurance with limits of at least One Million Dollars ($1,000,000.00) for each accident and Five Hundred Thousand Dollars ($500,000.00) for each separate injury, and property damage insurance In the amount of Fifty Thousand Dollars ($5O,000.OO), with an approved insurance company and to deliver to Landlord a copy of said policy or a certificate showing the same to be in force and effect. In the event Tenant shall fail to maintain such policy of insurance then Landlord may, after three (3) days' written notice to Tenant obtain such policy and pay the premium thereon and the amount so paid shall be added to the next installment of rent. PROPERTY AT TENANT'S RISK 28. It is understood and agreed that all personal property, goods, wares and merchandise in said premises shall be and remain at the Tenant's sole risk and the Landlord shall not be liable for any damage to or loss of such personal property, goods and merchandise arising from the bursting, overflowing or leaking of the roof or of water, sewer, or steam pipes, or from wires or fixtures or from any other cause whatsoever, unless said damages are caused through the negligence of the Landlord, its servants, employees and contractors. INSURANCE RISK 29. The Tenant shall not keep gasoline or other inflammable material or any other explosive in the demised premises or use the demised premises in any manner which will increase the rate of fire insurance on the Building or any part thereof beyond the ordinary risk established for the type of business hereinabove provided to be conducted therein, and any such increase in the insurance rate shall be borne by the Tenant. Tenant shall not do any act or thing upon the premises or in or about the Building which may make void or voidable any insurance on the demised premises, and the Tenant expressly agrees to conform to all rules and regulations from time to time established by the Maryland Insurance Rating Bureau. 14 LANDLORD ACCESS 30. The Landlord and its Agent shall have access to the demised premises at any and all reasonable times for the purpose of protecting said premises against fire, for the prevention of damage and injury to the leased premises, or for the purpose of inspecting the same. 31(a). In the event the Tenant shall be adjudicated bankrupt or adjudged to be insolvent, or if Tenant shall file or acquiesce in a petition in any court in any bankruptcy, reorganization, composition, extension, arrangement or insolvency proceedings, or if Tenant shall make an assignment or other conveyance in trust for the benefit of its creditors, or if any execution or attachment shall be issued against Tenant or Tenant's property whereupon the demised premises shall be taken or occupied or attempted to be taken or occupied by someone other than Tenant and such execution or attachment shall not be dismissed, vacated, discharged or bonded within sixty (60) days' after issuance of same, or if a receiver of Trustee shall be appointed for the property and assets of the Tenant and such receivership be not discharged within twenty (20) days from the date of such appointment, then upon the happening of any of said events, the term hereby demised shall, at the option of the Landlord, cease and determine, it being expressly agreed that the covenant hereinafter contained against the assignment of this Lease shall cover the case of the assignment of this Lease by operation of law as well as the assignment of this Lease by a voluntary act of the Tenant. 31(b). If this Lease shall be so cancelled and terminated, neither Tenant nor any person claiming through or under Tenant by virtue of any statute or order of any court shall be entitled to remain in possession of the demised premises but shall forthwith quit and surrender the demised premises. In no event, without the written approval of Landlord which approval may be granted or withheld at its sole discretion, shall this Lease be or be considered an asset of Tenant's estate in bankruptcy, or insolvency, or receiver or trustee (hereafter referred to as a "Trustee") with respect thereto. 31(c). To the extent that Landlord's right to cancel this Lease in accordance with the provisions of subsections (a) and (b) of this Article 31 is invalid or enforceable under the Bankruptcy Reform Act of 1978 (the "Act") or any other statute or rule of law, then the following provisions shall apply, to the extent valid and enforceable. 31(c)1. If there has been a Default by Tenant under any provision of this Lease (other than this Article 31), the Trustee may not assume this Lease, unless, at the time of assumption of this Lease, the Trustee: 31(c)1A cures, or provides adequate assurance (to Landlord's reasonable satisfaction) that the Trustee will promptly cure such default; and 31(c)1B provides adequate assurance (to Landlord's reasonable satisfaction) of future performance under the Lease, which shall include, without limitation, adequate assurance: 31(c)1Bi of the source of rent and other consideration due under such Lease; 31(c)1Bii that the Percentage Rent will not decline substantially; 15 31(c)1Biii that assumption or assignment of such Lease will not breach substantially any provision, such as a radius, location, use, or exclusivity provision, In any other lease, financing agreement, or master agreement relating to the Building; and 31(c)1Bvi that assumption or assignment of this Lease will not disrupt substantially any tenant mix or balance in the Building. 31 (c)2 If there has been a default by Tenant, the Trustee may not require the Landlord to provide services or supplies incidental to this Lease before assumption of this Lease unless the Landlord is compensated under the terms of this Lease for any services and supplies provided under this Lease before assumption of this Lease. 31(d) If this Lease is terminated under the provisions of this Article 31, or by reason of rejection by the Trustee, Landlord shall be entitled to the recovery of damages, and such other remedies, as are provided for in Article 33. The foregoing sentence shall not, however, limit or prejudice the right of Landlord to petition for and obtain as liquidated damages in any bankruptcy, insolvency, receivership, reorganization, or arrangement proceeding an amount equal to the maximum allowed by the Act or any other statute or rule of law governing such proceedings and in effect at the time when such damages are to be proved, whether or not such amount be greater, equal to or less than the amount of the excess referred to in the preceding sentence. REPOSSESSION 32. This Lease is subject to the limitation that if at any time either of the following events (herein called a "Default") shall occur: (i) if Tenant shall fail to pay any installment of rent or any other charge required to be paid by Tenant hereunder, when the same shall become due and payable (it being specifically understood and agreed that the term rent includes the minimum rental, the Percentage Rent, the share of real estate or other taxes and the share of cost of maintenance and operation of common areas, as referred to in this Lease or any other consideration under the Lease that is identified as rent in this Lease), and such failure shall continue for five (5) days; or (ii) if Tenant shall fail to perform or observe any other term, provision, covenant, condition or requirement of this Lease on the part of Tenant to be performed or observed, and such failure shall continue for ten (10) days after written notice from Landlord; then upon the happening of either of the aforementioned defaults, this Lease shall, at Landlord's option, cease and determine and shall operate as a Notice to Quit, any written Notice to Quit being hereby expressly waived. Landlord may proceed to recover possession of said premises by virtue of any legal process as may at the time be in operation and force in like cases relative to proceedings between Landlord and Tenant, and Tenant shall pay for any court costs relative to such proceedings and a reasonable attorneys' fee, or Landlord may at its option re-enter and re-rent the demised premises for the account of the Tenant, and in such event, Tenant shall remain liable to Landlord for any and all deficiencies in the rent under this Lease. RELETTING 33. Should Landlord elect to re-enter, as herein provided, or should it take possession pursuant to legal proceedings or pursuant to any notice provided by law, it may either terminate this Lease or 16 it may from time to time without terminating this Lease, make such reasonable alterations and reasonable repairs as may be necessary in order to relet the premises, and relet said premises or any part thereof for such term or terms (which may be for a term of less than as extending beyond the term of this Lease) and at such rental or rentals and upon other terms and conditions as Landlord in its discretion may deem advisable; upon each such reletting all rentals received by the Landlord from such reletting shall be applied first, to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs and expenses of such reletting, including brokerage fees and attorneys' fees and of costs of such reasonable alterations and reasonable repairs; third, to the payment of rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same may become due and payable hereunder. If such rentals received from such reletting during any month be less than that to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No such re-entry or taking possession of said premises by Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for any such previous breach. Should Landlord at any time terminate this Lease for any breach, in addition to any other remedies it may have, it may recover from Tenant damages it may incur by reason of such breach, including any unpaid rent (or other amounts due under this Lease) which is due and owing at the time of termination, repairing and redecorating the premises to a condition sufficient for reletting same. In addition, in the event of termination by Landlord as aforesaid, if Landlord at its sole option so elects, Tenant shall pay to Landlord, on demand, as liquidated, agreed final damages, the following: 1. The difference between: (i) the rent and all other charges which would have been payable from the date of such demand to the date when this Lease would have expired if it had not been terminated as aforesaid, and (ii) the fair rental value of the demised premises for the same period, with said difference being discounted at the rate of six percent (6%) per annum to present worth, and 2. commissions, advertising, cost of repairs and other expenses incidental to the reletting of the demised premises For purposes of the foregoing sentence, the term rent shall include fixed minimum rental, Percentage Rent, additional rent, and all other charges and pass-throughs provided herein. For the purpose of computing Percentage Rent after a Default, the monthly percentage rent shall be deemed to be equal to the average monthly Percentage Rent paid hereunder for the twenty-four (24) months during the term preceding such termination the entire preceding portion of the term if less than twenty-four months). HOLDOVER 34. If the Tenant shall not immediately surrender said premises on the day after the end of the term hereby created, then the Tenant shall, by virtue of this agreement, become Tenant by the month at twice the rental agreed by the said Tenant to be paid as aforesaid, commencing said monthly tenancy with the first day next after the end of the term above demised; and said Tenant as monthly Tenant, shall be subject to all of the conditions and covenants of this Lease as though the same had originally been a monthly tenant, and the said Tenant shall give to the Landlord at least thirty (30) days' written notice to quit said premises, except in the event of non- 17 payment of minimum rent in advance or of Percentage Rent when due or of the other additional rents, as provided for in Article 6 hereof, when due, or of the breach of any other covenant by the said Tenant, in which event the said Tenant shall not be entitled to any notice to quit, the usual thirty (30) days' notice to quit being expressly waived; provided, however, that in the event that the Tenant shall hold over after the expiration of the term hereby created, and if the said Landlord shall desire to regain possession of said premises promptly at the expiration of the term aforesaid, then at any time prior to the acceptance of the minimum rent by the Landlord from the Tenant, as monthly tenant hereunder, the Landlord, at its election or option, may re-enter and take possession of said premises forthwith, without process, or by any legal action or process in force in the State of Maryland. RENTAL SIGN 35. The Tenant agrees to give Landlord permission to place a "For Rent" sign in the window sixty (60) days before termination of the lease term. SUBORDINATION 36. Tenant agrees that this Lease shall be subject and subordinate to the lien of any bona fide mortgages or deeds of trust that may now or at any time hereafter be placed against the demised premises by the Landlord to secure money borrowed from any insurance company or recognized financial institution. Tenant agrees, at any time hereafter, on demand, to execute any instrument, release, or other documents that may be required by Landlord for the purpose of subjecting and subordinating this Lease to the lien of any mortgage or deed of trust, whether original or substituted. NOTICES 37. All notices, demands. requests, approval, consents or other instruments required or desired to be given hereunder by either party to the other shall be given by certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to Landlord. If to Tenant: Interstate Business Corporation Interstate General Co. L.P. 222 Smallwood Village Center 222 Smallwood Village Center St. Charles, Maryland 20602 St. Charles, Maryland 20602 ASSIGNS AND SUCCESSORS 38. Feminine or neuter pronouns shall be substituted for those of the masculine form, and the plural may be substituted for the singular number, in any place or places herein in which the context may require such substitution or substitutions; and the covenants and agreements herein contained shall, wherever appropriate, be binding upon the heirs, administrators, executors, personal representatives, successors and assigns of the parties hereto. SUBLETTING AND ASSIGNMENT 39. Tenant will not sublet demised premises or any part thereof, or transfer possession or occupancy thereof to any person (including but not by way of limitation, concessionaires or licensees of Tenant) firm or corporation or transfer, assign mortgage or encumber this Lease without the prior written consent of Landlord in each instance, nor shall any subletting or assignment hereof be effected by merger, liquidation or otherwise by operation of law or otherwise than by the prior written consent of the Landlord. Any attempted transfer, assignment, subletting, license or concession agreement or hypothecation shall be void and confer no rights upon any third party. If Landlord shall refuse to consent to any request of Tenant for the proposed assignment, sale, or other transfer of Tenant's interest in 18 and to this Lease and/or the demised premises, Landlord may, if it so elects, but only with the consent of Tenant, terminate this Lease as of a mutually agreeable termination date, in which event (i) this Lease shall expire and come to an end with the same force and effect as if said date were originally set forth in this Lease for expiration of the Term, (ii) Tenant agrees Landlord shall have the absolute right, with no consent required from Tenant, to relet the demised premises for its own account to Tenant's prospective assignee at such rentals and upon such other terms and conditions as Landlord shall desire If, without Landlord's prior written consent, there shall be an attempted assignment or subletting or if the demised premises shall be occupied by anybody other than Tenant, whether as a result of act or omission by Tenant, or by operation of law, or otherwise, Landlord, may. in addition to, and not in diminution of or substitution for, any other rights and remedies under this Lease or pursuant to law to which Landlord may be entitled as a result thereof, collect rent from the proposed assignee, subtenant or occupant and apply the net amount collected to the rent herein reserved, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of this covenant or the acceptance of the assignee, subtenant, or occupant as a tenant, or a release of Tenant hereunder from the further performance by Tenant of the covenants on the part of Tenant herein contained. If Landlord shall consent to any requested transfer, assignment, mortgage, hypothecation, encumbrance, subletting, license and/or concession, such consent shall be deemed consent to that particular transaction only and shall not be deemed consent to any other or future transfer, assignment, mortgage, hypothecation, encumbrance, subletting, license and/or concession, as the case may be. Any permitted transfer, assignment, mortgage, hypothecation, encumbrance, subletting, license and/or concession shall be expressly subject to each and every term, covenant and condition of this Lease, unless otherwise specifically provided in writing, and Tenant shall remain fully liable and obligated under all of such terms, covenants and conditions. If Tenant is a corporation, unincorporated association or partnership, and Tenant shall, without the prior written consent of Landlord, transfer, assign or hypothecate any stock or interest in such corporation, association or partnership so as to result in a change in the control thereof by the person, persons or entities owning a controlling interest therein as of the date of this Lease, then Landlord shall have the option to terminate this Lease at any time after actual notice of such change by giving Tenant at least sixty (60) days' prior written notice and, on the date fixed in such notice for termination of this Lease, this Lease shall expire and come to end with the same effect as if said date were originally set forth in this Lease for expiration of the term. The mere receipt by Landlord of rent from a party other than Tenant shall not be deemed actual notice of any change in control or ownership of Tenant. This provision shall not be applicable to the transfer of any stock or interest in such corporation, association or partnership to a member of the immediate family of any person(s) now owning a controlling interest therein (i.e.. the spouse and direct lineal ancestor or descendent of such person or such person's spouse). NOT PARTNERS 40. The parties hereto by this agreement expressly do not intend as a matter of fact or law to create or constitute a partnership. PROMOTIONAL SERVICE 41. Intentionally left blank. CONTINUOUS OCCUPANCY 42(a). On the Rent Commencement Date, Tenant shall occupy the premises and promptly open for business, at which time the premises shall be fully fixtured, fully stocked and fully staffed. Tenant acknowledges 19 that it has been informed that its obligation to open for business promptly on the Rent Commencement Date has been and will be relied upon by the Landlord in dealing with other tenants, and failure of Tenant to open for business as above specified shall constitute a Default under this Lease, and may cause substantial damages to Landlord. Tenant shall defend, indemnify and save Landlord harmless from any damages which may be claimed against Landlord and shall indemnify Landlord for any losses suffered because of Tenant's failure to comply with its obligations under the first sentence of this Article. 42(b). Throughout the term, Tenant shall continuously conduct in the premises, the business permitted under Article 19 (and no other business, including specifically any business or use prohibited by the terms of this Lease). Tenant acknowledges that its obligation to continuously and actively conduct business in the premises in the manner prescribed in this Article is for the purpose of enhancing the business activity and public patronage of all businesses in order to produce for Landlord the maximum possible percentage rents from all Tenants as well as from the premises and to enhance the leaseability of floor space and Tenant acknowledges that failure on its part to comply with provisions of this Article shall constitute a Default under this Lease, and would cause Landlord substantial damages which might be difficult or insusceptible of exact proof. Accordingly, the parties have agreed that if Tenant fails to comply with the provisions of this Article, then Landlord shall not be required to prove its actual damages for breach of this Article, but in lieu thereof Tenant shall pay Landlord as liquidated damages, and not as a penalty, an additional monthly rent equal to the monthly minimum rent payable under Article 5 hereof, which liquidated damage payments shall continue from the date of breach until such breach is cured or until the end of the then current term of this Lease, whichever is first. Said liquidated damages shall be paid monthly, concurrently with the monthly payments of minimum rent reserved under this Lease. Nothing in this Article shall be construed as a limitation upon Tenants obligations to continuously conduct business in the manner herein specified or upon Landlord's remedies under Articles 32 and 33 or upon Landlord's right to recover any other provable monetary damages. A breach by Tenant of its obligations under subsection (a) of this Article shall also constitute a breach of this subsection (b) and entitle Landlord not only to its claims under subsection (a), but also to liquidated damages under this subsection (b) for so long as the breach of this subsection continues. MAINTENANCE AND OPERATION OF COMMON AREAS 43. Landlord agrees to keep the parking areas and areas contiguous to the demised premises, reasonably free of snow, ice and debris and to keep the same lighted during the business hours of a majority of the tenants in the Building. Tenant further agrees to keep the parking areas and other common ares in good repair and order. COST OF MAINTENANCE AND OPERATION OF COMMON AREAS 44. Intentionally left blank. INSURANCE 45(a). Landlord shall obtain and maintain in effect during the term of this Lease a policy or policies of insurance (i) covering the improvements constituting the Building (including the common areas, but excluding Tenant's leasehold improvements, trade fixtures and other property required to be insured by Tenant) in an amount not less than eighty percent (80%) of the full replacement cost (exclusive of the cost of excavations, foundations and footings), providing protection against perils included within 20 the standard Maryland form of fire and extended coverage insurance policy, together with such other risks, and with such deductibles, as Landlord may from time to time determine, and (ii) public liability insurance covering the parking areas and other common areas in an amount not less than $500,000 for injury to any one person, $1,000,000 for injuries arising out of one accident, and $50,000 for property damage coverage. The cost of the premiums for any such policies shall be included in the Landlord common area maintenance costs. Any such insurance may be effected by a policy or policies of blanket insurance, covering additional items or locations or assureds. Tenant shall have no rights in any policy maintained by Landlord and shall not, by reason of payment by Tenant, as part of common area maintenance costs, of its pro rata share of Landlord's premium therefor, be entitled to be a named assured thereunder. 45(b). Tenant, at Tenant's sole cost and expense, shall obtain and maintain in effect at all times during the term of this Lease, policies providing the following coverage: (i) a comprehensive policy of general liability insurance, covering the demised premises and Tenant's use thereof against claims for personal injury or death or property damage occurring upon, in or about the demised premises, in the limits stipulated in Article 27; (ii) insurance covering Tenant's leasehold improvements, trade fixtures, equipment and personal property from time to time in, on or upon the demised premises, in an amount of not less than eighty percent (80%) of the full replacement value of said items, providing protection against perils included within the standard Maryland form of fire and extended coverage insurance policy, together with insurance against sprinkler damage, vandalism, and malicious mischief. Any policy proceeds from such insurance, so long as this Lease shall remain in effect, shall be held in trust by Tenant's insurance company first for the repair, reconstruction, restoration or replacement of the property damaged or destroyed, and (iii) plate glass insurance covering all plate glass in the demised premises. Tenant shall be and remain liable for the repair and restoration of all such plate glass. 45(c). All insurance policies herein required to be procured by Tenant (i) shall be issued in form acceptable to Landlord by good and solvent insurance companies qualified to do business in the State of Maryland and reasonably satisfactory to Landlord, (ii) shall be issued in the names of Landlord, Tenant and any other parties in interest from time to time designated in writing by notice from Landlord to Tenant, (iii) shall be written as primary policy coverage and not contributing with or in excess of any coverage which Landlord may carry; and (iv) shall contain an express waiver of any right of subrogation by the insurance company against Landlord. Neither the issuance of any insurance policy required hereunder, nor the minimum limits specified herein with respect to Tenant's insurance coverage, shall be deemed to limit or restrict in any way Tenant's liability arising under or out of this Lease. With respect to each and every one of the insurance policies herein required to be procured by Tenant, on or before the Rent Commencement Date and before any such insurance policy shall expire, Tenant shall delivery to Landlord certificates of insurance for, certified copies of, or duplicate originals of, each such policy or renewal thereof, as the case may be, together with evidence of payment of all applicable premiums. Any insurance required to be carried hereunder may be carried under a blanket policy covering the demised premises and other locations of Tenant, and if Tenant includes the demised 21 premises in such blanket coverage Tenant shall deliver to Landlord, as aforesaid, a duplicate original or certified copy of each such insurance policy or a certificate evidencing such insurance. Each and every insurance policy required to be carried hereunder by or on behalf of Tenant shall provide that, unless Landlord shall first have been given ten (10) days' prior written notice thereof: (i) such insurance policy shall not be cancelled and shall continue in full force and effect, (ii) the insurance carrier shall not, for any reason whatsoever, fail to renew such insurance policy, and (iii) no material change may be made in such insurance policy. In the event that Tenant shall fail promptly to furnish any insurance coverage herein required to be procured by Tenant, Landlord, at its sole option, shall have the right to obtain the same and pay the premium therefor for a period not exceeding one (1) year in each instance, and the premium so paid by Landlord shall be immediately payable by Tenant to Landlord as additional rent. ADDITIONAL RENT 46. If Landlord shall incur any charge or expense on behalf of Tenant under the terms of this Lease, such charge or expense and all other monetary payments due under this Lease to Landlord shall be considered additional rent hereunder; in addition to and not in limitation of any other rights and remedies which Landlord may have in case of the failure by Tenant to pay such sums when due, such nonpayment shall entitle Landlord to the remedies available to it hereunder for non-payment of rent. All such charges or expenses shall be paid to Landlord at its office in St. Charles, Maryland. RENT 47. Landlord covenants that if Tenant pays the rent and all other charges provided for herein, performs all of its obligations provided for hereunder, and observes all of the other provisions hereof, Tenant shall at all times during the term hereof peaceably and quietly have, hold and enjoy the demised premises, without any interruption or disturbance from Landlord, or anyone claiming through or under Landlord, subject to the terms hereof. TRANSFER OF LANDLORD'S INTEREST 48. Notwithstanding any provision of this Lease to the contrary, in the event of the sale or other transfer of Landlord's interest in the demised premises, (i) Landlord shall thereupon and without further act by either party hereto be released and discharged of all covenants and obligations of Landlord hereunder thereafter accruing, and (ii) it shall be deemed and construed conclusively, without further agreement between the parties, that the purchaser or other transferee or assignee has assumed and agreed to perform the obligations of Landlord thereafter accruing. NO WAIVER 49. That no waiver of any breach of any covenant, condition or agreement herein contained shall operate as a waiver of the covenant, condition or agreement itself, or of any subsequent breach thereof. PARTIAL INVALIDITY 50. If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease or the application of such term, covenant or condition to persons or circumstances other than those s to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant and condition of this Lease shall be valid and enforced to the fullest extent permitted by law. 22 RULES & REGULATIONS 51. Tenant shall at all times comply with the rules and regulations set forth on Exhibit "D' attached hereto, and with any additions thereto and modifications thereof adopted from time to time by Landlord, and each such rule or regulation shall be deemed as a covenant of this Lease to be performed and observed by Tenant. APPLICABLE LAW 52. This Lease shall be construed under the laws of the State of Maryland. CAPTIONS AND HEADINGS 53. Captions and headings are for convenience and reference only. JOINT AND SEVERAL LIABILITY 54. If two or more individuals, corporations, partnerships or other business associations (or any combination of two or more thereof) shall sign this Lease as Tenant, the liability of each such individual, corporation, partnership, or other business association to pay rent and perform all other obligations hereunder shall be deemed to be joint and several. In like manner, if the Tenant named in this Lease shall be a partnership or other business association, the members of which are, by virtue of statute or general law, subject to personal liability, the liability of each such member shall be joint and several. NOTIFICATION 55. This writing is intended by the parties as final expression of their agreement and as a complete and exclusive statement of the terms thereof, all negotiations, considerations and representations between the parties having been incorporated herein. No course of prior dealings between the parties or their affiliates shall be relevant or admissible to supplement, explain, or vary any of the terms of this Lease. Acceptance of, or acquiescence in, a course of performance rendered under this or any prior agreement between the parties or their affiliates shall not be relevant or admissible to determine the meaning of any of the terms of this Lease. No representations, understandings, or agreements have been made or relied upon in the making of this Lease other than those specifically set forth herein. This Lease can only be modified by a writing signed by all of the parties of their duly authorized agents. NO DISCRIMINATION 56. It is intended that the Building be developed so that all prospective tenants and all customers, employees, licensees and invitees of all tenants shall have the opportunity to obtain all the goods, services, accommodations, advantages, facilities and privileges of the Building without discrimination because of race, creed, color, national origin or ancestry. To that end, Tenant will not discriminate in the conduct and operation of its business in the premises against any person or group of persons because of the race, creed, color, national origin or ancestry of such person or group of persons. DELAY 57. Intentionally left blank. STORE FRONT 58. Intentionally left blank. ESTOPPEL CERTIFICATE 59. Tenant agrees, at any time and from time to time, upon not less than five (5) days prior written notice by Landlord, to execute, acknowledge and deliver to Landlord or to such person(s) as may be designated by Landlord, a statement in writing (i) certifying that Tenant is in possession of the demised premises, has unconditionally accepted the same and is currently paying the rents reserved hereunder, (ii) certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, 23 that the Lease is in full force and effect as modified and stating the modifications), (iii) stating the dates to which the rent and other charges hereunder have been paid by Tenant, (iv) stating whether or not to the best knowledge of Tenant, Landlord is in default in the performance of any covenant, agreement or condition contained in this Lease, and, if so, specifying each such default of which notices to Tenant should be sent. Any such statement delivered pursuant thereto may be relied upon by any owner of the Building, any prospective purchaser of the Building, any mortgagee or prospective mortgagee of the Building or of Landlord's interest, or any prospective assignee of any such mortgagee. OUTPARCEL 60. Landlord shall have the right to remove from the premises, sell, or separately develop any outparcels whereupon such outparcels shall, at the option of the Landlord, be removed from the definition of the premises. WAIVER OF JURY TRIAL 61. Tenant hereby waives all right to trial by jury in any claim, action, proceeding or counterclaim by either Landlord or Tenant against the other or any matters arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant and/or Tenant's use or occupancy of the demised premises. NO OPTION 62. The submission of this Lease for examination does not constitute a reservation of or option for the premises, and this Lease becomes effective only upon execution and delivery thereof by Landlord. SECURITY DEPOSIT 63. Landlord hereby acknowledges receipt from Tenant of a security deposit in the amount of N/A Dollars ($N/A) as security for Tenant's faithful performance of Tenant's obligations hereunder. If Tenant fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provisions of this Lease, Landlord may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default or for the payment of any other sum to which Landlord may become entitled by reason of Tenant's default, or to compensate Landlord for any loss or damage which Landlord may suffer thereby. If Landlord so uses or applies all or any portion of said deposit, Tenant shall within ten (10) days after written demand therefor deposit cash with Landlord in an amount sufficient to restore said deposit in full to the original amount and Tenant's failure to do so shall be a Default under this Lease. Landlord shall not be required to keep said deposit separate from its general accounts. If Tenant performs all of Tenant's obligations hereunder, said deposit or so much thereof as has not theretofore been applied by Landlord shall be returned, without payment of interest or other increment for its use, to Tenant within forty-five (45) days after the expiration of the term of this Lease, or after Tenant has vacated the demised premises, whichever is later. BROKER'S PERMISSION 64. The Landlord recognizes N/A, as the procuring cause and agent of this Lease, and recognizes its obligation to pay a commission. LESSOR'S RIGHT TO SELL OR MORTGAGE FEE 65. Nothing contained in this lease shall limit or curtail Landlord's right to sell, mortgage, or otherwise deal with its fee interest in the leased premises, the ground underlying the leased premises, the shopping center and the ground underlying the shopping center, or affect 24 Landlord's right to assign the net rent payable under this Lease either as further collateral security under a fee mortgage or otherwise. Any such assignment of rent shall be honored by Tenant. BUILDING ALTERATIONS 66. Landlord may from time to time change or alter the size, configuration, partitions or designations of all or any part of the Building, and may expand by adding thereto additional land and buildings without the consent of, or notice to, Tenant. IN WITNESS WHEREOF, and intending that this Lease be a sealed instrument, Landlord and Tenant have executed this Lease under seal on the dates indicated beneath their respective signatures. INTERSTATE BUSINESS CORPORATION /s/ Paul Resnik By: /s/ J. Michael Wilson - ----------------------------- ---------------------------- WITNESS LANDLORD Date of Execution by Landlord: 7/18/94 -------- AMERICAN FAMILY HOMES /s/ Paul Resnik /s/ Dennis O'Connor - ----------------------------- -------------------------------------- WITNESS TENANT Date of Execution by Tenant: 7/5/94 ---------- State of Maryland SS: County of Charles Before me, a Notary Public in and for the jurisdiction aforesaid, personally appeared this date, July 18, 1994, J. Michael Wilson, personally well known (or satisfactorily proven) to me to be the President of Interstate Business Corporation, a Delaware corporation, who, being by me first duly sworn, did acknowledge that he/she, as the duly authorized officer of said Corporation, executed the foregoing and annexed Instrument, in the name and on behalf of said Corporation, as its free act and deed for the uses and purposes therein contained. WITNESS my hand and official seal this 18th day of July, 1994. /s/ Patricia M. Brosco ----------------------------------- NOTARY PUBLIC My Commission Expires: 12/1/94 ------------- 25 EXHIBIT D RULES AND REGULATIONS Smallwood Village Center St. Charles, Maryland Tenant shall, at all times during the term of the Lease; 1. Use, maintain and occupy the premises in a careful, safe, proper and lawful manner, keep the premises and its appurtenances in a clean and safe condition; 2. Keep all glass in the doors and windows of the premises clean and in good repair; 3. Not place, maintain or sell any merchandise in any vestibule or entry to the premises, on the sidewalks adjacent to the premises, or elsewhere on the outside of the premises without the prior written consent of Landlord; 4. Keep the premises in a clean, orderly and sanitary condition, free of insects, rodents, vermin and other pests; 5. Not permit undue accumulations of garbage, trash, rubbish and other refuse in the premises, and keep refuse in closed containers within the interior of the premises until removed. 6. Not use, permit or suffer the use of any apparatus or instruments for musical or other sound reproduction or transmission in such manner that the sound emanating therefrom or caused thereby shall be audible beyond the interior of the premises; 7. Not deliver or suffer or permit delivery of merchandise to the premises after 10:00 a.m. on any day; 8. Light the show windows and exterior signs of the premises to the extent required in the Lease; 9. Keep all mechanical apparatus free of vibration and noise which may be transmitted beyond the confines of the premises; 10. Not cause or permit objectional odors to emanate or be dispelled from the premises; 11. Not overload the floors or electrical wiring and not install any additional electrical wiring or plumbing without Landlord's prior written consent; 12. Not use show windows in the premises for any purpose other than display of merchandise for sale in a neat and attractive manner; 13. Not conduct, permit or suffer any public or private auction sale to be conducted on or from the premises; and 26 14. Not solicit business in the common areas of the Building or distribute handbills or other advertising materials in the common areas, and if this provision is violated the Tenant shall pay Landlord the cost of collecting same from the common areas for trash disposal. 15. Maintain an attractive display in the show windows; and 16. Discourage congregations of people in the common areas and outside the store. 27 LEASE RENEWAL CLAUSE The following additional provisions are hereby added to the Lease: (a) Option to Extend Subject to the satisfaction of the conditions precedent set forth in Paragraph (b) below, Tenant shall have the right, at its option, to extend the term of this Lease for two additional periods (the "Extension Period") of two (2) years. Such extension option shall be exercisable by Tenant giving written notice to Landlord of the exercise of such option only during the three-month period that is at least one (1) month, but not more than three (3) months, prior to the expiration of the then current term of this Lease; and, upon the exercise of such extension option, the termination date of this Lease shall automatically be extended for two (2) years. Such Extension Period shall be upon the same terms, covenants, and conditions as set forth in this Lease with respect to the initial term, but subject to the rental adjustment provisions of Paragraph (c) below. With respect to such extension option, and in the event that (i) Tenant shall fail to exercise the same strictly within the time period and in the manner set forth above, and/or (ii) at the time hereinabove specified for the exercise of such option, all of the conditions precedent set forth in Paragraph (b) below shall not have been satisfied, then such extension option shall automatically expire and be absolutely void and of no force or effect. (b) Conditions Precendent. The extension option granted to Tenant in Paragraph (a) above, shall be void and of no force and effect unless, at the time above specified for exercising such option, each and every one of the following conditions precedent shall have been fully satisfied: 1. This Lease shall be in full force and effect; 2. Tenant shall be in possession of the demised premises and shall be regularly conducting its normal business operation therein; and 3. Tenant shall not be in default (beyond any grace period granted in this Lease for curing the same) in the performance or observance of any of the terms, provisions, covenants and conditions of this Lease. (c) Rent Adjustment. Notwithstanding any other provision of this Lease, in the event the term of this Lease is extended pursuant to the exercise by Tenant of the extension option hereinabove granted in Paragraph (a) above, then, with respect to such Extension Period, the rents, other charges and other economic benefits to be derived by Landlord under this Lease shall be the same as determined under provisions of Paragraphs 6(e) and 6(f). The foregoing sentence notwithstanding, in no event shall the fixed minimum annual rental (and the monthly installments thereof) payable hereunder during and for the Extension Period be less than the greater of (i) the fixed minimum annual rental in effect immediately prior to the Extension Period or (ii) the fixed minimum annual rental during the Initial term adjusted to the Consumer Price Index (as set forth in the following sentence). Such adjustment shall be accomplished by multiplying the average fixed minimum annual rental in effect during the initial term of this Lease by a fraction, the numerator of which shall be the Consumer Price Index as of the most recent date prior to the beginning of the Extension Period, and the denominator of which shall be the Consumer Price 28 Index as of the most recent date prior to the Rent Commencement Date. If the fixed minimum annual rental is established by the aforesaid adjustment pursuant to the preceding sentence, said fixed minimum annual rental shall be effective as of the beginning of the Extension Period and shall thereafter continue in effect as the fixed minimum annual rental required to be paid under this Lease during the entire Extension Period subject to adjustment as described in Article 6E of this Lease (d) Consumer Price Index. For all purposes of the Lease Agreement, the Consumer Price Index is hereby defined to be the "United States Bureau of Labor Statistics, Consumer Price Index, for Urban Wage Earners and Clerical Workers (CPl-W)", all items for Washington, D. C. SMSA (1967 = 100); and if the Consumer Price Index shall be discontinued or altered, Landlord and Tenant shall attempt to agree upon a substitute index or formula, and if said parties are not able to agree upon such substitute, the matter shall be referred to binding arbitration in accordance with the rules of the American Arbitration Association in the State of Maryland then prevailing. LATE PAYMENT CHARGES In the event that any installment or payment of minimum rent, percentage rent, additional rent or any other sum required hereunder to be paid by Tenant to Landlord is not received by Landlord on or before the fifth (5th) calendar day after the same is due and payable, then, for each and every such late payment, in addition to the payment then in arrears, Tenant shall immediately pay to Landlord as additional rent, a service charge equal to whichever is the greater of (i) Twenty Dollars ($20.00); or (ii) one half of one percent (.5%) of such unpaid sum per day for each calendar day after the due date of such payment that such payment has not been received by Landlord. The provisions herein for late payment service charges shall not be construed to extend the date for payment of any sums required to be paid by Tenant hereunder or to relieve Tenant of its obligations to pay all such sums at the time or times herein stipulated. Notwithstanding the imposition of such service charges pursuant to this subsection (b), Tenant shall be in default under this Lease if any or all payments required to be made by Tenant are not made at the time herein stipulated, and neither the demand for, nor collection by, Landlord of such late payment service charges shall be construed as a cure of such default on the part of Tenant. 68. Landlord gives Tenant an option to purchase the building. Terms shall be negotiated at the time the option is exercised. 69. This lease plus the option to buy must be approved by the Executive Committee of IGMC's Board of Directors. 29 TO: Interstate General Company L.P. FROM: Smallwood Village Associates Interstate Business Corporation DATE: August 25, 1995 IBC agrees to provide space for a file room to IGC on the first floor. IBC agrees to relocate the PDRB from its current space to a room in the upstairs offices. IBC agrees to hold IGC (AFH) to only six additional months rent at 99 Smallwood Drive from Sept. 1, 1995, or less, if building is released or sold prior to the six month period. IBC agrees to allow the Investment property division to relocate to upstairs offices and cancel the remaining time left on the Lease Agreement. However, the apartment maintenance and subsidized leasing offices shall continue leasing space on the first floor. /s/ J. Michael Wilson - ------------------------------- INTERSTATE BUSINESS CORPORATION EX-21 5 LIST OF SUBSIDIARIES 1 EXHIBIT 21 List of Subsidiaries of Registrant ---------------------------------- St. Charles Associates Limited Partnership, a Maryland limited partnership Interstate General Properties Limited Partnership S.E., a Maryland limited partnership Astoria Inc., a Pennsylvania corporation Brandywine Investment Associates Limited Partnership, a Maryland limited partnership Interstate Acceptance Corporation I, a Delaware corporation Maryland Cable Limited Partnership, a Maryland limited partnership Crossland Associates Limited Partnership, a Maryland limited partnership Wakefield Third Age Associates Limited Partnership, a Maryland limited partnership Wakefield Terrace Associates Limited Partnership, a Maryland limited partnership Headen House Associates Limited Partnership, a Maryland limited partnership Palmer Apartments Associates Limited Partnership, a Maryland limited partnership Huntington Associates Limited Partnership, a Maryland limited partnership Essex Apartments Associates, a Virginia limited partnership Bannister Associates Limited Partnership, a Maryland limited partnership Rio Piedras Associates, a New York limited partnership Piedras Americas Associates, a New York limited partnership Monacillos Associates, an Illinois limited partnership Las Lomas Associates, an Illinois limited partnership San Anton Associates, a Massachusetts limited partnership Monte de Oro Associates, a Maryland limited partnership Interstate General Realty, Inc., a Delaware corporation New Center Associates Limited Partnership, a Maryland limited partnership 2 Monserrate Associates Limited Partnership, a Maryland limited partnership Carolina Associates Limited Partnership, a Maryland limited partnership Alturas del Senorial Associates Limited Partnership, a Maryland limited partnership Jardines de Camparra Associates Limited Partnership, a Maryland limited partnership Colinas de San Juan Associates Limited Partnership, a Maryland limited partnership Bayamon Gardens Associates Limited Partnership, a Maryland limited partnership Turabo Limited Dividend Partnership, a Massachusetts limited partnership Valle del Sol Limited Partnership, a Maryland limited partnership Lancaster Apartments Limited Partnership, a Maryland limited partnership Chastleton Apartments Associates, a District of Columbia limited partnership Fox Chase Apartments General Partnership, a Maryland general partnership New Forest Apartments General Partnership, a Maryland general partnership Coachman's Limited Partnership, a Maryland limited partnership Land Development Associates S.E., a Puerto Rico partnership Interstate Waste Technologies, Inc., a Delaware corporation Brookside Gardens Limited Partnership, a Maryland limited partnership IWT Freehold, Inc., a Delaware corporation IWT Bridgeport, Inc., a Delaware corporation Sports Realty, Inc., a Delaware corporation Darby Station Apartments Limited Partnership, a Maryland limited partnership American Family Homes, Inc., a Delaware corporation Equus Management Corporation, a Delaware corporation Lakeside Apartments Limited Partnership, a Maryland limited partnership Escorial Builders S.E., a Puerto Rico special partnership EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 5,601 0 6,501 (709) 79,690 0 3,487 2,216 132,093 0 0 0 0 0 37,909 132,093 25,650 37,700 17,486 23,515 12,709 95 2,432 (1,051) 1,452 (2,967) 0 0 0 (2,967) (.29) (.29) Balance includes $2,125 of restricted cash.
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