<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1998
FILE NO. 001-14373
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM 10
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GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
INSIGNIA/ESG HOLDINGS, INC.
(TO BE RENAMED "INSIGNIA FINANCIAL GROUP, INC.")
(Exact name of registrant as specified in its charter)
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DELAWARE 56-2084290
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
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200 PARK AVENUE, NEW YORK, NEW YORK 10166
(Address of Principal Executive Offices) (Zip Code)
(212) 984-8000
(Registrant's telephone number, including area code)
Securities to be registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE, INC.
</TABLE>
Securities to be registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
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<PAGE> 2
INFORMATION STATEMENT
[INSIGNIA LOGO]
INSIGNIA/ESG HOLDINGS, INC.
(TO BE RENAMED "INSIGNIA FINANCIAL GROUP, INC.")
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
This Information Statement ("Information Statement") has been prepared by
Insignia Financial Group, Inc., a Delaware corporation ("Insignia"), in
connection with the proposed pro rata distribution (the "Distribution") by
Insignia to its stockholders of all of the outstanding Common Stock, par value
$.01 per share ("Holdings Common Stock"), of Insignia/ESG Holdings, Inc., a
Delaware corporation and a wholly-owned subsidiary of Insignia ("Holdings"). It
is currently anticipated that the Distribution will be effected as soon as
possible after the Special Meeting of Stockholders of Insignia to be held on
September 14, 1998 (the "Insignia Meeting"), at which Insignia stockholders will
be asked to approve, among other things, the Distribution and the Amended and
Restated Agreement and Plan of Merger, dated as of May 26, 1998 (the "Merger
Agreement"), by and among Insignia, Holdings, Apartment Investment and
Management Company, a Maryland corporation ("AIMCO"), and AIMCO Properties,
L.P., a Delaware limited partnership ("AIMCO Operating Partnership"), which
provides for the proposed merger (the "Merger") of Insignia with and into AIMCO,
as such Merger is described in the Joint Proxy Statement/Prospectus dated August
, 1998 (the "Joint Proxy Statement/Prospectus") relating to the Insignia
Meeting and the Special Meeting of Stockholders of AIMCO to be held on September
14, 1998 (the "AIMCO Meeting"). Following the Merger, Holdings will change its
name to "Insignia Financial Group, Inc."
As a result of the Distribution, each holder of record as of September 15,
1998 (the "Distribution Record Date") of shares of Class A Common Stock, par
value $.01 per share, of Insignia ("Insignia Common Stock") will receive two
shares of Holdings Common Stock for each three shares of Insignia Common Stock
held by such holder. Cash will be distributed in lieu of any fractional shares
of Holdings Common Stock (determined in the aggregate). The Insignia Board of
Directors (the "Insignia Board") expects to consummate the Distribution as soon
as practicable after the Distribution Record Date.
The Distribution will occur if the Insignia stockholders approve the
Distribution and the Insignia Board determines that the conditions to the
Distribution have been satisfied, regardless of whether the Merger Agreement is
approved. See "THE DISTRIBUTION -- CONDITIONS."
---------------------
THE SECURITIES TO BE ISSUED IN THE DISTRIBUTION AND THE WARRANT DISTRIBUTION
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS INFORMATION STATEMENT OR THE JOINT PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this Information Statement is August , 1998.
<PAGE> 3
Prior to the Distribution, Insignia will transfer to Holdings and its
subsidiaries the assets and liabilities that comprise Insignia's commercial real
estate operations and other select holdings. The business of Holdings will
include Insignia's commercial real estate services business, cooperative and
condominium apartment management business, single-family home brokerage and
mortgage origination business, equity co-investment business and certain other
related businesses. After the Distribution, Insignia and its remaining
subsidiaries will continue to own and operate Insignia's existing residential
multifamily property management, ownership and partnership administration
businesses, including related assets and liabilities, and if the Merger is
consummated, such businesses, assets and liabilities will be acquired by AIMCO.
No consideration will be paid by Insignia stockholders for the shares of
Holdings Common Stock to be received by them in the Distribution. There is
currently no public trading market for the Holdings Common Stock. The shares of
Holdings Common Stock to be distributed in the Distribution have been approved
for listing, subject to official notice of issuance and approval of the
Distribution by Insignia stockholders, on the NYSE under the symbol "IEG." See
"THE DISTRIBUTION -- MANNER OF EFFECTING THE DISTRIBUTION."
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION....................................... iii
SUMMARY..................................................... 1
Insignia/ESG Holdings, Inc................................ 1
Pro Forma Revenues........................................ 3
The Distribution and the Merger........................... 3
Effects of the Distribution............................... 4
SUMMARY COMBINED HISTORICAL AND PRO FORMA FINANCIAL
INFORMATION OF HOLDINGS................................... 6
CAPITALIZATION.............................................. 8
LISTING AND TRADING OF HOLDINGS COMMON STOCK................ 8
DIVIDEND POLICY............................................. 8
THE DISTRIBUTION............................................ 9
Reasons for the Distribution.............................. 9
The Distribution.......................................... 10
Manner of Effecting the Distribution...................... 11
Conditions................................................ 11
Relationship with Insignia and AIMCO Following the
Distribution........................................... 12
Expenses.................................................. 12
THE MERGER.................................................. 12
Reasons for the Merger.................................... 12
The Merger Agreement...................................... 13
The Indemnification Agreement............................. 13
BUSINESS OF HOLDINGS........................................ 14
General................................................... 14
Commercial Real Estate Services -- Insignia/ESG........... 16
Residential Real Estate Services -- Realty One and
Insignia Residential Group............................. 21
Cooperative and Condominium Apartment Management
Services............................................... 23
Mergers and Acquisitions.................................. 25
Competition............................................... 25
Employees................................................. 26
Environmental Regulation.................................. 26
Litigation................................................ 26
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO INSIGNIA
STOCKHOLDERS.............................................. 28
The Distribution.......................................... 28
SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL
INFORMATION OF HOLDINGS................................... 30
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF
HOLDINGS (UNAUDITED)...................................... 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 37
Results of Operations for the Three Months Ended March 31,
1998 and 1997.......................................... 37
Results of Operations for the Years Ended December 31,
1997 and 1996.......................................... 39
Results of Operations for the Years Ended December 31,
1996 and 1995.......................................... 40
Liquidity and Capital Resources........................... 41
Effect of New Accounting Standards........................ 41
Year 2000 Compliance...................................... 41
Impact of Inflation and Changing Prices................... 42
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i
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MANAGEMENT.................................................. 43
Directors and Executive Officers.......................... 43
Committees of the Holdings Board.......................... 44
Directors' Compensation................................... 45
EXECUTIVE COMPENSATION...................................... 46
Summary Compensation Table................................ 46
Insignia Option/SAR Grants in Last Fiscal Year............ 47
Aggregated Insignia Option/SAR Exercises in Last Fiscal
Year and Fiscal Year-End Option/SAR Values............. 48
Compensation Pursuant to Plans............................ 48
Employment Agreements..................................... 54
Compensation Committee Interlocks and Insider
Participation.......................................... 58
CERTAIN TRANSACTIONS........................................ 58
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 59
DESCRIPTION OF CAPITAL STOCK................................ 61
Common Stock.............................................. 61
Preferred Stock........................................... 61
NYSE Listing.............................................. 61
Transfer Agent and Registrar.............................. 61
The Delaware Business Combination Act..................... 61
Certain Certificate and By-laws Provisions................ 62
INDEX TO FINANCIAL STATEMENTS............................... F-1
ANNEX A -- AGREEMENT AND PLAN OF DISTRIBUTION............... A-1
</TABLE>
ii
<PAGE> 6
AVAILABLE INFORMATION
Holdings has filed with the Securities and Exchange Commission (the "SEC")
a registration statement on Form 10 (such registration statement, as it may be
amended or supplemented, the "Registration Statement") under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), with respect to the
Holdings Common Stock to be distributed to Insignia stockholders in the
Distribution. This Information Statement does not contain all of the information
that is set forth in the Registration Statement and the exhibits and schedules
thereto. Additional information concerning the proposed Distribution and related
transactions may be found in the Joint Proxy Statement/Prospectus forming a part
of the registration statement on Form S-4 (the "Form S-4") filed by AIMCO under
the Securities Act of 1933, as amended (the "Securities Act"). The Registration
Statement and the Form S-4, as well as the respective annexes, exhibits and
schedules thereto, can be copied and inspected at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, NW, Washington,
D.C. 20549, as well as the Regional Offices of the SEC at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such materials can also
be obtained from the Public Reference Section of the SEC at 450 Fifth Street NW,
Washington, D.C. 20549 at prescribed rates. The SEC also maintains a site on the
World Wide Web at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC, including Holdings and Insignia. In addition,
information filed by Holdings and Insignia with the NYSE may be inspected at the
offices of the NYSE at 20 Broad Street, New York, New York 10005.
Following the Distribution, Holdings will be subject to the informational
requirements of the Exchange Act and, in accordance therewith, will file
reports, proxy statements and other information with the SEC. The reports, proxy
statements and other information that will be filed by Holdings with the SEC
will be available for inspection and copying at the SEC's public reference
facilities referred to above. Copies of such material will be obtainable by mail
from the Public Reference Section of the SEC at the address referred to above at
prescribed rates and from the SEC's web site referred to above. In addition, it
is expected that reports, proxy statements, and other information concerning
Holdings will be available for inspection at the offices of the NYSE at 20 Broad
Street, New York, New York 10005.
NO PERSON HAS BEEN AUTHORIZED BY INSIGNIA OR HOLDINGS TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED
IN THIS INFORMATION STATEMENT OTHER THAN THOSE CONTAINED IN THIS INFORMATION
STATEMENT AND IN THE JOINT PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY EITHER INSIGNIA OR HOLDINGS. NEITHER THE DELIVERY OF THIS
INFORMATION STATEMENT OR THE JOINT PROXY STATEMENT/PROSPECTUS NOR THE
CONSUMMATION OF THE DISTRIBUTION CONTEMPLATED HEREBY SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF HOLDINGS SINCE THE DATE THEREOF, OR THAT THE INFORMATION HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO SUCH DATE.
iii
<PAGE> 7
SUMMARY
The following summary is not intended to be complete and is qualified in
its entirety by reference to the more detailed information and financial
statements, including the notes thereto, included in this Information Statement
and the Appendices to the Joint Proxy Statement/Prospectus, including (i) the
form of the Agreement and Plan of Distribution to be entered into between
Insignia and Holdings attached hereto as Appendix A (the "Distribution
Agreement") and (ii) the Merger Agreement attached as Appendix I to the Joint
Proxy Statement/Prospectus. Stockholders are urged to read this Information
Statement, the Joint Proxy Statement/Prospectus and the Appendices thereto in
their entirety. After the Distribution, Holdings will be one of the largest
international real estate firms in the world, comprised of Insignia's
international commercial real estate services business, cooperative and
condominium apartment management business, single-family home brokerage and
mortgage origination business, equity co-investment and certain other related
businesses (collectively, the "Holdings Businesses"), and Insignia will continue
to own and operate Insignia's existing residential multifamily property
management and ownership and partnership administration businesses, including
related assets and liabilities (collectively, the "Multifamily Business").
Assuming the Merger with AIMCO is consummated, AIMCO will succeed to the
Multifamily Business, including related assets and liabilities.
INSIGNIA/ESG HOLDINGS, INC.
Holdings, headquartered in New York, New York, is the parent company of an
international real estate organization. Holdings' business units specialize in
commercial real estate services, single-family home brokerage and mortgage
origination, condominium and cooperative apartment management, equity
co-investment and other services. As more fully described below and elsewhere in
this Information Statement, Holdings' principal operating units are
Insignia/ESG, Inc. (international commercial property services), Realty One,
Inc. (single-family home brokerage and mortgage origination) and Insignia
Residential Group, Inc. (condominium and cooperative housing management).
Through Insignia/ESG, Inc. and its subsidiaries ("Insignia/ESG"), including
its U.K. subsidiary Richard Ellis Group Limited ("Richard Ellis"), its Italian
subsidiary Insignia CAGISA S.P.A. ("Insignia/ CAGISA"), and its German
subsidiary Insignia RE GmbH, Holdings provides a broad spectrum of commercial
real estate services, including tenant representation, property leasing and
management, property disposition and acquisition, investment sales, equity and
debt financing, equity co-investment and consulting services. Insignia/ESG
provides these services for tenants, owners and investors in office,
manufacturing/distribution, retail, hospitality and mixed-use properties.
Insignia/ESG is among the leading providers of commercial real estate services
in the United States according to the January 1998 edition of Commercial
Property News. Insignia/ESG enjoys a dominant market position in the New York
metropolitan area, and also maintains a significant market position in property
owner and/or tenant services in Washington, DC, Philadelphia, Chicago, Atlanta,
Phoenix, Los Angeles, San Francisco, Dallas and other major central business
districts. In all, Insignia/ESG has operations in more than 40 markets in the
United States. Insignia/ESG also has growing international capabilities which
allow it to meet clients' expanding world-wide needs, most notably through
Richard Ellis in the United Kingdom, Insignia RE GmbH in Germany, and Insignia/
CAGISA in Italy. According to the January 1998 issue of Estates Gazette, Richard
Ellis is among the leading property services companies in the United Kingdom
with offices in London, Manchester, Glasgow, Birmingham, Leeds, Liverpool and
Belfast.
1
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Map of United States showing Map of United Kingdom showing
locations of Insignia/ESG offices locations of Insignia/ESG offices
</TABLE>
[INSIGNIA/ESG U.S. AND U.K. OFFICE LOCATIONS MAPS]
Through Realty One, Inc. and its affiliated companies ("Realty One"),
Holdings operates a full-service single-family residential brokerage and
mortgage loan origination business in northern Ohio. Realty One is the ninth
largest (based on unit volume) residential real estate brokerage firm in the
United States according to Real Trends "Big Broker Report" published in May
1998. In 1997, it handled more than 20,000 transaction sides valued at more than
$2.8 billion, and through its affiliate, First Ohio Mortgage Corp. Inc. ("First
Ohio"), Realty One originated in excess of 2,650 mortgage loans totaling
approximately $292 million.
Holdings' subsidiary, Insignia Residential Group, Inc. ("Insignia
Residential Group"), is the largest manager of cooperatives and condominiums in
the New York metropolitan tri-state area according to the July/August 1998 issue
of New York Habitat. As of March 31, 1998, Insignia Residential Group managed
315 residential properties, consisting of 237 cooperatives, 41 condominiums and
37 rental properties, comprising a total of approximately 59,000 residential
units.
As a result of the Distribution, Holdings will be an independent, publicly
held company. Certain of the current executive officers and directors of
Insignia are also executive officers and directors of Holdings. See
"MANAGEMENT."
Holdings, which was incorporated under the laws of the State of Delaware on
May 6, 1998, was organized by Insignia for the purpose of owning and operating
the Holdings Businesses in order to facilitate the Distribution. Holdings has no
operating history and no established sources of capital. Holdings' principal
executive offices are located at 200 Park Avenue, New York, New York 10166, and
its telephone number at that address is (212) 984-8000. Following the Merger,
Holdings will change its name to "Insignia Financial Group, Inc."
2
<PAGE> 9
PRO FORMA REVENUES
On a pro forma basis, Insignia/ESG's U.S. operations accounted for 58% of
Holdings' 1997 revenues, Insignia/ESG's European operations accounted for 16% of
Holdings' 1997 revenues, Realty One accounted for 21% of Holdings' 1997
revenues, and Insignia Residential Group accounted for 5% of Holdings' 1997
revenues.
HOLDINGS PRO FORMA REVENUES
[CHART]
[PIE CHART ILLUSTRATING PERCENTAGES OF HOLDINGS'
PRO FORMA REVENUES ACCOUNTED FOR BY OPERATIONS LISTED ABOVE]
THE DISTRIBUTION AND THE MERGER
Prior to the Distribution, Insignia will effect a series of contributions,
transfers and liability assumptions among itself and its subsidiaries for the
purpose of separating the Holdings Businesses and the Multifamily Business. The
purpose of these transactions is to facilitate the Distribution and the Merger.
Most of Insignia's existing liabilities, other than those directly relating to
the Holdings Businesses, will remain with Insignia after the Distribution
(subject to certain guarantees and pledges of Holdings and its subsidiaries
pending the completion of the Merger or refinancing thereof by Insignia).
Assuming the Merger is consummated, those liabilities will be assumed by AIMCO
and Holdings will be released from all guarantees, liens and pledges in favor of
Insignia's revolving credit facility lenders.
The Distribution. Insignia will distribute to each record holder of
Insignia Common Stock as of the Distribution Record Date certificates
representing that number of whole shares of Holdings Common Stock equal to
two-thirds of the number of shares of Insignia Common Stock held by such holder.
Insignia stockholders will recognize gain or loss to the extent cash is
distributed in lieu of any fractional shares of Holdings Common Stock. It is
currently anticipated that the Distribution will be effected as soon as
practicable after approval thereof at the Insignia Meeting. Insignia has
received an opinion from Rogers & Wells LLP that, although the matter is not
free from doubt, the Distribution should qualify as a reorganization and
tax-free distribution for Federal income tax purposes. Notwithstanding the
receipt of such an opinion, no assurance can be given that the Internal Revenue
Service ("IRS") or a court will agree with the conclusions of Rogers & Wells
LLP. To qualify as a tax-free distribution, the Distribution must satisfy the
requirements of Sections 355 and 368 of the Internal Revenue Code of 1986, as
amended (the "Code"), including the requirements that the Distribution not be
used as a device for the distribution of Insignia's earnings and that
3
<PAGE> 10
Insignia's historic business be continued following the Merger and Distribution.
The law is not entirely clear regarding the application of these requirements to
a distribution and subsequent merger with a real estate investment trust
("REIT") that will conduct the acquired business through a subsidiary
partnership and other non-controlled subsidiaries. If the Distribution did not
qualify as a tax-free reorganization, each Insignia stockholder would be treated
as receiving a distribution in an amount equal to the fair market value of
Holdings Common Stock received, which would result in a taxable dividend to the
extent of such stockholder's pro rata share of Insignia's current and
accumulated earnings and profits (including gain to Insignia from the
distribution of Holdings Common Stock). In the event that Insignia stockholders
approve the Distribution but not the Merger Agreement, the Distribution will
nonetheless be consummated if the Insignia Board determines that the conditions
to the Distribution have been satisfied. See "THE DISTRIBUTION -- CONDITIONS."
In connection with the Distribution, Insignia anticipates making a
distribution (the "Warrant Distribution") to record holders on the Distribution
Record Date of the 6 1/2% Trust Convertible Preferred Securities issued by
Insignia Financing I, a subsidiary of Insignia (the "Convertible Preferred
Securities"), of warrants to purchase approximately 1,196,000 shares of Holdings
Common Stock (four warrants for each $500 liquidation amount of Convertible
Preferred Securities held by them) (the "Warrants"). Each Warrant will represent
the right to purchase one share of Holdings Common Stock. The Warrants will have
an exercise price of 120% of the market price of Holdings Common Stock following
the Distribution. The term of each Warrant will be five years, and no Warrant
will be exercisable before two years after it is granted. Immediately prior to
the Warrant Distribution, Insignia will purchase the Warrants from Holdings for
approximately $8.5 million, which represents the estimated fair market value of
the Warrants. This value was determined using the Black-Scholes method, based on
the following assumptions: (i) no dividends are paid on Holdings Common Stock,
(ii) an exercise price equal to 120% of the market price, (iii) a five-year term
and (iv) 30% volatility of the Holdings Common Stock. See "THE
DISTRIBUTION -- MANNER OF EFFECTING THE DISTRIBUTION."
The Insignia Board will formally declare, and authorize Insignia to effect,
the Warrant Distribution if the Distribution has occurred and the Insignia Board
determines, among other things, that (i) the conditions to the Merger have been
satisfied and (ii) the closing of the Merger is imminent. See "THE
DISTRIBUTION -- CONDITIONS."
The Merger. If the Distribution and the Merger Agreement are approved by
Insignia stockholders, pursuant to the Merger Agreement Insignia (and thus the
Multifamily Business) will be merged with and into AIMCO, with AIMCO being the
surviving corporation. In the aggregate, Insignia's stockholders will receive
shares of preferred AIMCO equity securities ("AIMCO Securities") in the Merger,
which will also entitle the holders of the AIMCO Securities to a one-time
special dividend of approximately $50 million in cash (the "Special Dividend").
In addition, AIMCO is required to have Holdings released from all guarantees of,
and pledges of collateral for, Insignia debt as a condition of the Merger. A
more detailed description of the Merger Agreement and the Merger, including the
respective pre- and post-Merger obligations of the parties to the Merger
Agreement and the conditions to consummation of the Merger, can be found in the
Joint Proxy Statement/Prospectus. See "THE MERGER."
EFFECTS OF THE DISTRIBUTION
Set forth below is a brief summary of certain terms of the Distribution and
related transactions. The Distribution Agreement is more fully described herein
under "THE DISTRIBUTION" and is attached hereto as Appendix A.
Distributing Company.......... Insignia
Securities to be
Distributed................... Shares of Holdings Common Stock, on the basis
of two shares of Holdings Common Stock for each
three shares of Insignia Common Stock, and cash
in lieu of any fractional shares of Holdings
Common Stock. Based on the number of shares of
Insignia
4
<PAGE> 11
Common Stock outstanding as of July 31, 1998,
it is estimated that approximately 21,500,000
shares of Holdings Common Stock will be
distributed to Insignia stockholders in the
Distribution.
Distribution Record Date...... The Distribution Record Date is September 15,
1998.
Time of Distribution.......... The time at which the Distribution is effective
(the "Time of Distribution") is expected to be
as soon as practicable after the approval
thereof at the Insignia Meeting. Stock
certificates for shares of Holdings Common
Stock will be mailed as soon as practicable
after the Time of Distribution. See "THE
DISTRIBUTION -- MANNER OF EFFECTING THE
DISTRIBUTION."
Trading Market................ The Holdings Common Stock to be distributed in
the Distribution have been approved for listing
on the NYSE, subject to official notice of
issuance and approval of the Distribution by
Insignia stockholders, under the symbol "IEG."
Holdings is also considering applying to list
its shares of the Holdings Common Stock on the
London Stock Exchange. See "LISTING AND TRADING
OF HOLDINGS COMMON STOCK."
Distribution Agent, Transfer
Agent and Registrar........... First Union National Bank, which also serves as
transfer agent for the Insignia Common Stock,
is expected to serve as the distribution agent
and as the transfer agent and registrar for the
Holdings Common Stock.
Tax Consequences.............. The Distribution is intended to be tax-free to
holders of Insignia Common Stock. See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES TO INSIGNIA
STOCKHOLDERS."
Distribution Agreement........ Holdings and Insignia will enter into the
Distribution Agreement immediately prior to the
Distribution, which will govern the parties
respective rights, duties and obligations with
respect to the sharing of tax liabilities, if
any, and other pre- and post-Distribution
liabilities and obligations. A copy of the
Distribution Agreement is attached hereto as
Appendix A. See "THE DISTRIBUTION --
RELATIONSHIP WITH INSIGNIA FOLLOWING THE
DISTRIBUTION."
Relationship with Insignia
After the Distribution........ Except as provided in the Distribution
Agreement, the Merger Agreement and the Amended
and Restated Indemnification Agreement, dated
as of May 26, 1998, between AIMCO and Holdings
(the "Indemnification Agreement") and as
otherwise described herein, there will be no
relationship between Holdings and Insignia
after the Distribution, or between Holdings and
AIMCO after the Merger. See "THE
DISTRIBUTION -- RELATIONSHIP WITH INSIGNIA
FOLLOWING THE DISTRIBUTION."
5
<PAGE> 12
SUMMARY COMBINED HISTORICAL AND PRO FORMA
FINANCIAL INFORMATION OF HOLDINGS
The following table sets forth (i) unaudited summary combined historical
financial information of the Insignia entities to be spun off into Holdings (the
"Holdings Businesses") as of March 31, 1998 and for each of the three-month
periods ended March 31, 1998 and 1997; (ii) summary combined historical
financial information as of December 31, 1997 and 1996 and for each of the years
ended December 31, 1997, 1996 and 1995, which has been derived from the Holdings
Businesses' audited combined financial statements as of December 31, 1997 and
1996, and for each of the years ended December 31, 1997, 1996 and 1995, included
elsewhere herein; (iii) summary historical financial information as of and for
each of the years ended December 31, 1995, 1994, and 1993, which has been
derived from the unaudited combined financial statements of the Holdings
Businesses, not included elsewhere herein; and (iv) unaudited summary combined
pro forma financial information as of and for the three-month period ended March
31, 1998 and for the year ended December 31, 1997, which has been derived from
the Unaudited Pro Forma Condensed Combined Financial Statements of Holdings
included elsewhere herein. This historical and pro forma financial information
includes an allocable portion of corporate, administrative and general expenses
of Insignia estimated to be incurred by Holdings operating on a stand alone
basis. Such data should be read in conjunction with the combined financial
statements (including the notes thereto) and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" included elsewhere
herein. The unaudited summary combined pro forma balance sheet information as of
March 31, 1998 is presented as if the Distribution and the Merger had occurred
on March 31, 1998, and the unaudited summary combined pro forma income statement
information for the three-month period ended March 31, 1998 and the year ended
December 31, 1997 is presented as if the Distribution, the acquisition of
Richard Ellis, the acquisition of Realty One, and the acquisition of Barnes,
Morris, Pardoe & Foster had occurred on January 1, 1997. The unaudited summary
combined pro forma financial information incorporates certain assumptions set
forth in the footnotes to the Unaudited Pro Forma Condensed Combined Financial
Statements of Holdings included elsewhere herein. Historical per share data has
not been presented because the financial statements of the Holdings Businesses
include primarily wholly-owned subsidiaries or divisions of Insignia. The
summary combined pro forma information does not purport to represent what
Holdings' financial position or results of operations actually would have been
had the Distribution and the acquisitions described above, in fact, occurred on
such date or at the beginning of the period indicated, or to project Holdings'
financial position or results of operations at any future date or for any future
period.
The tables set forth below provide a variety of statistical information
about Holdings and the Holdings Businesses. Management believes that Net EBITDA,
which is defined as earnings before interest, income taxes, depreciation and
amortization ("EBITDA") combined with funds from operations ("FFO") less
interest expense, is a significant indicator of the strength of its results.
EBITDA does not represent cash flow as defined by GAAP and does not necessarily
represent amounts of cash available to fund Holdings' cash requirements. EBITDA
should not be considered an alternative to net income, an indicator of operating
performance or an alternative to cash flow from operations as a measure of
liquidity. There can be no assurance that Holdings' basis of computing EBITDA
and Net EBITDA is comparable with that of other companies.
6
<PAGE> 13
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, HOLDINGS HOLDINGS BUSINESSES
-------------------------------- --------- -------------------------------------------------
HOLDINGS HOLDINGS BUSINESSES YEAR ENDED DECEMBER 31,
--------- -------------------- -------------------------------------------------------------
PRO FORMA PRO FORMA
1998 1998 1997 1997 1997 1996 1995 1994 1993
--------- --------- -------- --------- -------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................... $113,033 $102,801 $43,866 $460,717 $295,753 $122,005 $38,658 $15,665 $11,711
Operating expenses............. 101,690 91,776 39,162 408,848 258,625 107,444 37,554 14,606 8,672
Depreciation and
amortization................. 6,007 5,184 3,268 22,056 15,244 9,197 3,778 771 157
Net income (loss).............. 2,330 2,759 1,072 14,570 13,055 3,484 (2,278) 173 1,758
Per share amount -- assuming
dilution..................... $ 0.10 $ 0.67
Weighted average and potential
dilutive common shares....... 22,581 21,657
CASH FLOW DATA:
Cash provided by (used in)
operating activities......... N/A $(11,778) $(6,030) N/A $ 30,332 $ 7,307 $(1,399) N/A N/A
Cash used in investing
activities................... N/A (36,845) (3,117) N/A (82,893) (77,194) (19,796) N/A N/A
Cash provided by financing
activities................... N/A 54,424 9,116 N/A 61,767 69,895 21,221 N/A N/A
SUPPLEMENTAL DATA:
EBITDA......................... $ 11,343 $ 11,025 $ 4,704 $ 51,869 $ 37,128 $ 14,561 $ 1,104 $ 1,059 $ 3,039
Combined EBITDA and FFO........ 11,709 11,391 4,860 52,673 37,932 14,923 1,104 1,059 3,039
Net EBITDA..................... 11,096 11,009 4,860 50,621 37,614 14,905 1,104 1,059 3,039
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, HOLDINGS BUSINESSES
---------------------- -------------------------------------------------
HOLDINGS HOLDINGS
--------- BUSINESSES AS OF DECEMBER 31,
PRO FORMA ---------- -------------------------------------------------
1998 1998 1997 1996 1995 1994 1993
--------- ---------- -------- -------- ------- ------- -------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................... $485,652 $450,907 $334,494 $171,787 $43,074 $19,877 $ 3,153
Notes payable.................. 31,208 31,208 20,891 -- -- -- --
Investment and net advances
from Insignia................ -- 288,720 208,444 137,777 39,948 17,294 1,671
Stockholders' equity........... 323,465 -- -- -- -- --
</TABLE>
7
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Holdings
Businesses as of March 31, 1998 and the pro forma capitalization of Holdings as
of such date after giving effect to the Distribution (amounts in thousands,
except share data). This table should be read in conjunction with Holdings
Businesses' Combined Financial Statements and the notes thereto, Holdings'
Unaudited Pro Forma Condensed Combined Financial Statements and the notes
thereto, and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," all of which are included elsewhere herein.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-----------------------
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
Long-term debt(1)......................................... $ 31,208 $ 31,208
Investment and net advances from Insignia -- stockholders'
equity................................................. 288,720 --
Common Stock, $.01 par value per share, 80,000,000 shares
authorized, 21,500,000 shares issued and
outstanding(2)......................................... -- 215
Preferred Stock, $.01 par value per share, 20,000,000
shares authorized, no shares issued and outstanding.... -- --
Additional paid-in capital................................ -- 323,250
Retained earnings......................................... -- --
-------- --------
Total investment and net advances from Insignia --
stockholders' equity............................ 288,720 323,465
-------- --------
Total capitalization.............................. $319,928 $354,673
======== ========
</TABLE>
- ---------------
(1) Holdings is a guarantor of, and the stock of each of its material
subsidiaries is pledged to secure, Insignia's $300 million revolving credit
facility.
(2) Does not include 6,154,000 shares of Holdings Common Stock which may be
issued upon exercise of options and warrants.
LISTING AND TRADING OF HOLDINGS COMMON STOCK
The Holdings Common Stock to be distributed in the Distribution have been
approved for listing on the NYSE, subject to official notice of issuance, under
the symbol "IEG." Holdings is also considering applying to list the Holdings
Common Stock on the London Stock Exchange. There is currently no public trading
market for the Holdings Common Stock, and there can be no assurance as to the
establishment or consistency of any such market. Of the approximately 21,500,000
million shares of Holdings Common Stock that are expected to be outstanding
following the Distribution, approximately 13.6 million shares will become
eligible for sale in the public market immediately following the Distribution,
and the remaining approximately 7.9 million shares held by affiliates will
become eligible for resale 90 days following the Distribution, subject to
volume, manner of sale and other limitations of Rule 144 under the Securities
Act. Persons who may be deemed to be affiliates of Holdings after the
Distribution generally include individuals or entities that control, are
controlled by or are under common control with Holdings, and may include the
directors and executive officers of Holdings as well as any principal
stockholder of Holdings. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT."
DIVIDEND POLICY
Holdings does not intend to pay dividends on the Holdings Common Stock in
the foreseeable future. Any payment of future dividends and the amounts thereof
will be dependent upon Holdings' earnings, financial requirements and other
factors, including contractual obligations.
8
<PAGE> 15
THE DISTRIBUTION
This section of the Information Statement describes certain aspects of the
Distribution. This description does not purport to be complete and is qualified
in its entirety by reference to the agreements (including the Distribution
Agreement and the Merger Agreement) which are attached as Appendices to this
Information Statement and to the Joint Proxy Statement/Prospectus.
REASONS FOR THE DISTRIBUTION
The Insignia Board believes that the Distribution will enhance stockholder
value principally for the following reasons:
- Access to Capital Markets. The separation of the Holdings Businesses will
provide Holdings with greater access to the capital markets to develop
its commercial and retained residential real estate operations,
facilitate future acquisitions and make Holdings better able to attract
and retain top quality professionals in its commercial real estate future
operations. Stock-based compensation of commercial real estate
professionals is expected to more closely tie their performance and
compensation.
- Continuation of Multifamily Business. Regardless of whether the Merger
occurs, the Distribution will permit Insignia to continue and expand the
Multifamily Business. Immediately following the Distribution, Insignia
will continue to be the largest manager of multifamily housing in the
United States.
- Future Prospects of Holdings. The strength and future prospects of
Holdings are favorable, even without the net cash flow contributed by the
Multifamily Business. The Insignia Board believes that Holdings will have
sufficient access to capital to fund its operations as a stand alone
entity.
- Commercial Business Attractive to Investors. The Insignia Board believes
that the creation of a stand-alone commercial business will be more
attractive to the investment community, because it will enable that
community to better understand and analyze the performance and prospects
of the Holdings Businesses.
- Management Focus. The Distribution will allow the management of Holdings
to focus exclusively on the operation and growth of the Holdings
Businesses.
- Tax Free Distribution. The Distribution is expected to be tax-free to
Insignia stockholders (except to the extent of cash received in lieu of
fractional shares).
Notwithstanding these favorable aspects of the Distribution, the Insignia
stockholders should be aware of the following factors, among others which the
Insignia Board considered in approving the Distribution:
- Tax Risks. While Insignia intends that the Distribution will qualify as a
tax-free distribution to its stockholders, the issue is not entirely free
from doubt and no assurance can be given that the IRS will agree with
this characterization. Insignia has received an opinion of Rogers & Wells
LLP to the effect that the Distribution should be tax-free to Insignia
stockholders (except in respect of cash received in lieu of fractional
shares).
- Lack of Operating History. Holdings has not operated as a business apart
from Insignia and there can be no assurance that the separation will not
result in a disruption, at least temporarily, of the Holdings Businesses.
The Insignia Board believes that Holdings' management has the experience
necessary to operate Holdings as a stand alone business.
- No Market for Holdings Common Stock. There is not currently a public
market for Holdings Common Stock, and there can be no assurance that a
public trading market will develop. However, Holdings' Common Stock has
been approved for listing on the NYSE, subject to official notice of
issuance.
9
<PAGE> 16
- Uncertainty of Market Prices. There can be no assurance that the combined
market value of Holdings Common Stock and Insignia Common Stock after the
Distribution will equal or exceed the market value of Insignia Common
Stock before the Distribution.
- Access to Credit. If the Merger does not occur following the
Distribution, Holdings and Insignia will have to refinance or restructure
Insignia's revolving credit facility in order to permit Holdings to have
access to the credit markets. The Insignia Board believes that Insignia's
revolving credit facility can be adequately restructured.
- Interests of Directors and Officers. Certain directors and officers of
Insignia will receive substantial payments from Insignia as a result of
the Merger and certain executive officers (or entities they control) will
be parties to employment and/or consulting agreements with Holdings and
Insignia. The Insignia Board reviewed and approved the nature and amount
of such payments and considered the consequent effect on non-affiliated
stockholders. In addition, the independent directors and certain key
personnel of Holdings will be granted an aggregate of approximately
1,100,000 options to purchase Holdings Common Stock under the Holdings
1998 Stock Plan.
The foregoing discussion of the factors considered by the Insignia Board is
not intended to be exhaustive, but includes all material factors considered by
the Insignia Board. In light of the variety of the factors considered in
connection with its evaluation of the Distribution, the Insignia Board did not
find it practicable to, and therefore did not, quantify or otherwise assign
relative weights to the specific factors considered in reaching its
determination and did not try to reach a consensus as to the appropriate
analysis of each factor. In addition, different members of the Insignia Board
may have given different weights to different factors and may have analyzed each
factor differently.
THE DISTRIBUTION
Prior to the Distribution, Insignia effected a series of contributions,
transfers and liability assumptions among itself and its subsidiaries for the
purpose of separating the Holdings Businesses and the Multifamily Business in
order to facilitate the Distribution and the Merger. Most of Insignia's existing
liabilities, other than those directly relating to the Holdings Businesses, will
remain with Insignia after the Distribution (subject to certain guarantees and
pledges of Holdings and its subsidiaries pending the completion of the Merger or
refinancing thereof by Insignia). Assuming the Merger is consummated, those
liabilities will be assumed by AIMCO and Holdings will be released from all
guarantees, liens and pledges in favor of Insignia's revolving credit facility.
Subject to receipt of Insignia stockholder approval and the satisfaction of
certain other conditions, Insignia will effect the Distribution by distributing
to each record holder of Insignia Common Stock as of the Distribution Record
Date certificates representing that number of whole shares of Holdings Common
Stock equal to two-thirds of the number of shares of Insignia Common Stock held
by such holder. Cash will be distributed in lieu of any fractional shares of
Holdings Common Stock (determined in the aggregate). It is currently anticipated
that the Distribution will be effected as soon as practicable after approval
thereof at the Insignia Meeting. In the event that Insignia stockholders approve
the Distribution but not the Merger Agreement, the Distribution will nonetheless
be consummated if the Insignia Board determines that the conditions to the
Distribution have been satisfied. The Holdings Common Stock has been approved
for listing on the NYSE, subject to official notice of issuance and approval of
the Distribution by Insignia stockholders, under the symbol "IEG." Consummation
of the Distribution is not conditioned upon approval or consummation of the
Merger. See "-- MANNER OF EFFECTING THE DISTRIBUTION" AND "-- CONDITIONS."
In connection with the Merger, Holdings will assume certain existing
options and warrants to purchase shares of Insignia Common Stock. It is
estimated that following the Distribution, such options and warrants will
represent the right to purchase approximately 3.86 million shares of Holdings
Common Stock. The precise number of shares underlying certain of such options
and warrants and the exercise prices thereof will depend in part upon the fair
market value of Holdings Common Stock following the Distribution, and thus is
indeterminable at this time. Such options and warrants are in addition to the
approximately 1,100,000 options to purchase Holding Common Stock under the
Holdings 1998 Stock Plan. See "CERTAIN TRANSACTIONS."
10
<PAGE> 17
In connection with the Distribution, Insignia anticipates making a
distribution to record holders of the Convertible Preferred Securities on the
Distribution Record Date of Warrants to purchase approximately 1,196,000 shares
of Holdings Common Stock (four warrants for each $500 liquidation amount of
Convertible Preferred Securities held by them). Each Warrant will represent the
right to purchase one share of Holdings Common Stock. The Warrants will have an
exercise price of 120% of the market price of Holdings Common Stock following
the Distribution. The term of each Warrant will be five years, and no Warrant
will be exercisable before two years after it is granted. Immediately prior to
the Warrant Distribution, Insignia will purchase the Warrants from Holdings for
approximately $8.5 million, which represents the estimated fair market value of
the Warrants. This value was determined using the Black-Scholes method, based on
the following assumptions: (i) no dividends are paid on Holdings Common Stock,
(ii) an exercise price equal to 120% of the market price, (iii) a five-year
term, and (iv) 30% volatility of the Holdings Common Stock. See "-- MANNER OF
EFFECTING THE DISTRIBUTION."
The Insignia Board will formally declare and authorize Insignia to effect
the Warrant Distribution if the Distribution has occurred and the Insignia Board
determines, among other things, that (i) the conditions to the Merger have been
satisfied, and (ii) the closing of the Merger is imminent. See "-- CONDITIONS."
MANNER OF EFFECTING THE DISTRIBUTION
Prior to the Distribution, Holdings will effect a stock split of the sole
current outstanding share of Holdings Common Stock, which will permit Insignia
to distribute the required number of shares of Holdings Common Stock in the
Distribution. Insignia will effect the Distribution by delivering new share
certificates for Holdings Common Stock to First Union National Bank as the
distribution agent (the "Distribution Agent"), for delivery on a pro rata basis
to the holders of Insignia Common Stock as of the close of business on the
Distribution Record Date without further action by such holders. It is expected
that the Distribution Agent will begin mailing new share certificates
representing the Holdings Common Stock as soon as practicable after the
Distribution. The Distribution will be deemed effective upon notification by
Insignia to the Distribution Agent that the Distribution has been declared and
that the Distribution Agent is authorized to proceed with the distribution of
Holdings Common Stock. All shares of Holdings Common Stock to be distributed in
the Distribution will be fully paid, nonassessable and free of preemptive
rights. See "DESCRIPTION OF CAPITAL STOCK." Insignia will effect the Warrant
Distribution by delivering warrant certificates for the Warrants to the
Distribution Agent for delivery to the holders of Convertible Preferred
Securities as of the close of business on the Distribution Record Date without
further action by such holders.
No fractional shares of Holdings Common Stock will be distributed in the
Distribution. Insignia stockholders who otherwise would be entitled to receive
fractional shares of Holdings Common Stock in the Distribution will receive a
number of whole shares of Holdings Common Stock equal to the next lower number
of shares of Insignia Common Stock to which such holder would be entitled. All
fractional shares of Holdings Common Stock that otherwise would have been
distributed to such holders of Insignia Common Stock will be aggregated and sold
in the open market as soon as practicable after the Time of Distribution and the
holders otherwise entitled to such fractional shares will receive, and will be
subject to tax on, their pro rata share of the proceeds of such sale in lieu of
such fractional shares.
No holder of Insignia Common Stock will be required to pay any cash or any
other consideration for the shares of Holdings Common Stock to be received in
the Distribution or to surrender or exchange shares of Insignia Common Stock in
order to receive shares of Holdings Common Stock.
THE DISTRIBUTION AGENT WILL SEND YOU YOUR NEW HOLDINGS STOCK CERTIFICATES
FOLLOWING CONSUMMATION OF THE DISTRIBUTION. STOCKHOLDERS SHOULD NOT SEND
INSIGNIA STOCK CERTIFICATES TO HOLDINGS OR THE DISTRIBUTION AGENT.
CONDITIONS
The obligation of Insignia to consummate the Distribution is subject to the
fulfillment or waiver of each of the following conditions: (i) the approval of
the Distribution by Insignia stockholders; (ii) the receipt of the requisite
consent to the Distribution by Insignia's revolving credit facility lenders;
(iii) the receipt of a confirming opinion of tax counsel to Insignia to the
effect that the Distribution should qualify as a tax-free
11
<PAGE> 18
distribution to Insignia's stockholders; and (iv) the determination by the
Insignia Board that Holdings and its subsidiaries will be relieved of
substantially all of their obligations under Insignia's revolving credit
facility and that all related liens on their assets will be terminated. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO INSIGNIA STOCKHOLDERS." See also
"THE MERGER AGREEMENT AND THE TERMS OF THE MERGER -- CONDITIONS TO THE MERGER"
in the Joint Proxy Statement/Prospectus.
RELATIONSHIP WITH INSIGNIA AND AIMCO FOLLOWING THE DISTRIBUTION
Immediately prior to the Distribution, Holdings and Insignia will enter
into the Distribution Agreement described below relating to the future
relationship between Holdings and Insignia after the Distribution. The
Distribution Agreement will govern the parties respective rights, duties and
obligations with respect to the sharing of tax liabilities, if any, and other
pre- and post-Distribution liabilities and obligations.
Prior to and after the Distribution, Holdings' stock in its material
subsidiaries will be subject to liens in favor of Insignia's revolving credit
facility lenders. The Distribution Agreement provides, among other things, that
Insignia will use its reasonable best efforts to obtain the release of the liens
on Holdings' stock in its material subsidiaries in favor of Insignia's revolving
credit facility lenders. AIMCO has covenanted in the Merger Agreement to obtain
such a release as a condition to the Merger being consummated. Unless and until
Insignia, or AIMCO after the Merger, obtains the release of such liens on
Holdings' stock in its material subsidiaries, it is unlikely that Holdings will
be able to obtain additional financing. Following the Merger, the relationship
between Holdings and AIMCO will be governed by the Merger Agreement and the
Indemnification Agreement. See "THE MERGER -- THE MERGER AGREEMENT" AND "-- THE
INDEMNIFICATION AGREEMENT."
After the Distribution, affiliates of Holdings will continue to provide
management services for certain properties owned by partnerships whose general
partners are affiliates of Insignia (or, after the Merger, AIMCO) on
substantially the same terms and conditions as management agreements currently
in effect. In addition, after the Distribution Insignia (or, after the Merger,
AIMCO) will provide computer services and data processing for accounting and
payroll functions at Insignia's (or AIMCO's) actual direct cost through December
31, 1998, and on a month-to-month basis thereafter pursuant to a technical
services agreement.
EXPENSES
Regardless of whether the Distribution and the Merger are consummated, all
fees, costs and expenses incurred in connection therewith will be paid by the
party incurring such fees, costs and expenses, except that Insignia and AIMCO
will share equally the cost of printing the Joint Proxy Statement/Prospectus.
THE MERGER
The following is a brief summary of the key terms and provisions of the
Merger Agreement and the Merger. This description does not purport to be
complete and is qualified in its entirety by reference to the agreements
(including the Merger Agreement and the Indemnification Agreement) which are
attached as Appendices to the Joint Proxy Statement/Prospectus.
REASONS FOR THE MERGER
For information concerning the background of and reasons for the Merger,
see "THE MERGER AND RELATED TRANSACTIONS -- BACKGROUND OF THE MERGER," and
"-- INSIGNIA'S REASONS FOR THE MERGER; RECOMMENDATION OF THE INSIGNIA BOARD" in
the Joint Proxy Statement/Prospectus. As described therein, the Insignia Board
has unanimously approved the Merger and believes that it is in the best
interests of Insignia's stockholders. AIMCO's interest in Insignia related only
to the Multifamily Business, and therefore a divestiture of the Holdings'
Businesses was required to permit the Merger to proceed. The Insignia Board
believes that the Merger will permit the Multifamily Business to maximize its
competitive advantage. The Insignia Board further believes that, taken together,
the Distribution and the Merger will permit stockholders to continue to be
involved in the Holdings Businesses, while also providing them with the
opportunity to
12
<PAGE> 19
participate in a company which will be one of the largest owners and managers of
multifamily apartment properties in the United States after the Merger.
THE MERGER AGREEMENT
If the Distribution and the Merger are approved by Insignia stockholders,
pursuant to the Merger Agreement Insignia (and thus the Multifamily Business)
will be merged with and into AIMCO, with AIMCO being the surviving corporation.
In the aggregate, Insignia's stockholders will receive a number of AIMCO
Securities in the Merger equal to approximately $303 million divided by the
AIMCO Index Price, which will also entitle the holders of AIMCO Securities to
the one-time Special Dividend of approximately $50 million in cash. In addition,
AIMCO is required to have Holdings released from all guarantees of, and pledges
of collateral for, Insignia debt at or prior to the time of the Merger. A more
detailed description of the Merger Agreement and the Merger, including the
respective pre- and post-Merger obligations of the parties to the Merger
Agreement and the conditions to consummation of the Merger, can be found in the
Joint Proxy Statement/Prospectus. The "AIMCO Index Price" is defined in the
Merger Agreement as the aggregate of the daily average price of AIMCO Common
Stock (computed based on the sum of the high and low sales prices of AIMCO
Common Stock (as reported on the NYSE Composite Transactions reporting system as
published in The Wall Street Journal or, if not published therein, in another
authoritative source) divided by two) on each of the 20 consecutive NYSE trading
days ending on the fifth NYSE trading day immediately preceding the effective
time of the Merger, divided by 20; provided, however, that if the AIMCO Index
Price is greater than $38.00, then the AIMCO Index Price will be deemed to be
$38.00. The AIMCO Index Price is not intended to and will not necessarily
represent the fair market value of the AIMCO Securities.
THE INDEMNIFICATION AGREEMENT
In connection with the Merger Agreement, Holdings and AIMCO entered into
the Indemnification Agreement. The Indemnification Agreement provides generally
that following consummation of the Merger, Holdings will indemnify and hold
harmless AIMCO from and against all losses in excess of $9.1 million resulting
from (i) breaches of representations, warranties or covenants of Insignia or
Holdings in the Merger Agreement, (ii) actions taken by or on behalf of Insignia
prior to consummation of the Merger and (iii) the Distribution. Holdings is also
required to indemnify AIMCO against all losses (without regard to any dollar
value limitation) resulting from (a) amounts paid or payable to employees of
Insignia actually paid by AIMCO, other than those employees AIMCO has agreed to
retain following the consummation of the Merger, (b) obligations to third
parties for goods, services, taxes or indebtedness incurred prior to the
consummation of the Merger, other than as agreed to by AIMCO or included in the
approximately $458 million of indebtedness and liabilities of Insignia and its
subsidiaries which will be assumed by AIMCO in the Merger, and (c) Insignia's
ownership and operation of Holdings and the Holdings Businesses.
At the time of the Merger, to the extent that Insignia and its subsidiaries
have more or less than $458 million of debts and liabilities, including
estimated income taxes through the effective time of the Merger (including
income taxes that will result from the Distribution), the Merger consideration
will be adjusted as follows: if such debts and liabilities are greater than $458
million, Holdings will pay to AIMCO the difference between those amounts; if
such debts and liabilities are less than $458 million, AIMCO will pay to
Holdings the difference between those amounts. Income taxes arising from the
Distribution have been estimated based on an assumed value of Holdings. Assuming
an AIMCO Index Price of $38.00, and based on 32,010,907 shares of Insignia
Common Stock outstanding as of July 31, 1998 and a spread value of approximately
$10.8 million for warrants and employee stock options which AIMCO is expected to
assume as a result of the Merger, the Merger consideration of $353 million
(including the Special Dividend) approximates $10.49 per share of Insignia
Common Stock. Using an assumed price of $25.00 per share of Insignia Common
Stock would imply a market value of Holdings of approximately $14.41 per share
of Insignia Common Stock. Insignia's taxable income attributable to the
Distribution at this implied value after reduction for expenses incurred in
connection with the Distribution and Merger, including the retirement of
options, is estimated to be approximately $5 million.
13
<PAGE> 20
The Distribution contemplates that two shares of Holdings Common Stock will
be distributed for each three shares of Insignia Common Stock. Accordingly, the
implied market valuation of Holdings per share of Insignia Common Stock would
equate to an implied market valuation of $21.51 per share of Holdings Common
Stock, with approximately 21,500,000 shares of Holdings Common Stock
outstanding. To the extent the fair market value of Holdings Common Stock is
greater than the implied market valuation of $21.51 per share of Holdings Common
Stock, Holdings is required to indemnify AIMCO for taxes paid in respect of such
excess fair market value. The amount of such taxes should approximate $13.0
million for each $1 per share that the fair market value of a share of Holdings
Common Stock exceeds $21.51. On the other hand, if the fair market value of the
Holdings Common Stock is less than $21.51 per share, the income tax liability of
Insignia assumed by AIMCO in the Merger would be less than the estimate included
in the $458 million of debt and liabilities of Insignia and its subsidiaries to
be assumed by AIMCO in the Merger, in which case AIMCO would owe to Holdings the
amount of such difference. The foregoing references to assumed market value are
not, and are not intended to be, an estimate of the actual prices at which such
shares may trade in the market.
The Indemnification Agreement also provides that following consummation of
the Merger, AIMCO will indemnify and hold harmless Holdings from all losses that
arise out of the operation of the Multifamily Business following consummation of
the Merger and for all losses in excess of $9.1 million arising from breach of
any representation, warranty or covenant of AIMCO in the Merger Agreement.
BUSINESS OF HOLDINGS
The following description of the business of Holdings gives effect to the
Distribution.
GENERAL
Holdings, headquartered in New York, New York, is the parent company of an
international real estate organization. Holdings' business units specialize in
commercial real estate services, single-family home brokerage and mortgage
origination, condominium and cooperative apartment management, equity
co-investment and other services. As more fully described below and elsewhere in
this Information Statement, Holdings' principal operating units are Insignia/ESG
(international commercial property services), Realty One (single-family home
brokerage and mortgage origination) and Insignia Residential Group (condominium
and cooperative housing management). The European operations of Insignia/ESG
consist of Richard Ellis in the United Kingdom, Insignia/CAGISA in Italy and
Insignia RE GmbH in Germany. The British Pound (Sterling) represents the only
foreign currency of a material business operation, as Richard Ellis is currently
responsible for approximately 90% of all foreign operations.
Through Insignia/ESG, Holdings provides a broad spectrum of commercial real
estate services, including tenant representation, property leasing and
management, property disposition and acquisition, investment sales, equity and
debt financing, equity co-investment and consulting services. Insignia/ESG
provides these services for tenants, owners and investors in office,
manufacturing/distribution, retail, hospitality and mixed-use properties.
Insignia/ESG is among the leading providers of commercial real estate services
in the United States. Insignia/ESG enjoys a dominant market position in the New
York metropolitan area, and also maintains a significant market position in
property owner and/or tenant services in Washington, DC, Philadelphia, Chicago,
Atlanta, Phoenix, Los Angeles, San Francisco, Dallas and other major central
business districts. In all, Insignia/ESG has operations in more than 40 markets
in the United States. Insignia/ESG also has growing international capabilities
which allow it to meet clients' expanding world-wide needs, most notably through
Richard Ellis in the United Kingdom, Insignia RE GmbH in Germany and Insignia/
CAGISA in Italy. According to the January 1998 issue of Estates Gazette, Richard
Ellis is among the leading property services companies in the United Kingdom,
with offices in London, Manchester, Glasgow, Birmingham, Leeds, Liverpool and
Belfast.
Through Realty One, Holdings operates a full-service single-family
residential brokerage and mortgage loan origination business in northern Ohio.
Realty One is the ninth largest (based on unit volume) residential real estate
brokerage firm in the United States according to Real Trends "Big Broker Report"
published in May 1998. In 1997, it handled more than 20,000 transactions valued
at more than $2.8 billion, and through its
14
<PAGE> 21
mortgage loan affiliate, First Ohio, originated in excess of 2,650 mortgage
loans totaling approximately $292 million. A transaction is measured by closed
transaction "sides," which means either the listing or selling of a closed
transaction. Each side closed is a commissionable event to the broker
responsible for that side of the transaction.
Holdings' subsidiary, Insignia Residential Group, is the largest manager of
cooperatives and condominiums in the New York metropolitan tri-state area,
according to the July/August 1998 issue of New York Habitat. As of March 31,
1998, Insignia Residential Group managed 315 residential properties, consisting
of 237 cooperatives, 41 condominiums and 37 rental properties, comprising a
total of approximately 59,000 residential units.
As a result of the Distribution, Holdings will be an independent, publicly
held company. Certain of the current executive officers and directors of
Insignia are also executive officers and directors of Holdings. See
"MANAGEMENT."
Holdings, which was incorporated under the laws of the State of Delaware on
May 6, 1998, was organized by Insignia for the purpose of owning and operating
the Holdings Businesses in order to facilitate the Distribution. Holdings has no
operating history and no established sources of capital. Holdings' principal
executive offices are located at 200 Park Avenue, New York, New York 10166, and
its telephone number at that address is (212) 984-8000. Following the Merger,
Holdings will change its name to "Insignia Financial Group, Inc."
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<PAGE> 22
COMMERCIAL REAL ESTATE SERVICES -- INSIGNIA/ESG
UNITED STATES OPERATIONS GENERALLY
The U.S. commercial real estate services business is the largest of
Holdings' operations, accounting for an estimated 58% of Holdings' 1997 pro
forma revenues. Insignia/ESG's commercial services business commenced operations
on January 1, 1991, as a division of Insignia's residential property management
business. As the commercial services area grew, it was separately incorporated
in late 1992 as Insignia Commercial Group, Inc. and has operated separately from
Insignia's residential services since that time. Its growth has come principally
through acquisitions, most notably substantially all the assets of Edward S.
Gordon Company, Incorporated ("ESG") on June 30, 1996. In February 1998, ESG was
merged into Insignia Commercial Group, Inc. which then changed its name to
Insignia/ESG, Inc. Insignia/ESG generated approximately $31.3 million in
revenues in 1995, $97.7 million in revenues in 1996, and $245.2 million in
revenues in 1997.
U.S. COMMERCIAL SERVICES REVENUES
[CHART]
[BAR CHART ILLUSTRATING THE ANNUAL REVENUES OF HOLDINGS'
REAL ESTATE SERVICES OPERATIONS FOR 1995, 1996 AND 1997]
Its 1997 revenues made Insignia/ESG the third-largest provider of
commercial real estate services in the United States according to the January
1998 issue of Commercial Property News. Insignia/ESG provides a broad spectrum
of commercial real estate services to corporations and other major space users,
property owners and investors. These services include tenant representation,
property leasing and management, property acquisition and disposition services,
placement of equity and debt financing, property co-investment and consulting
services. Insignia/ESG provides these services in the office, industrial, retail
and hospitality sectors of the commercial real estate industry. At June 30,
1998, Insignia/ESG provided property management, leasing or other services for
approximately 195 million square feet of commercial real estate, including 123
million square feet of office space, 53 million square feet of industrial space,
and 19 million square feet of retail space. These services are provided on a
third-party basis for owners such as Metropolitan Life Insurance Company, Chase
Manhattan Bank, Lennar, John Hancock Mutual Life, The Irvine Company and others.
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<PAGE> 23
U.S. PROPERTY SERVICES PORTFOLIO
Total: 195 million Sq. Ft.
[CHART]
[PIE CHART ILLUSTRATING HOLDINGS'
U.S. PROPERTY SERVICES PORTFOLIO BY SQUARE FOOTAGE]
Beginning in early 1998, all services nationally were rendered under the
highly-regarded Insignia/ESG brand name. Specialized divisions within
Insignia/ESG include the Capital Advisors Group, responsible for third-party
investment sales and equity/debt placement activities, and the Commercial
Investments Group, which offers fee-development and redevelopment services.
During 1997, Insignia/ESG completed in excess of 70 million square feet of
commercial real estate transactions, sold more than $2 billion in commercial
properties and arranged more than $500 million of financing for properties.
Insignia/ESG prides itself on the consistent, high-quality delivery of its
services across geographic markets, property types and disciplines. It is active
to varying degrees in more than 40 US markets, and maintains substantial market
share in key central business districts, such as New York, Chicago, Washington,
DC, Philadelphia, Phoenix, Los Angeles and others.
New York City is the largest market for Insignia/ESG. Insignia/ESG
represents many leading corporations and property owners, helping them to
fulfill their requirements in this marketplace. Insignia/ESG was responsible for
23 of the 50 largest leasing transactions in New York City during 1997,
including the single largest: Standard & Poors' 947,000 square feet lease at 55
Water Street. The closest competitor to Insignia/ESG was responsible for 10 of
the 50 largest leasing transactions in New York City.
Insignia/ESG believes that its success and reputation within the New York
area serve as a catalyst for its growth nationally as well as internationally.
Insignia/ESG's growth strategy combines targeted acquisitions of companies that
offer complementary skill sets as well as the establishment of servicing
capabilities in markets where it does not currently offer these services.
Insignia/ESG's expansion is primarily focused on first tier U.S. and
international markets (those comprising 75 million square feet or more) and
secondarily on opportunities in second tier U.S. and international markets
(those comprising 25 million to 74 million square feet). In the past 18 months,
Insignia/ESG has completed acquisitions of real estate services companies in
Chicago, IL, Washington, DC, Philadelphia, PA, Portland, OR and Stamford, CT,
and established brokerage capabilities in Atlanta, GA and Phoenix, AZ.
17
<PAGE> 24
EUROPEAN OPERATIONS GENERALLY
Insignia/ESG's European operations consist of Richard Ellis in the United
Kingdom, Insignia/CAGISA in Italy and Insignia RE GmbH in Germany. The European
operations accounted for approximately 16% of Holdings' 1997 pro forma revenues.
Richard Ellis
Richard Ellis is a London-based commercial real estate firm. It has
operated for 225 years and until May 1997 operated as a partnership. In 1997,
Richard Ellis was converted into an English limited company. Richard Ellis was
acquired by Insignia in February 1998 and its operations are currently being
integrated with Insignia/ESG's operations.
Richard Ellis is a highly regarded name in commercial real estate
throughout the United Kingdom. It provides extensive coverage of the entire UK
market through full-service offices in London, Glasgow, Birmingham, Leeds,
Manchester, Liverpool and Belfast. During 1997, Richard Ellis had revenues of
approximately $58 million, concluded 12.5 million square feet of transactions
and sold more than $2.4 billion worth of commercial property. Richard Ellis
services more than 20 million square feet of commercial properties. It has over
500 employees.
Richard Ellis' capabilities, culture, operating philosophy and client base
are very similar to Insignia/ESG's. In an increasingly global business
environment, Holdings expects that substantial synergies and cross-selling
opportunities will accrue from the pairing of the Richard Ellis and Insignia/ESG
operations, particularly with respect to two of the world's leading financial
centers, New York and London.
Richard Ellis provides broad-ranging services, including consulting,
project management, appraisal, zoning and other general services. The major
income components, however, are agency leasing, tenant representation and
property sales and financing. The London market reflects growing rents and
continued construction after a marked decline from the peak in the late 1980's.
It is currently expected that the positive market environment will continue in
London and in other parts of the country.
Through Richard Ellis, Holdings believes it can serve as a springboard for
the global expansion of its commercial real estate services business. Holdings
expects to further penetrate the European market, and longer-term, expects to
expand into Asia as well. For example, in July 1998, Richard Ellis assisted in
opening the offices of Insignia RE GmbH, Holdings' German subsidiary, in
Frankfurt.
Insignia/CAGISA
In 1997, Insignia acquired 60% of the capital stock of Insignia/CAGISA, a
leading Italian management company founded in 1939. Insignia/CAGISA operates a
mixed portfolio of 10,000 commercial and residential units throughout Italy from
its offices in Rome and Milan.
Insignia/CAGISA is operating in a relatively underdeveloped real estate
services market in Italy which presents growth opportunities. Government
entities, such as municipalities and pension funds, are required by law to
outsource the management of their properties, and many private companies, driven
by European convergence and competitive pressures, are following suit.
Insignia/CAGISA has started to develop strong real estate advisory expertise for
these clients, leveraging on the Insignia, and particularly the Richard Ellis
experience and know-how.
SERVICES
The full-range of Insignia/ESG's services, both in the United States and
internationally, includes:
Tenant Representation: the acquisition or disposition of leased or
owned space on behalf of space users;
Consulting: specialization in large, multi-faceted transactions
(usually 50,000 square feet or more) requiring in-depth planning, analysis
and execution;
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<PAGE> 25
Investment Sales: the sale or acquisition of all types of commercial
property on behalf of owners;
Debt/Equity Placement: the arrangement of financing -- either debt or
equity -- on behalf of owners of all types of commercial properties;
Property Leasing: the marketing of available space within commercial
properties and the consummation of leases with tenants;
Property Management: responsibility for the financial and operational
aspects of a commercial property which sometimes involves specialized
services such as construction management, engineering or energy management;
Retail Services: specialized services performed on behalf of retail
tenants and retail property owners;
Industrial Services: specialized services performed for the owners
and/or users of manufacturing, warehouse, distribution, or flex-space
(combining office and industrial uses) facilities; and
Property Development: development and construction services for owners
of office, industrial and retail properties, and the
re-development/re-positioning of properties for owners looking to create
enhanced value.
Equity Co-investments in Real Estate: the identification of investment
opportunities for select clients and investment along side of these clients
in the ownership of qualifying properties.
MARKET TRENDS
Management believes that the commercial real estate services industry in
the United States is undergoing consolidation. A number of factors are driving
this trend, including:
- Clients Demand More Services; Desire to Consolidate Service
Providers -- As requirements become more sophisticated, clients' needs
follow. They want to be able to turn to a single source for all of their
real estate use, investment and management requirements. As a result,
clients with multiple real estate requirements ranging from occupancy
needs to investment objectives are fast consolidating service providers.
Whereas several years ago it might have been common for real estate
owners, users and investors to hire several different companies in
different locations to manage their needs, the industry is clearly seeing
a trend towards the hiring of fewer providers to address all of a
client's requirements.
- Industrial Consolidation is Driven by Economies of Scale -- The ability
of commercial property services providers to accommodate the increasing
demands being made by clients is in no small part driven by their ability
to deliver these services while controlling cost increases. The ability of
service companies to amortize their overhead costs over a larger revenue
base helps to drive consolidation.
- Increasing Sophistication of Transactions -- As companies grow, the
significance of their real estate issues follow suit. It is common today
for a company's real estate occupancy and investment issues to be second
only to labor as a component of overall operating costs. Additionally,
with the increasing sophistication of capital markets, the trend towards
real estate securitization, the tendency of companies today to merge with
others to achieve economies of scale and capture market share, and the
consolidation of worldwide locations that accompany such mergers, the
manner in which corporations manage such issues can have profound impacts
on their profit and loss statements and on their balance sheets. As a
result, the level of sophistication required to manage such complex
requirements and interrelationships transcends the traditional role of
the real estate broker. Successful commercial real estate services
companies today must be able to manage these requirements in order to
effectively compete.
- Improvements in Real Estate Markets and the Economy Generally -- To the
extent that commercial property services firms do not focus on expansion
of service lines, consolidation, and increasing their ability to manage
complex transactions, an improving economy can commoditize their
services.
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<PAGE> 26
- Insignia/ESG's Business Plan -- Insignia/ESG's response to all of the
foregoing is to seek to become an advisor for corporations and pension
funds with respect to their real estate use, investment and management
requirements in the same manner that major investment banks are advisors
with respect to a corporation's corporate finance requirements. By
focusing on providing the highest quality services with the best talent
in the major business centers of the world, Insignia/ESG seeks to become
the one-stop resource for all real estate requirements, specializing in
the more complex and creative transactions that characterize today's
worldwide marketplace.
Holdings believes that Insignia/ESG is well positioned to meet the
competitive challenges of an industry in flux. Among its competitive strengths
are:
- its strong reputation and the recognition of its brand name within the
industry;
- the quality and depth of both its management and brokerage staff;
- its entrepreneurial corporate culture, which allows it to respond quickly
to opportunities;
- its unique methodologies for implementing large, complex transactions;
- its array of services, which allows it to both meet existing client needs
and take advantage of cross-selling opportunities;
- its extensive nationwide property services portfolio, which provides
significant economies of scale;
- its proven mergers and acquisitions capability;
- growth in excess of 250% over the last 24 months;
- its market leadership in the world's two most important financial
centers -- New York and London; and
- its focus on attracting, retaining, supporting and promoting the highest
quality, most skilled personnel in the industry.
EQUITY CO-INVESTMENTS IN REAL ESTATE
Insignia/ESG will succeed to the commercial portion of the equity
co-investment programs formerly conducted by Insignia's investment banking unit,
which Insignia/ESG intends to expand into European markets through Richard
Ellis, Insignia GmbH and Insignia/CAGISA. This unit identifies investment
opportunities for select clients and invests along side of these clients in the
ownership of qualifying properties.
Since its formation in 1996, this unit has concluded real estate investment
transactions having an aggregate value of approximately $575 million, with
Holdings' ownership interest typically ranging from 10% to 35%. Co-investment
partners include ING Barings, Blackacre Capital, Lennar, Investcorp, Lone Star,
Lehman Brothers, Whitehall and CS First Boston. Insignia/ESG does not compete
for acquisitions with its advisory clients who do not seek co-investment
partners. In addition, with the recent acquisition of Richard Ellis, this
program is being expanded to include opportunities in the United Kingdom and
Europe. This expansion is expected to utilize the personnel of Richard Ellis
Financial, Ltd., a Securities and Futures Authority regulated entity which has
substantial investment experience. Holdings believes the European co-investment
opportunities will increase as a result of increasing investor appetites for
European real estate and Holdings' increase in the capital to be made available
to the Richard Ellis unit. See "CERTAIN TRANSACTIONS."
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<PAGE> 27
ACQUISITIONS
Since 1991, Insignia has completed the following acquisitions of commercial
real estate services firms which are now included within Insignia/ESG's
operations:
ACQUISITIONS OF COMMERCIAL REAL ESTATE SERVICES FIRMS
<TABLE>
<CAPTION>
YEAR PURCHASE
ACQUIRED NAME LOCATION PRICE
- -------- ---- -------- -----------
<C> <S> <C> <C>
1991 Brunner Companies Southeast $ 1,450,000
1993 First Resource Realty, Inc. Oklahoma 425,000
1994 Gross Lancton & Co. Houston, TX 1,200,000
1995 O'Donnell Property Services, Southern California 7,000,000
Inc.
1996 Paragon Commercial National 18,100,000
1996 Edward S. Gordon Company, Inc. New York, NY 81,000,000
1997 Rostenberg-Doern Company, Inc. Westchester/Fairfield 2,333,333
Counties (New York)
1997 HMB Property Services, Inc. Denver, CO 1,100,000
1997 Frain, Camins & Swartchild, Chicago, IL 5,000,000
Inc.
1997 Radius Retail Advisors, Inc. California 250,000
1997 Forum Properties, Inc. Portland, OR 1,500,000
1997 CAGISA Rome/Milan, Italy 2,800,000
1997 Barnes, Morris, Pardoe & Washington, D.C. 17,000,000
Foster
1998 Cohen Financial Chicago, IL 1,000,000
1998 Richard Ellis Group Limited United Kingdom 68,200,000
1998 Goldie B. Wolfe & Company Chicago, IL 5,300,000
1998 Hotel Partners Chicago, IL 14,200,000
1998 Jackson-Cross Co. Philadelphia, PA 9,100,000
</TABLE>
In addition, Insignia has completed the following acquisitions which
included some commercial operations:
OTHER INSIGNIA ACQUISITIONS WHICH INCLUDED
SOME COMMERCIAL OPERATIONS
<TABLE>
<CAPTION>
YEAR
ACQUIRED NAME LOCATION
- -------- ---- --------
<C> <S> <C>
1992 Angeles Corporation National
1992 Brunner Companies Southeast
1993 Duddlesten Management Co. Texas
1993 VMS Realty Investment, Ltd. National
1994 SHL Properties Acquisition Partners, Ltd. National
1994 Hampton Real Estate Group National
1994 The Rooney Company Tulsa, OK
1994 Allegiance Realty Group, Inc. National
1994 Capital Realty Group, Inc. Dallas, TX
1994 Consolidated Capital National
</TABLE>
RESIDENTIAL REAL ESTATE SERVICES -- REALTY ONE AND INSIGNIA RESIDENTIAL GROUP
SINGLE-FAMILY HOME BROKERAGE SERVICES
General
Realty One, a full-service residential real estate broker headquartered in
Cleveland, Ohio, was established in 1953 and acquired by Insignia in 1997.
Realty One's current business operation is the result of nearly 60 separate
mergers and acquisitions. It is the largest residential real estate brokerage
firm in Ohio and the ninth
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<PAGE> 28
largest (based on unit volume) in the United States according to Real Trends
"Big Brokers Report" published in May 1998. With more than 1,500 sales
associates and 400 support staff located in more than 45 offices throughout
northern Ohio, it represents more than 90 residential builders and handles more
than 20,000 transactions valued at more than $2.8 billion annually. Realty One's
services include residential real estate sales, corporate relocation services
and residential builder representation. First Ohio, an affiliate of Realty One,
originates single-family home mortgages for both Realty One clients and third
parties. Realty One accounted for approximately 21% of Holdings' 1997 pro forma
revenues.
Services
The services provided by Realty One include the following:
Residential Brokerage: the agency representation of both buyers and
sellers in the purchase and sale of residential housing. These services
include assisting the seller in pricing the property, marketing and
advertising the property, showing the property to prospective buyers,
assisting the parties in negotiating the terms of the sale and closing the
transaction.
Relocation Services: assisting both corporations and individuals in
the sale, procurement and temporary management of properties for
corporations and transferees. Realty One assists in large group moves as
well as individual relocations.
Builder Marketing Services: representing and consulting with large
national and local developers providing marketing, research studies,
product development and brokerage services.
Mortgage: through First Ohio, Realty One offers convenient and
competitive mortgage services to its customers and many other brokerages
throughout northern Ohio. First Ohio represents more than 15 lenders, each
offering multiple financial products.
Escrow: through First Ohio Escrow, an affiliate of First Ohio, Realty
One provides residential escrow services facilitating the closing of
property sales.
Industry Overview
Holdings continues to evaluate a consolidation-based strategy in the
single-family brokerage industry. The industry is currently defined by several
key trends, including:
Margin Compression: Margins are being compressed as a result of
increasing splits paid to agents and, for the larger, more progressive
firms, the investment in technology, marketing and development of one-stop
shopping services.
Market Fragmentation: There are more than 50,000 single-family
brokerages in the U.S., one quarter of which are currently estimated to be
unprofitable, according to various industry research studies. These consist
of independent brokerages as well as franchise operations. No single
independent broker commands more than 1% of the national market, and no
national franchise company maintains more than an 11% market share, with
only three franchise companies holding more than 3%.
Aging Entrepreneurial Base of Industry Founders: According to the July
1997 issue of Real Estate Outlook, a leading industry publication, over 85%
of the current principals in this industry are over 55 years old and are
beginning to look for ways to continue to grow their business, such as
mergers or strategic alliances, or for exit strategies.
Strategy
The above trends coupled with the available economies of scale suggest that
pursuit of a consolidation based strategy may be capable of reversing the
downward trend in margins, exploiting proprietary technology to build real
competitive advantages, and building brand equity so as to increase the value of
the brokerage company in the eyes of the consumer. Realty One may also benefit
from horizontal and vertical expansion in related areas, such as mortgage,
escrow and title, by offering the consumer a one stop shopping experience.
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<PAGE> 29
The residential brokerage industry has been consolidating for some time,
and with access to additional capital, Realty One could acquire key brokerage
firms. Realty One already has significant experience acquiring and assimilating
companies, completing 60 acquisitions over the last 15 years. The senior
officers of Realty One are highly respected within their industry and have
strong contacts with the principals of numerous other large, independent
brokerages around the United States.
In addition to consolidation strategies, opportunities exist to increase
margins to the brokerage firm as well as the sale of services to generate other
income. Realty One is a pioneer with this strategy and has been successful at
increasing its margins. Realty One's approach is, through technology, to bundle
services more inexpensively and increase the value to the consumer.
COOPERATIVE AND CONDOMINIUM APARTMENT MANAGEMENT SERVICES
General
In 1995, Insignia purchased the residential property management business of
Douglas Elliman-Gibbons & Ives and all of the outstanding capital stock of
Kreisel Company, Inc., forming the largest manager of cooperative and
condominium apartments in the New York metropolitan tri-state area according to
the July/August 1998 issue of New York Habitat. Its primary business is to
provide third party fee management to cooperative, condominium and rental
housing in the New York marketplace. At March 1, 1998, Insignia Residential
Group, operating under the Douglas Elliman-Gibbons & Ives and Kreisel Company,
Inc. trade names, provided full service management to 315 residential properties
comprised of approximately 59,000 residential units in the greater New York
metropolitan area. Insignia Residential Group's cooperative and condominium
management services accounted for approximately 5% of Holdings' 1997 pro forma
revenues.
Portfolio Composition
The 315 residential properties consist of 237 cooperatives, 41 condominiums
and 37 rental properties. Among the notable properties in each of these
categories are the San Remo, Worldwide Plaza and Fresh Meadows, respectively.
Manhattan is the largest market for Insignia Residential Group, although it does
maintain a presence in each of the other four boroughs of New York City as well
as Long Island and Westchester County. In late 1996, Insignia Residential Group
made its foray into the Northern New Jersey marketplace by obtaining the
management of the 1,266 unit Horizon House cooperative. Since that time Insignia
Residential Group has added an additional 1,300 units in New Jersey. The
division strategy has been to focus in key markets where its size and economies
of scale allow it to become the dominant player.
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<PAGE> 30
Services
Insignia Residential Group generated revenues of $21.3 million in 1995,
$23.5 million in 1996 and $24.4 million in 1997.
[CHART]
[BAR CHART ILLUSTRATING HOLDINGS' COOPERATIVE/
CONDOMINIUM SERVICES REVENUES FOR 1995, 1996 AND 1997]
Insignia Residential Group's revenues were generated by providing the
following services:
Property Management: Responsibility for all of the financial and
operational aspects of a residential property. This service involves
providing accounting on a cash or accrual basis, lease administration,
central purchasing, cash management, insurance oversight, collections and
compliance monitoring, and construction management.
Transfer Agent: On behalf of cooperative and condominium clients,
Insignia Residential Group processes applications of prospective
purchasers, arranges and attends closings, facilitates the assignment of
proprietary leases and provides safekeeping of leases and other documents.
Brokerage: While Insignia Residential Group does engage, to a limited
extent, in apartment resale and mortgage brokerage, there exists the
potential to expand these activities to a point where they could make a
meaningful contribution. Many cooperative and condominium management
companies have used management as a loss leader to provide business flows
to more profitable transactional activities.
Strategy: Insignia Residential Group anticipates that its reputation
for quality service and the broad experience of its personnel in managing
condominiums and cooperatives located throughout the New York metropolitan
area should enable it to successfully pursue new property management
opportunities. Insignia Residential Group also believes its economies of
scale and state-of-the-art management information system will allow it to
increase margins by offering its services efficiently and at a competitive
cost. Insignia Residential Group also anticipates pursuing opportunities in
the apartment resale and mortgage brokerage businesses, which not only
could offer the potential for higher margins but may provide for an above
average rate of growth.
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<PAGE> 31
MERGERS AND ACQUISITIONS
Holdings will maintain an internal mergers and acquisitions staff, which
will include all senior members of Insignia's existing investment banking group
as well as the acquisition analysis staff currently maintained by Richard Ellis.
Insignia has historically pursued an opportunistically oriented acquisition
strategy focusing on the development of its core businesses. Holdings expects to
continue this approach in the development of each of its international and
domestic businesses, while simultaneously seeking principal opportunities to
invest capital in real estate assets in partnership with its clients. Such
undertakings are expected to be pursued in the areas of both commercial and
residential real estate assets and services. Holdings also expects that, with
time, it may pursue opportunities to diversify its lines of business and
investment objectives as circumstances and opportunities change. Holdings
believes this strategy to be consistent with the ideas and objectives upon which
Insignia was founded.
COMPETITION
COMMERCIAL PROPERTY SERVICES
Competition is intense in the commercial property services industry,
particularly in the areas of tenant representation, property leasing/management
and other services in which Insignia/ESG is engaged. Historically, most
competitors have been regional or local companies specializing in one or more
aspects of the business (e.g. property management, tenant representation, etc.).
However, the consolidation trend (discussed in "-- COMMERCIAL REAL ESTATE
SERVICES -- INSIGNIA/ESG -- MARKET TRENDS" above) has spawned fewer, larger
national competitors that are integrated across property types and disciplines.
Insignia/ESG competes increasingly with these full-service national competitors,
including CB/Richard Ellis, Cushman & Wakefield, Grubb & Ellis, LaSalle Partners
and Trammel Crow.
Different factors weigh heavily in the competition for tenant
representation and property services assignments. For major tenant
representation assignments, competition is based on quality of services,
demonstrated track record, breadth of resources, analytical skills and market
knowledge. Insignia/ESG believes it has a distinct methodology for executing
major tenant representation assignments, which combines brokerage and consulting
disciplines. This methodology, honed in New York over the past decade, can be
exported to top tier markets throughout the United States. Further, Insignia/ESG
has an outstanding track record in completing major tenant representation
assignments. As tenant representative, Insignia/ESG arranged 16 transactions for
more than 100,000 square feet in New York City during 1997 -- twice as many as
the nearest competitor -- including assignments for such well-known entities as
McGraw-Hill, Standard & Poors, Chubb Insurance, Empire Blue Cross and Blue
Shield, AON Risk Services and Bankers Trust. Moreover, Insignia/ESG's creativity
and transaction-structuring have been recognized by a leading trade group which
annually recognizes two New York City transactions as its "Deals of the Year."
Insignia/ESG has been the recipient of both awards in each of the past three
years, and has earned the top award overall in four consecutive years.
Insignia/ESG believes this outstanding track record provides a distinct
competitive advantage.
Competition for third-party commercial property services is based
principally on quality of service, including the ability to enhance asset
values, and cost. Unlike many of its competitors, Insignia/ESG's personnel are
experienced in managing a wide variety of types of properties in locations
throughout the country. This enables Insignia/ESG to offer an owner of a large
diversified portfolio the ability to obtain experienced management for most or
all of its properties through one organization. Insignia/ESG believes it has
demonstrated an ability to effectively manage, lease and improve the value of
properties. In addition, Insignia/ESG believes it has developed a reputation for
quality service and attention to detail to clients, investors and tenants alike.
Insignia/ESG also believes its economies of scale and state-of-the-art
management information systems allow it to offer its services efficiently and at
an overall cost which is competitive with or less expensive than is offered by
other property service companies. Because of its size, Insignia/ESG is able to
control operating costs by spreading fixed overhead costs over its large service
volume, which benefits Insignia/ESG's results of operations and enables
Insignia/ESG to pass on some of these savings to the
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<PAGE> 32
property owners for which it provides services. As a result, Insignia/ESG
believes it has competed effectively in the market for provision of real estate
services to third party entities.
SINGLE-FAMILY HOME BROKERAGE SERVICES
Realty One accounts for almost one-third of single-family home sales or
listings within the northern Ohio residential market. The number two firm,
Smythe, Cramer, is responsible for approximately 20% of the total sales and
listings. Other firms trail significantly further behind. Realty One believes
its success is due to a number of factors, including its leading-edge use of
technology and innovative marketing practices. For example, its proprietary
computer system, CARS, defines the "readiness" of potential customers to
purchase a home, thus allowing for highly targeted direct-marketing and
advertising programs.
COOPERATIVE AND CONDOMINIUM MANAGEMENT SERVICES
The cooperative condominium management business is extremely competitive.
In addition, to several large companies, including Charles Greenthal, Inc. and
Brown, Harris and Stevens, Inc., there are many small entities that aggressively
compete for business. In addition, some owner associations have opted for self
management, which eliminates the need for third party service providers
altogether. Despite the competitive landscape, Insignia Residential Group
believes that it has a proven record and that it has the capability to continue
to compete successfully. It has grown to be an industry leader by offering
superior service while providing its clients cost benefits not available from
smaller competitors. Examples are the lower cost of supplies, insurance and
other items that Insignia Residential Group purchases on behalf of its clients
using the buying power available because of size. Furthermore, Insignia
Residential Group has begun to develop a new state-of-the-art information system
that, when fully operational, will provide further product differentiation.
EMPLOYEES
If the Distribution had occurred on March 31, 1998, Holdings would have had
approximately 3,700 full time employees as of such date. As Insignia's employee
relations have been good for the seven years prior to the Distribution, Holdings
believes that its employee relations will be good as well.
ENVIRONMENTAL REGULATION
Under various federal and state environmental laws and regulations, a
current or previous owner or operator of real estate may be required to
investigate and remediate certain hazardous or toxic substances or
petroleum-product releases at the property, and may be held liable to a
governmental entity or to third parties for property damage and for
investigation and cleanup costs incurred by such parties in connection with
contamination. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. The presence of contamination or the failure
to remediate contamination may adversely affect the owner's ability to sell or
lease real estate or to borrow using the real estate as collateral. The owner or
operator of a site may be liable under common law to third parties for damages
and injuries resulting from environmental contamination emanating from the site.
There can be no assurance that Holdings, or any assets owned or controlled by
Holdings, currently are in compliance with all of such laws and regulations, or
that Holdings will not become subject to liabilities that arise in whole or in
part out of any such laws, rules, or regulations. Moreover, there can be no
assurance that any of such liabilities to which Holdings may become subject will
not have a material adverse effect upon the business or financial condition of
Holdings.
LITIGATION
On March 24, 1998, certain persons claiming to own limited partner
interests in certain limited partnerships whose general partners (the "General
Partners") are affiliates of Insignia (the "Partnerships") filed a purported
class and derivative action in California Superior Court in the County of San
Mateo against Insignia, the General Partners, AIMCO, certain persons and
entities who purportedly formerly controlled the General Partners, and
additional entities affiliated with and individuals who are officers, directors
and/or
26
<PAGE> 33
principals of several of the defendants. The complaint contains allegations
that, among other things, (i) the defendants breached their fiduciary duties to
the plaintiffs by selling or agreeing to sell their "fiduciary positions" as
stockholders, officers and directors of the General Partners for a profit and
retaining said profit rather than distributing it to the plaintiffs; (ii) the
defendants breached their fiduciary duties by mismanaging the Partnerships and
misappropriating the assets of the Partnerships by (a) manipulating the
operations of the Partnerships to depress the trading price of limited
partnership units ("Units") of the Partnerships; (b) coercing and fraudulently
inducing Unit holders to sell Units to certain of the defendants at depressed
prices, and (c) using the voting control obtained by purchasing Units at
depressed prices to entrench certain of the defendants' positions of control
over the Partnerships; and (iii) the defendants breached their fiduciary duties
to the plaintiffs by (a) selling assets of the Partnerships such as mailing
lists of Unit holders; and (b) causing the General Partners to enter into
exclusive arrangements with their affiliates to sell goods and services to the
Partnerships, the Unit holders and tenants of Partnership properties. The
complaint also alleges that the foregoing allegations constitute violations of
various California securities, corporate and partnership statutes, as well as
conversion and common law fraud. The complaint seeks unspecified compensatory
and punitive damages, an injunction blocking the sale of control of the General
Partners to AIMCO and a court order directing the defendants to discharge their
fiduciary duties to the plaintiffs. On June 25, 1998, Insignia, the General
Partners and certain other defendants served a demurrer to the complaint and a
motion to strike. Plaintiffs' opposition to the demurrer and motion to strike is
due on August 21, 1998 and a hearing is scheduled for October 2, 1998. AIMCO
served a separate demurrer to the complaint which is scheduled to be heard by
the Court on August 6, 1998. Defendants Apollo Real Estate Advisors, L.P. and
Michael L. Ashner have also each filed separate motions which seek,
respectively, to dismiss the complaint and quash service of the summons. In lieu
of responding to defendants' motion and demurrers, plaintiffs' counsel has
notified defendants that they intend to file and serve an amended complaint,
which will render the motions and demurrers moot. Based upon the allegations of
the complaint, Holdings is unable to quantify the relief sought. Holdings
intends to defend the action vigorously. Holdings does not believe that the
outcome of the litigation will have a material adverse impact on either its
financial condition, its results of operations or its ability to consummate the
Distribution.
On July 30, 1998, certain entities claiming to own limited partnership
interests in certain limited partnerships whose general partners are affiliates
of Insignia filed a complaint in the Superior Court of the State of California,
County of Los Angeles, which asserts eleven causes of action, including breach
of contract and fiduciary duty, tortious interference with prospective economic
advantage, interference with contract, unfair business practices, violations of
California's Cartwright Act, and the respective Limited Partnership Acts of
California, Delaware, South Carolina, Massachusetts and Missouri, under which
the relevant limited partnerships are organized. The complaint names, among
others, Insignia Financial Group, Inc., Insignia Properties Trust ("IPT"),
Insignia Properties, L.P., three IPT subsidiaries (Angeles Realty Corporation,
Angeles Realty Corporation II and ConCap Equities, Inc.) and 12 other entities
alleged to be managing partners of the defendant limited partnerships.
The action involves 44 real estate limited partnerships (each named as a
defendant) in which the plaintiffs allegedly own interests and which Insignia
entities allegedly manage or control (the "Subject Partnerships"). Plaintiffs
allege that they have requested from, but have been denied by, each of the
Subject Partnerships their respective lists of limited partners for the purpose
of making tender offers to purchase up to 4.9% of the limited partner units of
each of the Subject Partnerships. The complaint also alleges that certain of the
defendants made tender offers to purchase limited partner units in many of the
Subject Partnerships, with the result that plaintiffs have been deprived of the
benefits they would have realized from ownership of the additional units.
Plaintiffs' complaint seeks compensatory damages in excess of $15 million,
punitive and treble damages.
Certain subsidiaries of Holdings are defendants in lawsuits arising in the
ordinary course of business. Claims may demand substantial compensatory and
punitive damages. Management of Holdings believes that all of those lawsuits
will be resolved without material loss to Holdings or its subsidiaries.
27
<PAGE> 34
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO INSIGNIA STOCKHOLDERS
The following discussion is a summary of the material U.S. Federal income
tax consequences of the Distribution to a holder of Insignia Common Stock. The
discussion is based on the Code, Treasury Regulations promulgated thereunder,
administrative rulings and pronouncements and judicial decisions as of the date
hereof, all of which are subject to change (possibly with retroactive effect).
This discussion does not address all aspects of U.S. Federal taxation that may
be relevant to particular Insignia stockholders in light of their personal
investment circumstances or to Insignia stockholders subject to special
treatment under the Code (including insurance companies, tax-exempt
organizations, financial institutions, broker-dealers, regulated investment
companies, Insignia stockholders who received their shares through the exercise
of employee stock options or otherwise as compensation, foreign corporations and
persons who are not citizens or residents of the United States and Insignia
stockholders who hold their shares as part of a straddle, hedge or conversion
transaction) who may be subject to tax rules that differ significantly from
those described below. In addition, this discussion does not include a detailed
discussion of any state, local or foreign tax consequences.
EACH INSIGNIA STOCKHOLDER IS URGED TO CONSULT SUCH STOCKHOLDER'S TAX
ADVISOR AS TO THE PERSONAL TAX CONSEQUENCES OF THE DISTRIBUTION, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN LAWS AND OF CHANGES IN
APPLICABLE TAX LAWS.
There can be no assurance that future legislative, judicial or
administrative changes or interpretations will not adversely affect the accuracy
of the statements and conclusions set forth herein. Any such changes or
interpretations could be applied retroactively and could affect the tax
consequences of the Distribution to Insignia stockholders.
THE DISTRIBUTION
General
Insignia has received an opinion of its special tax counsel, Rogers & Wells
LLP, to the effect that for Federal income tax purposes, although the matter is
not entirely free from doubt, the Distribution should qualify as a tax-free
distribution and reorganization under Sections 355 and 368 of the Code.
Counsel's opinion is based on various assumptions and is conditioned upon
certain representations made by Insignia, AIMCO, the AIMCO Operating Partnership
and others as to factual matters. An opinion of counsel is not binding upon the
IRS and no assurance can be given that the IRS will not challenge the tax
treatment of the Distribution. In this regard, the Distribution must satisfy the
requirements of Sections 355 and 368 of the Code to qualify as a tax-free
distribution, including the requirements that the Distribution not be used as a
device for the distribution of Insignia's earnings. Moreover, the tax treatment
of the Distribution depends on future events, such as AIMCO and the AIMCO
Operating Partnership continuing certain businesses of Insignia in the AIMCO
Operating Partnership, and various other qualification tests imposed under the
Code, to which AIMCO and the AIMCO Operating Partnership have made factual
representations concerning their business and properties, and the use of the
business and properties of Insignia after the Merger, the results of which will
not be reviewed by counsel. The law is not entirely clear regarding the
application of these requirements to a distribution and subsequent merger with a
REIT that will conduct the acquired business through a subsidiary partnership
and other non-controlled subsidiaries. If the Distribution did not qualify as a
tax-free reorganization, each Insignia stockholder would be treated as receiving
a distribution in an amount equal to the fair market value of Holdings Common
Stock received, which would result in a taxable dividend to the extent of such
stockholder's pro rata share of Insignia's current and accumulated earnings and
profits (including gain to Insignia from the distribution of Holdings Common
Stock).
The Distribution and Merger Agreement are subject to the approval of the
Insignia stockholders. In the event the Insignia stockholders approve the
Distribution, but not the Merger Agreement, or there is a change in
circumstances after the approval of both the Distribution and Merger Agreement
which prevents the completion of the Merger, Insignia intends, subject to the
conditions noted under "THE DISTRIBUTION -- CONDITIONS," to consummate the
Distribution nonetheless. Insignia believes that there are substantial business
purposes supporting the completion of the Distribution independent of the
Merger. Based on these purposes,
28
<PAGE> 35
Rogers & Wells LLP expects to issue its opinion that the Distribution should
still qualify as a reorganization within the meaning of Section 368(a)(1)(D) of
the Code and a tax-free distribution under Section 355 of the Code. See "THE
DISTRIBUTION -- REASONS FOR THE DISTRIBUTION." However, no assurance can be
given that the IRS will agree with the opinion of Rogers & Wells LLP.
Taxation to Insignia Stockholders
Assuming the Distribution qualifies as a tax-free distribution under
Section 355 of the Code, (i) Insignia stockholders will not recognize any gain
or loss upon the receipt of Holdings Common Stock, (ii) Insignia stockholders'
aggregate tax basis in the Insignia Common Stock and the Holdings Common Stock
held by them immediately after the Distribution will equal the stockholders'
aggregate basis in the Insignia Common Stock held by them immediately before the
Distribution and will be allocated between the Insignia Common Stock and the
Holdings Common Stock in proportion to their market values (if an Insignia
stockholder holds blocks of Insignia Common Stock that were purchased at
different times or for different prices, the allocation of basis must be
calculated separately for each of those blocks of Insignia Common Stock); and
(iii) Insignia stockholders' holding period of the Holdings Common Stock
received in the Distribution will include the holding period of the Insignia
Common Stock with respect to which the Holdings Common Stock was issued. Cash
received in lieu of fractional shares will be treated as if such fractional
shares were actually received and then redeemed for cash and, in general, gain
or loss will be measured by the differences between the cash received and the
basis allocable to such fractional shares.
Each Insignia stockholder who receives Holdings Common Stock in the
Distribution must attach to the stockholder's Federal income tax return for the
year in which the Holdings Common Stock is received, a statement which describes
the applicability of Code Section 355 to the Distribution. Each Insignia
stockholder is urged to consult its own tax advisor with respect to special tax
consequences of the Distribution which may apply to that particular Insignia
stockholder, including the effects of state, local and foreign tax laws.
Taxation to Insignia
Under recently-enacted Section 355(e) of the Code, a corporation that
distributes the stock of a subsidiary in a distribution under Section 355 of the
Code will be required to recognize gain if the transaction is part of a plan in
which one or more persons acquire directly or indirectly stock representing a
50% or greater interest in either the distributing corporation or the
distributed subsidiary. If one or more persons acquire such stock within two
years before or after the transaction, the acquisition will be treated as being
part of a plan unless it is otherwise established. AIMCO will be treated as
acquiring 100% of the stock of Insignia in the Merger. Therefore, if the Merger
is consummated, gain will be realized and recognized by Insignia, but not by
Insignia stockholders, as if Insignia had sold its stock in Holdings to its
Insignia stockholders at its fair market value immediately before the
Distribution.
If the Distribution is completed without the Merger, Insignia generally
should not recognize gain under Code Section 355(e), provided that AIMCO or
another party (or their stockholders) does not directly or indirectly acquire a
50% or greater interest in Insignia or Holdings after the Distribution as part
of a plan in existence at the time of the Distribution.
BECAUSE OF THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH INSIGNIA
STOCKHOLDER IS URGED TO CONSULT ITS TAX ADVISOR WITH RESPECT TO THE PERSONAL TAX
CONSEQUENCES OF THE DISTRIBUTION, INCLUDING THE EFFECT OF FEDERAL, STATE, LOCAL
AND FOREIGN AND OTHER TAX RULES, AND THE EFFECT OF POSSIBLE CHANGES IN TAX LAWS.
29
<PAGE> 36
SELECTED COMBINED HISTORICAL AND
PRO FORMA FINANCIAL INFORMATION OF HOLDINGS
The following table sets forth (i) unaudited selected combined historical
financial information of the Holdings Businesses as of March 31, 1998 for each
of the three-month periods ended March 31, 1998 and 1997; (ii) selected combined
historical financial information as of December 31, 1997 and 1996 and for each
of the years ended December 31, 1997, 1996 and 1995, which has been derived from
the Holdings Businesses' audited combined financial statements as of December
31, 1997 and 1996, and for each of the years ended December 31, 1997, 1996 and
1995, included elsewhere herein; (iii) selected historical financial information
as of and for each of the years ended December 31, 1995, 1994, and 1993, which
has been derived from the unaudited combined financial statements of the
Holdings Businesses, not included elsewhere herein; and (iv) unaudited selected
combined pro forma financial information as of and for the three-month period
ended March 31, 1998 and for the year ended December 31, 1997, which has been
derived from the Unaudited Pro Forma Condensed Combined Financial Statements of
Holdings included elsewhere herein. This historical and pro forma financial
information includes an allocable portion of corporate, administrative and
general expenses of Insignia estimated to be incurred by Holdings operating on a
stand alone basis. Such data should be read in conjunction with the combined
financial statements (including the notes thereto) and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" included
elsewhere herein. The unaudited selected combined pro forma balance sheet
information as of March 31, 1998 is presented as if the Distribution and the
Merger had occurred on March 31, 1998, and the unaudited selected combined pro
forma income statement information for the three-month period ended March 31,
1998 and the year ended December 31, 1997 is presented as if the Distribution,
the acquisition of Richard Ellis, the acquisition of Realty One, and the
acquisition of Barnes, Morris, Pardoe & Foster had occurred on January 1, 1997.
The unaudited selected combined pro forma financial information incorporates
certain assumptions set forth in the footnotes to the Unaudited Pro Forma
Condensed Combined Financial Statements of Holdings included elsewhere herein.
Historical per share data has not been presented because the financial
statements of the Holdings Businesses include primarily wholly-owned
subsidiaries or divisions of Insignia. The selected combined pro forma
information does not purport to represent what Holdings' financial position or
results of operations actually would have been had the Distribution and the
acquisitions described above in fact occurred on such date or at the beginning
of the period indicated, or to project Holdings' financial position or results
of operations at any future date or for any future period.
The tables set forth below provide a variety of statistical information
about Holdings and the Holdings Businesses. Management believes that Net EBITDA
is a significant indicator of the strength of its results. EBITDA does not
represent cash flow as defined by GAAP and does not necessarily represent
amounts of cash available to fund Holdings' cash requirements. EBITDA should not
be considered an alternative to net income, an indicator of operating
performance or an alternative to cash flow from operations as a measure of
liquidity. There can be no assurance that Holdings' basis of computing EBITDA
and Net EBITDA is comparable with that of other companies.
30
<PAGE> 37
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, HOLDINGS HOLDINGS BUSINESSES
---------------------------------- --------- --------------------------------------------------
HOLDINGS HOLDINGS BUSINESSES YEAR ENDED DECEMBER 31,
--------- ---------------------- --------------------------------------------------------------
PRO FORMA PRO FORMA
1998 1998 1997 1997 1997 1996 1995 1994 1993
--------- ----------- -------- --------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.................... $113,033 $102,801 $ 43,866 $460,717 $295,753 $122,005 $ 38,658 $15,665 $11,711
Operating expenses.......... 101,690 91,776 39,162 408,848 258,625 107,444 37,554 14,606 8,672
Depreciation and
amortization.............. 6,007 5,184 3,268 22,056 15,244 9,197 3,778 771 157
Net income (loss)........... 2,330 2,759 1,072 14,570 13,055 3,484 (2,278) 173 1,758
Per Share amount -- assuming
dilution.................. $ 0.10 $ 0.67
Weighted average and
potential dilutive common
shares.................... 22,581 21,657
CASH FLOW DATA:
Cash provided by (used in)
operating activities...... N/A $(11,778) $ (6,030) N/A $ 30,332 $ 7,307 (1,399) $ N/A N/A
Cash used in investing
activities................ N/A (36,845) (3,117) N/A (82,893) (77,194) (19,796) N/A N/A
Cash provided by financing
activities................ N/A 54,424 9,116 N/A 61,767 69,895 21,221 N/A N/A
SUPPLEMENTAL DATA:
EBITDA...................... $ 11,343 $ 11,025 $ 4,704 $ 51,869 $ 37,128 $ 14,561 $ 1,104 $ 1,059 $ 3,039
Combined EBITDA and FFO..... 11,709 11,391 4,860 52,673 37,932 14,923 1,104 1,059 3,039
Net EBITDA.................. 11,096 11,009 4,860 50,621 37,614 14,905 1,104 1,059 3,039
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, HOLDINGS BUSINESSES
----------------------- --------------------------------------------------
HOLDINGS HOLDINGS
--------- BUSINESSES AS OF DECEMBER 31,
PRO FORMA ----------- --------------------------------------------------
1998 1998 1997 1996 1995 1994 1993
--------- ----------- -------- -------- -------- ------- -------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................ $485,652 $450,907 $334,494 $171,787 $ 43,074 $19,877 $ 3,153
Notes payable............... 31,208 31,208 20,891 -- -- -- --
Investment and net advances
from Insignia............. -- 288,720 208,444 137,777 39,948 17,294 1,671
Stockholders' equity........ 323,465 -- -- -- -- -- --
</TABLE>
31
<PAGE> 38
PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS OF HOLDINGS (UNAUDITED)
The following Pro Forma Condensed Combined Balance Sheet as of March 31,
1998 gives effect to the consummation of the Distribution and the Merger as if
effected at such date and the Pro Forma Condensed Combined Statements of Income
for the year ended December 31, 1997 and the three months ended March 31, 1998
for Holdings give effect to (i) the acquisition of the outstanding stock of
Realty One, (ii) the acquisition of Barnes, Morris, Pardoe & Foster and (iii)
the acquisition of the outstanding stock of Richard Ellis, in each case as if
effected at January 1, 1997. The exchange rates used in the translation of the
Richard Ellis financial statements, included herein, are as follows: $1.68 for
the balance sheet as of March 31, 1998; $1.68 for statement of income for the
year end December 31, 1997; and $1.65 for the statement of income for the three
months ended March 31, 1998. These exchange rates have been determined based on
the end of the period rate, in the case of the balance sheet, and the average
rate for the periods presented, in the case of the statement of income.
The pro forma statements have been prepared by management of Insignia and
are based on the historical financial statements of Holdings, Realty One and
Richard Ellis, giving effect to the transactions under the purchase method of
accounting and the assumptions and adjustments in the accompanying Notes to
Unaudited Pro Forma Condensed Combined Financial Statements. These pro forma
statements may not be indicative of the actual results that may have occurred if
the combination had been in effect on the date indicated or results which may be
experienced in the future. The pro forma statements should be read in
conjunction with the audited financial statements and corresponding footnote
disclosures of the Holdings Businesses included elsewhere herein.
PRO FORMA CONDENSED COMBINED
BALANCE SHEET OF HOLDINGS -- (UNAUDITED)
MARCH 31, 1998
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HOLDINGS ADJUSTMENTS BALANCE SHEET
-------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................. $ 15,051 $ 34,745(a) $ 49,796
Receivables........................................... 129,115 -- 129,115
Property and equipment................................ 13,473 -- 13,473
Co-investments in real estate......................... 19,637 -- 19,637
Property management contracts......................... 46,825 -- 46,825
Cost in excess of net assets of acquired businesses... 209,947 -- 209,947
Other assets.......................................... 16,859 -- 16,859
-------- --------- ---------
Total assets.......................................... $450,907 $ 34,745 $ 485,652
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable...................................... $ 13,912 $ -- $ 13,912
Commissions payable................................... 56,404 -- 56,404
Accrued and sundry liabilities........................ 60,308 -- 60,308
Notes payable......................................... 31,208 -- 31,208
-------- --------- ---------
Total liabilities..................................... 161,832 -- 161,832
-------- --------- ---------
Minority interest in consolidated subsidiaries.......... 355 -- 355
Stockholders' Equity:
Investment and net advances from Insignia............. 288,720 34,745(a) --
(323,465)(b)
Common stock, par value $.01 per share................ -- 215(b) 215
Additional paid-in capital............................ -- 323,250(b) 323,250
Retained earnings..................................... -- -- --
-------- --------- ---------
Total stockholders' equity............................ 288,720 34,745 323,465
-------- --------- ---------
Total liabilities and stockholders' equity............ $450,907 $ 34,745 $ 485,652
======== ========= =========
</TABLE>
32
<PAGE> 39
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
PRO FORMA ADJUSTMENTS
(a) As a part of the Merger negotiation, Insignia provided that a
significant portion of its working capital will be contributed to Holdings at
the time of the Distribution. This pro forma adjustment, which assumes the
consummation of the proposed Merger, represents the contribution by Insignia
which will result in the debt and other liabilities of Insignia and its
subsidiaries at the time of the Merger being in compliance with the Merger
Agreement.
The cash contributed by Insignia is shown net of approximately $9.6 million
to be paid by Holdings to certain of Insignia's executive officers. These
payments are the obligation of Holdings only in the event that the Merger
occurs. The net impact of these payments has no effect on Holdings.
(b) Represents the adjustment to record the issuance of approximately
21,500,000 shares of Holdings Common Stock, with a par value of $.01 per share,
at the time of the Distribution.
33
<PAGE> 40
PRO FORMA CONDENSED COMBINED STATEMENT OF
OPERATIONS OF HOLDINGS -- (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------------------- PRO FORMA
REALTY RICHARD BARNES OTHER INCOME
HOLDINGS ONE(1) ELLIS(1) MORRIS(1) ADJUSTMENTS STATEMENT
-------- ------- -------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Fee based services.............. $295,258 $71,364 $69,405 $21,409 $ -- $ 457,436
Interest........................ 457 48 622 118 -- 1,245
Other........................... 38 1,987 -- 11 -- 2,036
-------- ------- ------- ------- ----------- -----------
295,753 73,399 70,027 21,538 -- 460,717
-------- ------- ------- ------- ----------- -----------
Costs and expenses
Fee based services.............. 251,268 62,436 60,767 17,578 (4,152)(a) 387,897
Overhead allocations from
Insignia...................... 6,770 -- -- -- -- 6,770
Administrative.................. 587 4,730 2,465 3,714 2,685(b) 14,181
Contract terminations........... -- -- 8,702 -- (8,702)(c) --
Interest........................ 318 441 704 9 580(d) 2,052
Depreciation and amortization... 15,244 1,804 850 221 3,937(e) 22,056
-------- ------- ------- ------- ----------- -----------
274,187 69,411 73,488 21,522 (5,652) 432,956
-------- ------- ------- ------- ----------- -----------
Equity earnings................... 151 -- -- -- (3,669)(f) (3,518)
Minority interest in consolidated
subsidiaries.................... 41 -- 60 -- (60)(g) 41
-------- ------- ------- ------- ----------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES........................... 21,758 3,988 (3,401) 16 1,923 24,284
Provision for income taxes...... 8,703 552 (489) -- 948(h) 9,714
-------- ------- ------- ------- ----------- -----------
NET INCOME (LOSS)................. $ 13,055 $ 3,436 $(2,912) $ 16 $ 975 $ 14,570
======== ======= ======= ======= =========== ===========
Per share amount -- assuming
dilution........................ N/A $ 0.67
======== ===========
Weighted average and potential
dilutive common shares.......... N/A 21,656,679(i) 21,656,679
======== =========== ===========
</TABLE>
- ---------------
(1) Represents operations prior to acquisition by Holdings.
See "Notes to Unaudited Pro Forma Condensed Combined Statements of Operations"
for pro forma adjustments notes.
34
<PAGE> 41
PRO FORMA CONDENSED COMBINED STATEMENT OF
OPERATIONS OF HOLDINGS -- (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------- PRO FORMA
RICHARD OTHER INCOME
HOLDINGS ELLIS(1) ADJUSTMENTS STATEMENT
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES
Fee based services......................... $102,511 $10,079 $ -- $ 112,590
Interest................................... 282 153 -- 435
Other...................................... 8 -- -- 8
-------- ------- ----------- ----------
102,801 10,232 -- 113,033
-------- ------- ----------- ----------
COSTS AND EXPENSES
Fee based services......................... 89,212 9,473 (446)(a) 98,239
Overhead allocations from Insignia......... 1,746 -- -- 1,746
Administrative............................. 818 217 670(b) 1,705
Interest................................... 382 72 159(d) 613
Depreciation and amortization.............. 5,184 90 733(e) 6,007
-------- ------- ----------- ----------
97,342 9,852 1,116 108,310
-------- ------- ----------- ----------
Equity earnings.............................. (476) -- -- (476)
Minority interest in consolidated
subsidiaries............................... 33 (43) -- (10)
-------- ------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES............ 5,016 337 (1,116) 4,237
Provision for income taxes................. 2,257 191 (541)(h) 1,907
-------- ------- ----------- ----------
NET INCOME (LOSS)............................ $ 2,759 $ 146 $ (575) $ 2,330
======== ======= =========== ==========
Per share amount -- assuming dilution........ N/A $ 0.10
======== ==========
Weighted average and potential dilutive
common shares.............................. N/A 22,580,876(i) 22,580,876
======== =========== ==========
</TABLE>
- ---------------
(1) Represents operations prior to acquisition by Holdings.
See "Notes to Unaudited Pro Forma Condensed Combined Statements of Operations"
for pro forma adjustments notes.
35
<PAGE> 42
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
INCOME INCREASE (DECREASE)
---------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------------
<S> <C> <C> <C>
PRO FORMA ADJUSTMENTS
COSTS AND EXPENSES
(a) Reduction (increase) in fee-based services expenses:
Prior to its acquisition, Richard Ellis accounted for
annuities to retired employees as expense when paid. As a
part of the purchase, the present value of these
obligations was recorded as a liability using a 9% present
value discount rate and actuarial life expectancies. The
pro forma adjustment eliminates the annuity expense from
fee-based services expense................................ $ 687 $ 71
As a part of the Richard Ellis acquisition, the present
value of future office lease obligations pertaining to
locations no longer occupied, and in one case, the
difference between the rental rate pursuant to the lease
in excess of current market rent, was recorded as a
liability using a 9% present value discount rate. The
applicable rent is removed from fee-based services
expense................................................... 1,650 268
As a condition to the acquisition of Richard Ellis, lifetime
employment agreements of seven employees of Richard Ellis
were terminated by payment in cash. These employees were
no longer providing any economic benefit to Richard Ellis.
The pro forma adjustment removes these cash payments from
fee-based services expense................................ 1,529 107
As a condition to the acquisition of Richard Ellis, the
Richard Ellis bonus plan was modified by shareholder vote.
The adjustment to the amount of bonus based on the revised
plan in place at the date of acquisition is reflected as a
pro forma adjustment...................................... 286 --
------------ ------------
4,152 446
------------ ------------
(b) Represents the estimated administrative expenses associated
with new employment agreements with three executive
officers of Insignia, liability insurance policies,
director fees and similar costs in excess of
administrative expenses formerly allocated from
Insignia.................................................. (2,685) (670)
(c) Prior to the Richard Ellis acquisition, Insignia entered
into agreements to terminate lifetime employment
agreements with seven persons and to reduce the term of
employment contracts with three other persons. The amount
to be paid for such terminations and modifications was
accrued by Richard Ellis during the year ended December
31, 1997, and Insignia contributed the funds to make the
modification payments to Richard Ellis at the time of the
acquisition. The contract termination expense is
eliminated from historical results as a pro forma
adjustment................................................ 8,702 --
(d) Interest expense on the present value obligations described
in (a) above is reflected as a pro forma adjustment using
the 9% present value discount rate in calculating the
liabilities............................................... (580) (159)
(e) Represents reductions (increases) in:
Amortization of purchase price of acquired entities
allocated to goodwill (25 yr.)............................ (4,068) (749)
Removal of Richard Ellis historical goodwill amortization... 131 16
------------ ------------
(3,937) (733)
------------ ------------
Total cost and expense effect............................ 5,652 (1,116)
------------ ------------
(f) Represents the pro forma adjustment to record equity loss in
Fresh Meadows (apartment property 35% owned) from 1/1/97
to 12/4/97................................................ (3,669)
(g) Represents the removal of Richard Ellis historical
interest.................................................. (60)
(h) Income tax effect........................................... (948) 541
------------ ------------
Adjustment to net income.................................... $ 975 $ (575)
============ ============
SHARE DATA
(i) Weighted average and potential dilutive common shares:
Issuance of Holdings Common Stock, on a two for three basis,
to Insignia stockholders.................................. 20,835,288 21,538,208
Potential dilutive common shares, with respect to warrants
and employee options assumed by Holdings.................. 821,391 1,042,668
------------ ------------
21,656,679 22,580,876
============ ============
</TABLE>
36
<PAGE> 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Holdings has two principal business segments -- commercial real estate
services and residential real estate services. The commercial real estate
services segment is comprised of Insignia/ESG's United States operations
division and its European operations division; and the residential services
segment is comprised of a single-family home brokerage division (Realty One) and
a cooperative and condominium apartment services division (Insignia Residential
Group).
Insignia/ESG is one of the largest commercial real estate services firms in
the United States according to January 1998 issue of Commercial Property News.
With the acquisition of Richard Ellis in the United Kingdom and the purchase of
60% of the capital stock in Insignia/CAGISA in Italy, Insignia/ESG is becoming a
global leader in real estate services.
In addition to commercial real estate services, Holdings provides
residential real estate services principally through Realty One and Insignia
Residential Group. Realty One, based in Ohio, is the ninth largest residential
real estate brokerage firm in the United States according to Real Trends "Big
Broker Report" published in May 1998. Insignia Residential Group manages
cooperative and condominium properties in the New York metropolitan tri-state
area.
Revenue from tenant representation, consulting, investment sales,
debt/equity placements and property leasing, which is a substantial majority of
Holdings' revenue, is largely transactional in nature and therefore subject to
changes in economic cycles. Holdings believes that its large, diversified client
base, geographical reach, overall size and number of annual transactions will
minimize the impact of changes in economic cycles on annual revenue. A large
majority of the expenses associated with the above mentioned activities are
directly correlated to revenue.
Holdings' primary objective is to increase EBITDA and stockholder value
through internal growth and the acquisition of companies. See "BUSINESS OF
HOLDINGS -- COMMERCIAL SERVICES -- INSIGNIA/ESG" and "BUSINESS OF
HOLDINGS -- MERGERS AND ACQUISITIONS" for information regarding Holdings'
acquisitions.
The following results are based on the historical financial statements of
the Holdings Businesses and include certain assumptions concerning the
allocation of overhead costs from Insignia. These results may not be indicative
of the actual results that may have occurred if the Holdings Businesses had been
operating on a stand-alone basis for the periods presented.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
The Holdings Businesses, with the exception of Insignia Residential Group,
posted strong results in all major components of operational activity for the
three months ended March 31, 1998 in comparison to 1997. These results are
primarily attributable to a vibrant real estate market in the United States and
Europe, as well as continued growth through acquisitions over the past year. The
Holdings Businesses use Net EBITDA, which is EBITDA combined with funds from
operations minus interest expenses, as a primary indicator of financial
performance. Net EBITDA increased 126% for the quarter over the same period last
year from $4.9 million for March 31, 1997 to $11.0 million for March 31, 1998.
Total revenues increased 134% or $58.9 million for the three months from
$43.9 million in 1997 to $102.8 million in 1998. The growth in revenues is
primarily reflected in fee-based services, which posted gains of 134% or $58.6
million for the three months. This growth is attributable primarily to internal
growth in the U.S. commercial operations of Insignia/ESG, in conjunction with
the operations of the Richard Ellis and Realty One companies acquired over the
past six months.
Fee-based services expense increased 136% from $37.9 million in the first
quarter of 1997 to $89.2 million in the first quarter of 1998. Consistent with
fee-based services revenue, fee-based services expense increased significantly
as a result of the internal growth and growth through acquisitions over the past
12 months.
37
<PAGE> 44
Insignia/ESG revenues increased 85% from $37.7 million in the first quarter
of 1997 to $69.7 million in the first quarter of 1998. This increase is
attributable to the operating impact of several acquisitions throughout the last
nine months of 1997, including Frain, Camins & Swartchild, Inc.; Forum
Properties, Inc.; and Barnes, Morris, Pardoe & Foster. Also, contributing to
this increase was increased brokerage activity in comparison to the same period
of 1997. Insignia/ESG fee-based services expense increased 81% from $32.6
million in the first quarter of 1997 to $59.1 million in the first quarter of
1998. Consistent with revenues, the increase in fee-based services expense is
due primarily to the impact of the above mentioned acquisitions coupled with
increased brokerage activity in the New York metropolitan tri-state area.
The European operations of Insignia/ESG, comprised of Richard Ellis in
London and Insignia/CAGISA in Italy, reported revenues of $7.7 million and
fee-based service expenses of $5.6 million for the three months of 1998. These
entities were acquired subsequent to March 31, 1997 (Insignia/CAGISA on
September 30, 1997 and Richard Ellis on February 26, 1998), therefore no
comparable operations existed for this period. The operations of Richard Ellis,
which reflected less than a full quarter of ownership, comprised $7.0 million,
or 91%, of the total revenues for the European operations.
Realty One reported total revenues of $18.3 million for the first three
months of 1998. Realty One was acquired in October 1997; therefore, no actual
operations are reflected for Realty One for the first three months of 1997.
These results were considerably stronger than anticipated and can be attributed
to an improved market due to attractive interest rates and the mild winter. On a
comparable basis after giving pro forma effect to the ownership of the Realty
One operations for all of the three-month periods of 1998 and 1997 revenues
increased 9% from $16.8 million in the first quarter of 1997 to $18.3 million in
the first quarter of 1998. During the first quarter of 1998, fee-based services
expense for Realty One was $18.3 million. On a comparable basis after giving
effect for the ownership of the Realty One operations for all of the three-month
periods of 1998 and 1997, fee-based services expense decreased 7% from $19.8
million in 1997.
It is important to note that despite the improved performance over 1997,
Realty One reported a negative Net EBITDA of $512,000 for the first three months
of 1998. Consistent with most of the residential brokerage industry, Realty One
experiences significant seasonality, with the first quarter results typically
being the lowest. In spite of the negative contribution, the results exceeded
expectations for the period due to a mild winter and strong home sales.
Insignia Residential Group revenues increased 1% from $6.1 million in the
first quarter of 1997 to $6.2 million in the first quarter of 1998. Fee-based
services expense increased 8% from $5.3 million in the first quarter of 1997 to
$5.7 million in the first quarter of 1998. These changes reflect that revenues
were consistent with the prior year, whereas fee-based services expenses were
impacted by normal salary increases and additional staffing hires throughout the
latter part of 1997.
Overhead allocations from Insignia increased 35% from $1.3 million in the
first quarter of 1997 to $1.7 million in the first quarter of 1998. This
increase is directly correlated to the increased administrative costs absorbed
with newly acquired entities over the past year. It is important to note that
the rate of growth in overhead costs from Insignia is substantially lower than
the growth rate in revenues of the combined entities.
Administrative expenses of $0.8 million were incurred for the three months
ended March 31, 1998. These expenses relate entirely to the operations of the
Richard Ellis, Insignia/CAGISA and Realty One subsidiaries acquired over the
past six months. No comparable expenses were incurred for the same period of
1997. As additional consolidations are made in the respective business units
represented by these entities, efficiencies are expected to be gained and the
growth in administrative expenses is expected to slow.
Depreciation and amortization increased 59% from $3.3 million in the first
quarter of 1997 to $5.2 million in the first quarter of 1998. This increase is
consistent with the growth in the Holdings Businesses over the past year
attributable to acquisitions. These acquisitions, most notably Richard Ellis and
Realty One, have resulted in significant purchases of amortizable assets
resulting in a corresponding increase in amortization expense.
Equity earnings decreased from $351,000 in the first quarter of 1997 to a
loss of $476,000 in the first quarter of 1998. The loss is primarily
attributable to substantial losses of Fresh Meadows, a 35% owned apartment
property, acquired in December 1997. Holdings' share of the loss was $656,000.
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<PAGE> 45
The provision for income taxes increased 216% from $715,000 in the first
quarter of 1997 to $2.3 million in the first quarter of 1998. This increase is
due primarily to the increase in pretax earnings attributable to the factors
discussed above. Also contributing to this increase is a change in the effective
tax rate from 40% to 45% because of changes in assets and their tax bases from
acquisition activity and higher tax rates where those acquisitions occurred.
As a result of the foregoing, net income increased 157% to $2.8 million for
the first three months of 1998 compared to $1.1 million for the same period of
1997.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
The Holdings Businesses posted strong results in all major components of
operational activity for 1997. Favorable comparisons to 1996 are attributable to
a vibrant commercial real estate market in the United States, the inclusion of
ESG for a full year (versus six months in 1996), and the partial year impact of
several acquisitions during 1997. The Holdings Businesses use Net EBITDA as a
primary indicator of financial performance. Net EBITDA increased 152% from $14.9
million in 1996 to $37.6 million in 1997.
Total revenues increased 142% or $173.7 million for the year from $122.0
million in 1996 to $295.8 million in 1997. The growth in revenues is primarily
reflected in fee-based services, which posted gains of 142% or $173.3 million in
comparison to 1996. This increase is reflective of the contributions of a full
year of operations of ESG, which was acquired on June 30, 1996, and the eight
acquisitions made in 1997. In addition ESG experienced strong internal revenue
growth of over $60 million in 1997 as compared to its 1996 results.
Fee-based services expense increased 142% from $103.9 million in 1996 to
$251.3 million in 1997. Consistent with fee-based services revenue, fee-based
services expense increased significantly as a direct result of the acquisitions
over the past eighteen months and Insignia/ESG's strong internal growth. In
addition, in 1997 Holdings incurred a one time charge of $1.5 million in legal
and litigation settlement costs associated with the establishment of an office
in Phoenix.
Insignia/ESG revenues increased 151% from $97.7 million in 1996 to $245.2
million in 1997. This increase is attributable to the operating impact of
several acquisitions throughout 1997, including Rostenberg-Doern Company, Inc.;
HMB Property Services, Inc.; Frain, Camins & Swartchild, Inc.; Forum Properties,
Inc.; and Barnes, Morris, Pardoe & Foster. Also, contributing to this increase
was a full year of operations of ESG in 1997 compared to six months for 1996,
and increased brokerage activity of ESG in the New York metropolitan tri-state
area. Insignia/ESG fee-based services expense increased 145% from $83.4 million
in 1996 to $204.7 million in 1997. Consistent with revenues, the increase in
fee-based services expense is due primarily to the impact of the above mentioned
acquisitions coupled with the full year's effect of ESG operations.
The European operations of Insignia/ESG, comprised of Insignia/CAGISA in
Italy, reported revenues of $712,000 for 1997. These revenues reflect only one
quarter of operations for Insignia/CAGISA, which was acquired on September 30,
1997. Fee-based services expense for Insignia/CAGISA was $413,000 for 1997.
Realty One, organized in October 1997, reported total revenues of $24.0
million and fee-based services expenses of $22.2 million for the three months of
ownership in 1997. No comparative operations are reflected for Realty One for
1996.
Insignia Residential Group revenues increased 4% from $23.5 million in 1996
to $24.4 million in 1997. Fee-based services expense for Insignia Residential
Group increased 10% from $20.5 million in 1996 to $22.6 million in 1997. These
figures reflect that the operations of the cooperative and condominium business
for 1997 were consistent with the prior year.
Overhead allocations from Insignia increased 93% from $3.5 million in 1996
to $6.8 million in 1997. This increase is directly correlated to increased
administrative responsibility in absorbing newly acquired entities over the past
year. The rate of growth in overhead allocations from Insignia is substantially
lower than the
39
<PAGE> 46
growth rate in revenues for the same period, clearly reflecting the ability of
Holdings to efficiently absorb acquisitions into its existing corporate
infrastructure.
Administrative expenses of $0.6 million were included in 1997 which relate
entirely to the Insignia/ CAGISA acquisition.
Depreciation and amortization increased 66% from $9.2 million in 1996 to
$15.2 million in 1997. This increase is consistent with the growth of Holdings
attributable to acquisitions. These acquisitions have reflected significant
purchases of amortizable assets resulting in a corresponding increase in
amortization expense.
The provision for income taxes increased 308% from $2.1 million in 1996 to
$8.7 million in 1997. This increase is attributable to the rise in net income in
comparison to 1996 coupled with an increase in the effective tax rate from 38%
to 40% because of changes in assets and their tax bases as determined by the
structure of the purchase agreements for acquisitions completed over the past
twelve months and higher tax rates where these acquisitions occurred.
As a result of the foregoing factors, net income increased 275% to $13.1
million in 1997 compared to $3.5 million in 1996.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
The Holdings Businesses posted strong growth in all major components of
operational activity for 1996 due primarily to acquisition activity.
Revenues increased 216% for the year from $38.7 million for 1995 to $122.0
million for 1996 with the primary growth being in fee-based services revenue.
The acquisitions of ESG and Group Property Services, Inc. completed in June 1996
contributed substantially to this growth.
Fee-based services expense increased 189% from $36.0 million for 1995 to
$103.9 million for 1996. This increase is primarily caused by the completed
acquisitions mentioned previously.
Insignia/ESG revenues increased 249% from $28.0 million in 1995 to $97.7
million in 1996. This increase is due to internal growth of $12.6 million in the
commercial management business, coupled with the acquisition of ESG on June 30,
1996. ESG, a commercial brokerage firm located in New York, contributed revenues
of $53.4 million for the second half of 1996. On a comparable basis without
respect to ownership, ESG total revenues increased 9% from $92.1 million in 1995
to $100.2 million for the twelve months of 1996. Insignia/ESG fee-based services
expense increased 183% from $29.5 million in 1995 to $83.4 million in 1996.
Consistent with revenues, the increase in fee-based services expense is due
primarily to the impact of the ESG acquisition, which contributed $45.2 million
in expense in the second half of 1996.
Insignia Residential Group revenues increased 220% from $7.3 million in
1995 to $23.5 million in 1996. Insignia Residential Group commenced operations
with the acquisition of Douglas Elliman-Gibbons & Ives and Kreisel Company, Inc.
of New York in September 1995. Insignia Residential Group fee-based services
expense increased 216% from $6.5 million in 1995 to $20.5 million in 1996. This
increase is due to the comparison of four months of operations in 1995 to a full
year for 1996.
Overhead allocations from Insignia increased 119% from $1.6 million for
1995 to $3.5 million for 1996. This increase is due to increased administrative
responsibility related to the recent acquisitions.
During 1995, a one-time charge for $1.0 million was incurred as a result of
terminating a contract arrangement with a senior executive. Both Holdings and
the employee agreed to the termination. No such expenses were incurred during
the year ended December 31, 1996.
Depreciation and amortization increased 143% from $3.8 million for 1995 to
$9.2 million for 1996. This is a result of the amortization of acquired property
management contracts and goodwill.
The provision for income taxes increased by $3.5 million from $(l.4)
million in 1995 to $2.1 million in 1996 in direct proportion to the increase in
income before income taxes, resulting from the factors discussed above.
40
<PAGE> 47
As a result of the foregoing factors, net income increased by $5.8 million
from a $2.3 million loss in 1995 to $3.5 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Holdings Businesses have not historically maintained separate capital
resources. Rather, all of its cash flows have been remitted to Insignia, and
Insignia has provided the capital resources required for operating needs,
capital expenditure needs and to acquire businesses.
Holdings uses Net EBITDA as an indicator of its ability to internally
produce capital. Net EBITDA was $11.0 million for the three months ended March
31, 1998 and $37.6 million for the year ended December 31, 1997. However, Net
EBITDA must be used to finance increases in net working capital and to pay
income taxes before it is available for other purposes.
Holdings expects to use excess cash generated from its businesses together
with external capital to continue its acquisition and equity co-investment
activities. During the first quarter of 1998, the aggregate expenditure for such
activities was $26.6 million, all of which was paid for by Insignia. Cash
provided by operations was $30.3 million for the year ended December 31, 1997,
however, operations used cash of $11.8 million in the first quarter of 1998. The
first quarter of each year typically reflects annual employee bonus payments for
the prior year, and the amount paid in 1998 was approximately $12 million,
reflecting the strong 1997 results. Additionally, increased receivables related
to heightened commercial brokerage activity contributed to the use of funds in
the first quarter of 1998.
Holdings has pro forma cash of approximately $50 million and is negotiating
for and expects to procure a $150 million revolving credit facility as soon as
possible after the Distribution. However, negotiations regarding the credit
facility are in the very early stages, and there can be no assurance that
Holdings will in fact procure a facility in any amount. In addition, all of
Holdings' interests in its material subsidiaries are pledged to secure
Insignia's $300 million revolving credit facility, and any Holdings borrowings
under a new credit facility would require a release from that obligation.
Over the twelve-month period commencing July 1, 1998, Holdings anticipates
incurring capital expenditures significantly in excess of the normal needs of
the business due to following: (i) the relocation of Insignia Residential Group
to newly leased office space in Manhattan and the purchase and development of
new client accounting and information systems which Holdings believes will be
state-of-the-art for the cooperative and condominium management industry, (ii)
the upgrade and replacement of substantially all information systems of Richard
Ellis, as contemplated in the purchase transaction, (iii) the separation of
networks systems of the commercial businesses from the residential businesses to
be merged with AIMCO and (iv) the potential purchase of a new marketing system
for the single-family brokerage business. The aggregate capital expenditures
anticipated for these and other normal items is approximately $16.0 million,
which Holdings expects to pay from operating cash flows and cash on hand at the
time of the Distribution.
EFFECT OF NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which requires that an enterprise report the change in its net assets
during the period from nonowner sources, and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes annual and
interim reporting and disclosure standards for an enterprise's operating
segments. Adoption of these statements will not impact the Holdings consolidated
financial position, results of operations or cash flows, and will be limited to
the form and content of its disclosures. Both statements are effective for
fiscal years beginning after December 15, 1997.
YEAR 2000 COMPLIANCE
Holdings has completed an assessment on the impact of the year 2000 issue
and has determined that it will have to modify or replace portions of its
software and its computer platform so that computer systems will function
properly with respect to dates in the year 2000 and thereafter. The project is
expected to be
41
<PAGE> 48
completed in 1998; therefore, the year 2000 issues should not pose significant
operational problems for Holdings.
Holdings has begun to assess the impact of the year 2000 issue as it
relates to systems and software used to process property management customers'
transactions. At this point, Holdings cannot estimate the cost and time required
to modify or replace such systems and software. Holdings plans to complete this
assessment and begin implementation during 1998.
Holdings believes that year 2000 issues could have a substantial impact on
the operation of buildings managed by it, such as life safety, energy
management, elevator and security systems. Holdings has a program to assist its
property management customers with the identification and correction of year
2000 issues associated with critical systems at these properties.
Holdings is currently assessing the extent to which its operations are
vulnerable should third party vendors and other organizations with which
Holdings conducts business fail to properly remediate their computer systems. In
the event that such necessary modifications and conversions are not made, or are
not completed in a timely fashion, the year 2000 issue could potentially have a
material impact on the operations of Holdings.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation has not had a significant impact on the results of operations of
Holdings in recent years and is not anticipated to have a significant negative
impact in the foreseeable future. Holdings' exposure to market risk from
changing prices consists primarily of fluctuations in rental rates of properties
managed, market interest rates on residential mortgages and debt obligations,
real estate property values, and foreign currency fluctuations of the European
operations.
The revenues of the property management operations with respect to rental
properties are highly dependent upon the aggregate rents of the properties
managed, which are affected by rental rates and building occupancy rates. Rental
rate increases are dependent upon market conditions and the competitive
environments in the respective locations of the properties. Employee
compensation is the principal cost element of property management.
The revenues of the single-family brokerage business are impacted by
changes in market interest rates on residential mortgage loans and changes in
real property values in the Northern Ohio area.
The revenues associated with the commercial services business are impacted
by fluctuations in interest rates, lease rates, real property values and the
availability of space and competition in the market place. Commercial services
revenues are derived from a broad range of services which are primarily
transaction driven and are therefore volatile in nature and highly competitive.
Recent price and cost trends have not significantly affected profit
margins; however, changes in these trends in the future could have a potentially
significant impact on the profitability of Holdings.
42
<PAGE> 49
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning persons who
serve as directors and executive officers of Holdings, most of whom currently
serve in similar capacities for Insignia.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH HOLDINGS
---- --- ----------------------
<S> <C> <C>
Andrew L. Farkas......... 38 Director; Chairman of the Board; Chief Executive Officer
Robert J. Denison........ 57 Director
Robin L. Farkas.......... 64 Director
Andrew J.M. Huntley...... 59 Director; Office of the Chairman
Robert G. Koen........... 52 Director
Stephen B. Siegel........ 53 Director; President
H. Strauss Zelnick....... 41 Director
James A. Aston........... 45 Office of the Chairman; Chief Financial Officer
Frank M. Garrison........ 43 Office of the Chairman
Adam B. Gilbert.......... 45 Executive Vice President -- Legal General Counsel; Secretary
Edward S. Gordon......... 62 Office of the Chairman
Ronald Uretta............ 42 Office of the Chairman; Chief Operating Officer; Treasurer
</TABLE>
The Board of Directors of Holdings (the "Holdings Board") is comprised of
seven members, divided into two classes of two members each and one class of
three members. At each annual meeting of stockholders, directors constituting
one class will be elected for a three-year term. The terms of Messrs. Huntley
and Koen will expire at the 1999 annual meeting of stockholders, the terms of
Messrs. Robin L. Farkas, Denison and Zelnick will expire at the 2000 annual
meeting of stockholders, and the terms of Messrs. Andrew L. Farkas and Siegel
will expire at the 2001 annual meeting of stockholders. See "DESCRIPTION OF
CAPITAL STOCK -- CERTAIN CERTIFICATE AND BY-LAWS PROVISIONS." All executive
officers of Holdings serve at the discretion of the Holdings Board.
The following is additional information with respect to the above-named
executive officers and directors.
Andrew L. Farkas has been a director and Chairman of Holdings since its
inception in May 1998, Chief Executive Officer of Holdings since August 1998 and
a director of Insignia since its inception in August 1990. Mr. Farkas has been
Chairman and Chief Executive Officer of Insignia since January 1991, and
President since May 1995. Prior to August 1993, Mr. Farkas was the sole director
of Insignia. He has been Chairman of the Board of Trustees of Insignia
Properties Trust since December 1996.
Robert J. Denison has been a director of Holdings since its inception in
May 1988 and a director of Insignia since May 1996. Mr. Denison has been General
Partner of First Security Company II, L.P., an investment advisory firm, for
more than the past five years.
Robin L. Farkas has been a director of Holdings since its inception in May
1988 and a director of Insignia since August 1993. Mr. Farkas is the retired
Chairman of the Board and Chief Executive Officer of Alexander's Inc., a real
estate company. He served in that capacity from 1984 until 1993. He is also a
director of Refac Technology Development Corporation, Noodle Kiddoodle, Inc. and
Containerways International, Ltd.
Andrew J.M. Huntley has been a director and member of the Office of the
Chairman of Holdings since its inception in May 1998. Mr. Huntley also serves as
Chairman of Richard Ellis, and his principal employment has been with Richard
Ellis for more than the past five years.
Robert G. Koen has been a director of Holdings since its inception in May
1998 and a director of Insignia since August 1993. Since February 1996, Mr. Koen
has been a partner in the law firm Akin, Gump, Strauss, Hauer & Feld, which
represents Insignia or certain of its affiliates from time to time. From January
1991 to February 1996, Mr. Koen was a partner in the law firm of LeBoeuf, Lamb,
Greene & MacRae.
Stephen B. Siegel has been a director of Holdings since its inception in
May 1998 and President of Holdings since August 1998. Mr. Siegel also serves as
Chief Executive Officer of Insignia/ESG (since July
43
<PAGE> 50
1996) and Executive Managing Director of Insignia (since June 1996). Mr. Siegel
served as President of ESG (now Insignia/ESG) from June 1992 to May 1998. From
1988 to 1992, Mr. Siegel was engaged in a joint venture with Chubb Corporation
to develop and acquire investment-grade office buildings throughout the United
States.
H. Strauss Zelnick has been a director of Holdings since August 1998. Mr.
Zelnick has been President and Chief Executive Officer of BMG Entertainment
since July 1998. Mr. Zelnick was President and Chief Executive Officer of BMG
Entertainment North America, a division of BMG Entertainment, from January 1994
to June 1998. Prior to joining BMG Entertainment, Mr. Zelnick was President and
Chief Executive Officer of Crystal Dynamics, a supplier of video game software,
from 1993 to 1994.
James A. Aston has been a member of the Office of the Chairman and Chief
Financial Officer of Holdings since August 1998. Mr. Aston has been Executive
Managing Director of Investment Banking of Insignia since January 1991, with the
Office of the Chairman of Insignia since July 1994, and Chief Financial Officer
since August 1996.
Frank M. Garrison has been a member of the Office of the Chairman of
Holdings since August 1998. Mr. Garrison also serves as Executive Managing
Director of Insignia and President of Insignia Financial Services, a division of
Insignia. He commenced his employment with Insignia in January 1992.
Adam B. Gilbert has been General Counsel and Secretary of Holdings since
its inception in May 1998 and Executive Vice President -- Legal of Holdings
since August 1998. Mr. Gilbert also serves as an Executive Managing Director of
Insignia/ESG (since July 1998) and General Counsel and Secretary of Insignia
(since March 1998). Prior to March 1998, Mr. Gilbert was a partner in the law
firm of Nixon, Hargrave, Devans & Doyle, LLP, New York, New York.
Edward S. Gordon has been a member of the Office of the Chairman of
Holdings since its inception in May 1998. Mr. Gordon also serves as Chairman of
Insignia/ESG (since June 1996) and a member of the Office of the Chairman of
Insignia (since June 1996). He is also the founder of ESG, which was acquired by
Insignia in June 1996.
Ronald Uretta has been a member of the Office of the Chairman, Chief
Operating Officer and Treasurer of Holdings since August 1998. Mr. Uretta also
serves as Chief Operating Officer and Treasurer of Insignia.
There is no family relationship between any of the executive officers of
Holdings. Robin L. Farkas is the father of Andrew L. Farkas.
COMMITTEES OF THE HOLDINGS BOARD
In order to facilitate the activities of the Holdings Board following the
Distribution, it has created the following standing committees: an Executive
Committee, an Audit Committee and a Compensation Committee. The Holdings Board
will not have a standing nominating committee. The functions normally performed
by a nominating committee will be performed by the Holdings Board as a whole.
The committees, their primary functions and their memberships are as follows:
Executive Committee -- This Committee has the authority of the
Holdings Board to act on most matters during intervals between meetings of
the Board of Directors. The members of the Executive Committee are Andrew
L. Farkas (Chairman), Robin L. Farkas, Mr. Siegel, Mr. Koen and Mr.
Huntley.
Audit Committee -- This Committee will make recommendations to the
Holdings Board with respect to the appointment of independent public
accountants, review significant audit and accounting policies and
practices, meet with Holdings' independent public accountants concerning,
among other things, the scope of audits and reports, and review the
performance of the overall accounting and financial controls of Holdings.
The members of the Audit Committee are Mr. Denison (Chairman) and Mr.
Zelnick.
Compensation Committee -- This Committee has the responsibility for
reviewing and approving the compensation and benefits of executive
officers, advising management regarding benefits, including
44
<PAGE> 51
bonuses, and other terms and conditions of compensation of other employees,
administering Holdings' incentive compensation plans, including the Holding
1998 Stock Incentive Plan (the "Holdings Stock Plan"), and reviewing and
recommending compensation of directors. The members of the Compensation
Committee are Mr. Denison (Chairman) and Mr. Zelnick.
Nominations for election to the Holdings Board may be made by the Holdings
Board, by a nominating committee appointed by the Holdings Board or by any
stockholder entitled to vote for the election of directors as described below.
The By-laws establish an advance notice procedure for the nomination, other than
by or at the direction of the Holdings Board or a committee thereof, of
candidates for election as directors. Notice of director nominations must be
timely given in writing to the Secretary of Holdings prior to the meeting at
which the directors are to be elected. To be timely, notice must be delivered to
or mailed and received at the principal executive offices of Holdings not less
than 50 nor more than 80 days prior to the scheduled date of the annual meeting
of the stockholders or special meeting of stockholders called by the Board of
Directors for the purpose of electing directors, provided, however, that if less
than 60 days' notice or prior public disclosure of the date of the meeting is
given or made to stockholders, notice by the stockholder to be timely must be so
delivered or mailed and received not later than the close of business on the
tenth day following the earlier of (i) the day on which such notice of the date
of the meeting was mailed, or (ii) the day on which such public disclosure was
made. Notice to Holdings from a stockholder who proposes to nominate a person at
a meeting for election as a director must contain all information about such
person that would be required to be included in a proxy statement soliciting
proxies for the election of the proposed nominee (including such person's
written consent to serve as a director if so elected) and certain information
about the stockholder proposing to nominate that person. If the chairman of the
meeting of stockholders determines that a person was not nominated in accordance
with the nomination procedure, such nomination will be disregarded.
DIRECTORS' COMPENSATION
Each of Holdings' directors who is not an employee of Holdings will receive
a fee of $25,000 per year for serving as a director. Each director who is not a
full-time employee of Holdings also may receive a bonus based on Holdings'
performance. Each director who is not a full-time employee of Holdings is
eligible to participate in the Holdings Stock Plan, which provides for each
non-employee director to receive at the time of his initial election an option
to purchase 20,000 shares of Holdings Common Stock and to receive an additional
option each year thereafter to purchase 2,000 shares, in each case at the then
fair market value of the Holdings Common Stock.
45
<PAGE> 52
EXECUTIVE COMPENSATION
Prior to the Distribution, Holdings has been a wholly-owned subsidiary of
Insignia and Holdings' officers and directors have not been separately
compensated for acting in such capacities. The following Summary Compensation
Table sets forth the cash compensation and certain other components of the
compensation of Andrew L. Farkas, the Chief Executive Officer of Holdings, and
the four other executive officers of Holdings who were paid over $100,000 for
services rendered to Insignia in 1997 and who served as executive officers of
Insignia at December 31, 1997 (including Mr. Farkas, the "Named Executive
Officers"). Compensation and benefits to be provided by Holdings to its
executive officers will be governed, in part, by the employment agreements
between such officers and Holdings. See "-- EMPLOYMENT AGREEMENTS." In addition,
certain of the Named Executive Officers and certain key personnel of Holdings
have been granted, effective at the Time of the Distribution, an aggregate of
approximately 1,100,000 options to purchase Holdings Common Stock under the
Holdings Stock Plan. See "-- COMPENSATION PURSUANT TO PLANS.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------
AWARDS
ANNUAL COMPENSATION -------------------------
-------------------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)
- --------------------------- ---- --------- --------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Andrew L. Farkas 1997 600,000 2,000,000 153,329(a) -- 61,500(b)
Chairman, President, and 1996 600,000 1,450,000 151,055(c) 300,000(j) 58,500(b)
Chief Executive Officer 1995 600,000 1,450,000 233,636(d) 628,000 48,000(b)
Edward S. Gordon 1997 1,000,000 1,334,000 322,546(e)(f) -- 3,200(b)
Office of the 1996(i) 505,130 -- 83,377(e)(f) 250,000(g) --
Chairman of Insignia
Stephen B. Siegel 1997 1,000,613 2,400,000 998,376(e)(f) 374,063(k) 50,000(l) 4,056(b)
Chairman, President and 1996(i) 303,333 300,000 284,117(e)(f) 75,000(h) 6,500(b)
Chief Executive Officer
of Insignia/ESG
Frank M. Garrison 1997 300,000 500,000 --(f) -- 21,000(b)
Executive 1996 250,000 400,000 (f) -- 3,000(b)
Managing Director 1995 199,667 325,000 (f) 190,000 3,000(b)
James A. Aston 1997 300,000 500,000 --(f) -- 3,200(b)
Office of the 1996 250,000 400,000 (f) -- 3,000(b)
Chairman and Chief 1995 194,900 325,000 (f) 250,000 3,000(b)
Financial Officer
</TABLE>
- ---------------
(a) Represents forgiveness of $77,350 principal and $1,875 interest related to
a $400,000 loan in accordance with the Employment Agreement dated August 1,
1993. Prerequisites totaled $74,104 including $58,633 for personal tax
return assistance.
(b) Represents Insignia's contribution under its 401(k) Plan and 401(k)
Restoration Plan.
(c) Represents forgiveness of $100,000 principal and $7,641 interest related to
a $400,000 loan in accordance with the Employment Agreement dated August 1,
1993. Perquisites totaled $43,414 including $30,267 for personal use of
leased aircraft.
(d) Represents forgiveness of $100,000 principal and $18,000 interest to a
$400,000 loan in accordance with the Employment Agreement dated August 1,
1993. Perquisites totaled $115,636 including $37,284 for personal use of
leased aircraft and $32,231 for personal tax return assistance.
(e) Sales commissions. Does not include certain advance payments with respect
to a non-compete agreement. See "Executive Compensation -- Employment
Agreements."
(f) Total perquisites did not exceed the lesser of $50,000 or 10% of total
salary and bonus.
(g) Does not include options to purchase 840,679 shares assumed by the Company
in the acquisition of ESG.
(h) Does not include options to purchase 146,680 shares assumed by the Company
in the acquisition of ESG.
(i) Employment began on July 1, 1996.
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<PAGE> 53
(j) Granted on February 20, 1996 and disclosed in the Proxy Statement for the
Annual Meeting of Stockholders held on May 23, 1996.
(k) Restricted stock award for 17,500 shares of Insignia Common Stock.
Valuation based on $21.375 per share, the fair market value on the date of
the award. The restrictions lapse for 25% of the award after 18 months, 25%
after 36 months and 50% after 60 months.
(l) Does not include repriced options replacing those originally granted in
1996.
INSIGNIA OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table summarizes the terms of stock options granted by
Insignia to each of the Named Executive Officers during 1997. All of the options
referred to in the table below are nonqualified stock options granted pursuant
to Insignia's 1992 Stock Incentive Plan, as amended (the "Insignia 1992 Stock
Plan"), at the fair market value on the date of grant and are for the purchase
of Insignia Common Stock. In connection with the Distribution, all then
outstanding options held by Insignia employees and consultants who become
employees of Holdings or any affiliate, including those that are held by the
Named Executive Officers, will be converted into options to purchase Holdings
Common Stock and will be covered by the Holdings Stock Plan, except that options
and warrants held by Messrs. Farkas, Aston and Garrison and certain other
employees and certain options held by Mr. Siegel will be purchased for a cash
payment by Insignia. See "-- EMPLOYMENT AGREEMENTS."
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERMS(A)
---------------------------------------------------- --------------------------
% OF TOTAL
OPTIONS/SARS EXERCISE
GRANTED TO OR BASE
EMPLOYEES IN PRICE
OPTIONS/SARS FISCAL YEAR ($/SHARE) EXPIRATION
NAME GRANTED(#) (B) (C) DATE 5% 10%
---- ------------ ------------ --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Andrew L. Farkas......... none
Edward S. Gordon......... none
Stephen B. Siegel........ 125,000(d) 13.4% $16.4375 7/21/02 $567,675(e) $1,254,413(e)
Frank M. Garrison........ none
James A. Aston........... none
</TABLE>
- ---------------
(a) The dollar amounts under these columns are the result of calculations at 5%
and 10% rates set by the SEC and therefore are not intended to forecast
possible future appreciation, if any, of the Insignia Common Stock price.
(b) During the year ended December 31, 1997, stock options representing an
aggregate of 935,250 shares of Insignia Common Stock were issued to all
employees as a group.
(c) Exercise prices represent the fair market value, as determined by the
Insignia Board, on the date of grant. The exercise price may be paid in
cash, in shares of Insignia Common Stock valued at fair market value on the
date of exercise, or a combination thereof.
(d) Includes options to purchase 75,000 shares repriced to replace options
originally issued July 1, 1996 and options to purchase 25,000 shares
repriced to replace options originally issued February 21, 1997. All such
options become exercisable in five equal annual installments, the first
installment becoming exercisable six months after the date of grant.
(e) Represents gain before income taxes; the fair market value of the Insignia
Common Stock on July 21, 1997 (the date of the grant), as determined by the
Insignia Board, was $16.4375 per share.
47
<PAGE> 54
AGGREGATED INSIGNIA OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table summarizes, for each of the Named Executive Officers,
information concerning the exercise of stock options during fiscal 1997 and the
total number of unexercised stock options and the aggregate dollar value of
in-the-money unexercised stock options held at December 31, 1997. All of the
stock options referenced below are for Insignia Common Stock and were awarded
pursuant to the Insignia 1992 Stock Plan. In connection with the Distribution,
all then outstanding options held by Insignia employees and consultants who
become employees of or consultants to Holdings or any affiliate, including those
that are held by the Named Executive Officers, will be converted into options to
purchase Holdings Common Stock and will be covered by Holdings Stock Plan,
except that options and warrants owned by Messrs. Farkas, Aston and Garrison and
certain options held by Mr. Siegel will be purchased for a cash payment by
Insignia. See "-- EMPLOYMENT AND CONSULTING AGREEMENTS."
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT FISCAL
FISCAL YEAR-END(#) YEAR-END($)(A)
VALUE ---------------------- ----------------------
SHARES ACQUIRED REALIZED EXERCISABLE(E)/ EXERCISABLE(E)/
NAME ON EXERCISE(#) ($) UNEXERCISABLE(U) UNEXERCISABLE(U)
- ---- --------------- ----------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Andrew L. Farkas.......... none 748,000(E) $6,330,750(E)
180,000(U) 630,000(U)
------- ----------
928,000 $6,960,750
======= ==========
Edward S. Gordon.......... 840,679(b) $12,921,473 50,000(E) $ -0-(E)
200,000(U) -0-(U)
------- ----------
250,000 $ -0-
======= ==========
Stephen B. Siegel......... none 146,680(E)(c) $2,470,332(E)(c)
125,000(U) 820,313(U)
------- ----------
271,680 $3,290,645
======= ==========
Frank M. Garrison......... 8,890 $ 166,132 168,500(E) $2,195,742(E)
112,000(U) 1,277,863(U)
------- ----------
280,500 $3,473,605
======= ==========
James A. Aston............ none 239,890(E) $2,836,800(E)
78,000(U) 911,375(U)
------- ----------
317,890 $3,748,175
======= ==========
</TABLE>
- ---------------
(a) Based on the closing price of Insignia Common Stock on the NYSE on December
31, 1997 of $23.00 per share.
(b) Includes options to purchase 840,679 shares assumed by Insignia in the
acquisition of ESG.
(c) Includes options to purchase 146,680 shares assumed by Insignia in the
acquisition of ESG.
COMPENSATION PURSUANT TO PLANS
HOLDINGS STOCK PLAN
At the Insignia Meeting, Insignia's stockholders will be asked to approve
the Holdings Stock Plan which is intended to enhance the profitability and value
of Holdings for the benefit of its stockholders by enabling Holdings (i) to
offer stock-based incentives to employees and consultants of Holdings and its
affiliates (as defined in the Holdings Stock Plan), thereby creating a means to
raise the level of stock ownership by such individuals in order to attract,
retain and reward such individuals and strengthen the mutuality of interests
between such individuals and stockholders, and (ii) to grant nondiscretionary,
nonqualified stock options to non-employee directors, thereby creating a means
to attract, retain and reward such non-employee directors
48
<PAGE> 55
and strengthen the mutuality of interests between non-employee directors and
stockholders. The following description of the Holdings Stock Plan is a summary
and is qualified in its entirety by reference to the Holdings Stock Plan, a copy
of which may be obtained upon written request to Holdings' Investor Relations
Department at 200 Park Avenue, New York, NY 10166.
Administration
The Holdings Stock Plan will be administered and interpreted by the
Compensation Committee of the Holdings Board (which must consist of two or more
non-employee directors, each of whom is intended to be a non-employee director
as defined in Rule 16b-3 under the Exchange Act ("Rule 16b-3") and an outside
director as defined under Section 162(m) of the Code). If no Compensation
Committee exists which has the authority to administer the Holdings Stock Plan,
the functions of the Compensation Committee will be exercised by the Holdings
Board.
The Compensation Committee will have the full authority to administer and
interpret the Holdings Stock Plan (except that with respect to awards to
non-employee directors, the Holdings Stock Plan will be administered by the
Holdings Board), to grant discretionary awards under the Holdings Stock Plan, to
determine the persons to whom awards will be granted, to determine the types of
awards to be granted, to determine the terms and conditions of each award, to
determine whether, to what extent and under what circumstances to provide loans
to participants (other than non-employee directors) in order to exercise stock
options or to purchase awards (including shares of Holdings Common Stock), to
determine the number of shares of Holdings Common Stock to be covered by each
award, to prescribe the form or forms of instruments evidencing awards and to
make all other determinations in connection with the Holdings Stock Plan and the
awards thereunder as the Compensation Committee (or the Holdings Board, in the
case of non-employee directors' awards), in its sole discretion, deems necessary
or desirable.
The terms and conditions of individual awards will be set forth in written
agreements which will be consistent with the terms of the Holdings Stock Plan.
Awards under the Holdings Stock Plan may not be made on or after the tenth
anniversary of the earlier of the adoption of the Holdings Stock Plan or the
date of stockholder approval, but awards granted prior to such date may extend
beyond that date.
Eligibility and Types of Awards
All employees and consultants of Holdings and its affiliates (including
prospective employees and consultants) are eligible to be granted nonqualified
stock options, stock appreciation rights, restricted stock, performance shares,
performance units, other stock-based awards and awards providing benefits
similar to those listed above which are designed to meet the requirements of
non-U.S. jurisdictions under the Holdings Stock Plan. In addition, employees of
Holdings and its affiliates that qualify as subsidiaries or parent corporations
(within the meaning of Section 424 of the Code) are eligible to be granted
incentive stock options ("ISOs") under the Holdings Stock Plan. Non-employee
directors of Holdings are eligible to receive nondiscretionary grants of
nonqualified stock options.
Available Shares
The aggregate number of shares of Holdings Common Stock which may be issued
or used for reference purposes under the Holdings Stock Plan or with respect to
which awards may be granted may not exceed the greater of (i) 3,500,000 shares
of Holdings Common Stock with respect to all types of awards or (ii) 12% of the
number of shares of Holdings Common Stock issued and outstanding (assuming full
dilution for all outstanding awards and equity convertible into Holdings Common
Stock), determined as of the close of the most recent fiscal quarter of
Holdings, with respect to all types of awards other than ISOs.
The maximum number of shares of Holdings Common Stock with respect to which
any option, stock appreciation right, award of performance shares or award of
restricted stock for which the grant of such award or lapse of the relevant
restriction period is subject to the attainment of pre-established performance
goals (in accordance with Section 162(m) of the Code) which may be granted under
the Holdings Stock Plan during any fiscal year of Holdings to any individual
will be 500,000 shares per type of award, provided that the
49
<PAGE> 56
maximum number of shares of Holdings Common Stock for all types of awards does
not exceed 500,000 during any fiscal year. The maximum value at grant of
performance units which may be granted under the Stock Plan during any fiscal
year of Holdings to any individual will be $250,000. To the extent that shares
of Holdings Common Stock for which awards are permitted to be granted to an
individual during a fiscal year are not covered by an award in a fiscal year,
the number of shares of Holdings Common Stock available for awards will
automatically increase in subsequent fiscal years until used.
The number of shares of Holdings Common Stock available for the grant of
awards and the exercise price of an award may be adjusted to reflect any change
in the Holdings' capital structure or business by reason of certain corporate
transactions or events.
Outstanding options held by Insignia employees who become employees of
Holdings or any affiliate (other than options held by Messrs. Farkas, Aston and
Garrison and certain options held by Mr. Siegel) will be converted into options
to purchase shares of Holdings Common Stock and will be covered by the Holdings
Stock Plan.
Awards Under the Holdings Stock Plan
Stock Options. The Compensation Committee may grant nonqualified stock
options and ISOs to purchase shares of Holdings Common Stock. The Compensation
Committee will determine the number of shares of Holdings Common Stock subject
to each option, the term of each option (which may not exceed 10 years (or five
years in the case of an ISO granted to a 10% shareholder)), the exercise price,
the vesting schedule (if any) and the other material terms of each option. No
ISO or nonqualified stock option which is intended to be performance based for
purposes of Section 162(m) of the Code may have an exercise price less than the
fair market value of the Holdings Common Stock at the time of grant (or, in the
case of an ISO granted to a 10% shareholder, 110% of fair market value). Options
will be exercisable at such time or times and subject to such terms and
conditions as determined by the Compensation Committee at grant and the
exercisability of such options may be accelerated by the Compensation Committee
in its sole discretion. Payment of the purchase price may be made: (i) in cash
or by check, bank draft or money order, (ii) through a "cashless exercise"
procedure whereby the recipient delivers irrevocable instructions to a broker to
deliver promptly to Holdings an amount equal to the purchase price, or (iii) on
such other terms and conditions as may be acceptable to the Compensation
Committee or the Holdings Board of Directors, as applicable.
Stock Appreciation Rights. The Compensation Committee may grant stock
appreciation rights ("SARs") either with a stock option which may be exercised
only at such times and to the extent the related option is exercisable ("Tandem
SAR") or independent of a stock option ("Non-Tandem SARs"). An SAR is a right to
receive a payment either in cash or common stock, as the Compensation Committee
may determine, equal in value to the excess of the fair market value of one
share of Holdings Common Stock on the date of exercise over the exercise price
per share established in connection with the grant of the SAR. The exercise
price per share covered by an SAR will be the exercise price per share of the
related option in the case of a Tandem SAR and will be the fair market value of
the Holdings Common Stock on the date of grant in the case of a Non-Tandem SAR.
Restricted Stock. The Compensation Committee may award "restricted" shares
of Holdings Common Stock. Upon the award of restricted stock, the recipient has
all rights of a stockholder with respect to the shares, including the right to
receive dividends, the right to vote the shares of restricted stock and,
conditioned upon full vesting of shares of restricted stock, the right to tender
such shares, subject to the conditions and restrictions generally applicable to
restricted stock or specifically set forth in the recipient's restricted stock
agreement. The Compensation Committee may, in its sole discretion, determine at
grant, that the payment of dividends, if any, shall be deferred until the
expiration of the applicable restriction period. Recipients of restricted stock
are required to enter into a restricted stock agreement with Holdings which
states the restrictions to which the shares are subject and the criteria or date
or dates on which such restrictions will lapse. Within these limits, based on
service, attainment of objective performance goals and such other factors as the
Compensation Committee may determine in its sole discretion, the Compensation
Committee may provide for the lapse of such restrictions or may accelerate or
waive such restrictions at any time. If the grant
50
<PAGE> 57
of restricted stock or the lapse of the relevant restriction is based on the
attainment of objective performance goals, the Compensation Committee shall
establish the performance goals, formulae or standards and the applicable
vesting percentage for the restricted stock award applicable to each participant
while the outcome of the performance goals are substantially uncertain. Such
performance goals may incorporate provisions for disregarding (or adjusting for)
changes in accounting methods, corporate transactions (including without
limitation dispositions and acquisitions) and other similar events or
circumstances. These performance goals shall be based on one or more of the
performance criteria described under the description of the Executive
Performance Incentive Plan below ("Performance Criteria").
Performance Shares and Performance Unit. The Compensation Committee may
grant performance shares entitling recipients to receive a fixed number of
shares of Common Stock or the cash equivalent thereof, as determined by the
Compensation Committee in its sole discretion, upon the attainment of
performance goals established by the Compensation Committee (based on the
Performance Criteria), based on a specified performance period. The Compensation
Committee may also grant performance units entitling recipients to receive a
value payable in cash or shares of Holdings Common Stock, as determined by the
Compensation Committee, upon the attainment of performance goals established by
the Compensation Committee (based on the Performance Criteria), for a specified
performance cycle. The Compensation Committee may subject such grants of
performance shares and performance units to such vesting and forfeiture
conditions as it deems appropriate.
Other Stock-Based Awards. The Compensation Committee may grant awards of
Holdings Common Stock and other awards that are valued in whole or in part by
reference to, or are payable in or otherwise based on, Holdings Common Stock and
may be granted either alone or in addition to or in tandem with stock options,
stock appreciation rights, restricted stock, performance shares or performance
units. Subject to the provisions of the Holdings Stock Plan, the Compensation
Committee has the authority to determine the recipients to whom and the time or
times at which such awards will be made, the number of shares of Holdings Common
Stock to be awarded pursuant to such awards and all other conditions of the
awards. The Compensation Committee may also provide for the grant of Holdings
Common Stock under such awards upon the completion of a specified performance
period. The Compensation Committee also determines the purchase price to be
paid, if any, by a recipient to purchase other stock-based awards (including
without limitation shares of Holdings Common Stock). The purchase of shares of
Holdings Common Stock or other stock-based awards may be made on either an
after-tax or pre-tax basis, as determined by the Compensation Committee;
provided, however, that if the purchase is made on a pre-tax basis, such
purchase will be made pursuant to a deferred compensation program established by
the Compensation Committee, which will be deemed to be part of the Holdings
Stock Plan.
Supplemental Stock Purchase and Loan Program. The Compensation Committee
has adopted as an "Other Stock-Based Award" under the Holdings Stock Plan, a
supplemental stock purchase and loan program (the "Supplemental Stock Purchase
and Loan Program") for employees of Holdings and its designated affiliates whose
target annual base compensation equals or exceeds $100,000 ("Covered
Employees"). Covered Employees may purchase shares of Holdings Common Stock
through the Holdings Stock Plan, subject to and in accordance with terms and
conditions set by the Compensation Committee. Under the Supplemental Stock
Purchase and Loan Program, purchases of shares of Holdings Common Stock may be
made by means of check, payroll deduction or pursuant to a loan granted to the
Covered Employee. Purchases generally may be made on a quarterly basis at a
price per share equal to 100% of fair market value of a share of Holdings Common
Stock on the last business day of the applicable calendar quarter.
51
<PAGE> 58
Covered Employees may borrow up to 50% of their base compensation to
purchase shares of Holdings Common Stock at an interest rate set by the
Compensation Committee, but in no event less than the rate at which Holdings may
borrow from its principal lenders. Loans may not exceed five years, may be
repaid by payroll deductions and will be secured by the Holdings Common Stock
purchased with such loans. Upon a Covered Employee's termination of employment,
any outstanding loan amounts (including accrued and unpaid interest) will be due
and payable within 30 days of such event.
Change in Control
Unless determined otherwise by the Compensation Committee at the time of
grant, and except to the extent provided in the applicable award agreement, the
recipient's employment agreement or other agreement approved by the Compensation
Committee, no accelerated vesting or lapsing of restrictions will occur upon a
change in control of Holdings (as defined in the Holdings Stock Plan). The
Compensation Committee may, in its sole discretion, provide for accelerated
vesting of an award at any time. Upon a change in control of Holdings, options
granted to non-employee directors will be subject to the rules described below.
Non-Employee Director Stock Option Grants
The Holdings Stock Plan authorizes the automatic grant of nonqualified
stock options to each non-employee director, without further action by the
Holdings Board or the stockholders, as follows: (i) options to purchase 20,000
shares of Holdings Common Stock will be granted to each non-employee director as
of the date he or she begins service as a non-employee director on the Holdings
Board; and (ii) options to purchase 2,000 shares of Holdings Common Stock will
be granted to each non-employee director as of the first day of the month
following each annual meeting of stockholders of Holdings. The exercise price
per share of such options will be determined by the Holdings Board at the time
of grant but may not be less than the fair market value of the Holdings Common
Stock at the time of grant. The term of each such option will be five years.
Options granted to non-employee directors pursuant to (i) above will vest and
become exercisable at the rate of 5,000 shares of Holdings Common Stock on or
after each anniversary of the date that is six months and one day after the date
of grant. Options granted to non-employee directors pursuant to (ii) above will
vest and become exercisable on or after six months and one day after the date of
grant. All options granted to non-employee directors and not previously
exercisable will become fully exercisable immediately upon a change in control
(as defined in the Holdings Stock Plan) of Holdings.
Amendment and Termination
Notwithstanding any other provision of the Holdings Stock Plan, the
Holdings Board or the Compensation Committee may at any time, amend any or all
of the provisions of the Holdings Stock Plan, or suspend or terminate it
entirely, retroactively or otherwise; provided, however, that, unless otherwise
required by law or specifically provided in the Holdings Stock Plan, the rights
of a participant with respect to awards granted prior to such amendment,
suspension or termination, may not be impaired without the consent of such
participant and, provided further, without the approval of the stockholders of
Holdings in accordance with the laws of the State of Delaware, to the extent
required under Section 162(m) of the Code, or to the extent applicable to ISOs,
Section 422 of the Code, no amendment may be made which would: (i) increase the
aggregate number of shares of Holdings Common Stock that may be issued; (ii)
increase the maximum individual participant share limitations for a fiscal year;
(iii) change the classification of employees or consultants eligible to receive
awards; (iv) decrease the minimum exercise price of any stock option or SAR; (v)
extend the maximum option term; (vi) materially alter the Performance Criteria;
or (vii) require stockholder approval in order for the Holdings Stock Plan to
continue to comply with the applicable provisions of Section 162(m) of the Code
or, to the extent applicable to ISOs, Section 422 of the Code.
Future Awards; Miscellaneous
Awards granted under the Holdings Stock Plan are generally nontransferable,
except that the Compensation Committee may, in its sole discretion, permit the
transfer of nonqualified stock options (other than those granted to non-employee
directors) at the time of grant or thereafter.
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<PAGE> 59
The Holdings Stock Plan is not subject to any of the requirements of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The
Holdings Stock Plan is not, nor is it intended to be, qualified under Section
401(a) of the Code.
Because future awards under the proposed Holdings Stock Plan will be based
upon prospective factors including the nature of services to be rendered by
prospective employees of Holdings and their potential contributions to the
success of Holdings, actual awards cannot be determined at this time, except
that effective upon the Distribution, certain of the Named Executive Officers
and certain other key personnel of Holdings will be granted an aggregate of
approximately 1,100,000 options to purchase Holdings Common Stock, of which Mr.
Siegel will be granted 100,000 and Messrs. Farkas, Aston and Garrison will each
be granted 50,000 options.
HOLDINGS EXECUTIVE PERFORMANCE INCENTIVE PLAN
At the Insignia Meeting, Insignia's stockholders will be asked to approve
the Holdings Executive Performance Incentive Plan (the "Incentive Plan"), which
will be effective as of the Time of Distribution. The Incentive Plan provides
for annual incentive payments to key executives of Holdings, its subsidiaries or
its parent, if any, (as such terms are defined in the Incentive Plan) based upon
the performance of Holdings (or a subsidiary division or other operational
unit). The Incentive Plan is based on a strong pay-for-performance philosophy
and provides a direct linkage between Holdings' performance and compensation. A
central element of this philosophy is to link a significant portion of annual
cash compensation to the attainment of annual financial objectives. The
following description of the Incentive Plan is a summary and is qualified in its
entirety by reference to the Incentive Plan, a copy of which may be obtained
upon written request to Holdings' Investor Relations Department at 200 Park
Avenue, New York, New York 10166.
Section 162(m) of the Code generally disallows a Federal income tax
deduction to any publicly held corporation for compensation paid in excess of $1
million in any taxable year to the chief executive officer or any of the four
other most highly compensated executive officers. Holdings intends to structure
awards under the Incentive Plan so that compensation resulting therefrom would
be qualified "performance based compensation" eligible for continued
deductibility.
No individual may receive for any fiscal year an amount under the Incentive
Plan which exceeds $3,000,000.
Plan Administration. The Incentive Plan will be administered by the
Compensation Committee which is intended to consist entirely of non-employee
directors who meet the criteria of "outside director" under Section 162(m) of
the Code. The Compensation Committee shall select the key executives of Holdings
who shall receive awards, the target pay-out level and the performance targets.
The Compensation Committee will certify the level of attainment of performance
targets. Currently, approximately 8 key executives are expected to be eligible
to receive awards under the Incentive Plan.
Performance Criteria. Participants in the Incentive Plan will be eligible
to receive an annual cash performance award based on attainment by Holdings
and/or a subsidiary, division or other operational unit of Holdings of specified
performance goals to be established for each fiscal year by the Compensation
Committee. The performance award will be payable as soon as administratively
feasible following the end of the fiscal year with respect to which the payment
relates, but only after the Compensation Committee certifies that the
performance goals have been attained. A participant and Holdings may agree to
defer all or a portion of a performance award in a written agreement executed
prior to the beginning of the fiscal year to which the performance award relates
in accordance with any deferred compensation program in effect applicable to
such participant. Any deferred performance award will increase (between the date
on which it is credited to any deferred compensation program and the payment
date) by a measuring factor for each fiscal year greater than the interest rate
on thirty year Treasury Bonds on the first business day of such fiscal year
compounded annually, as elected by the participant in the deferral agreement.
Code Section 162(m) requires that performance awards be based upon
objective performance measures. The performance goals will be based on one or
more of the following criteria: (i) revenues, income before
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income taxes and extraordinary income, net income, earnings before income tax,
earnings before interest, taxes, depreciation and amortization, funds from
operation of real estate investments or a combination of any or all of the
foregoing; (ii) after-tax or pre-tax profits; (iii) operational cash flow; (iv)
level of, reduction of, or other specified objectives with regard to Holdings'
bank debt or other long-term or short-term public or private debt or other
similar financial obligations; (v) earnings per share or earnings per share from
continuing operations; (vi) return on capital employed or return on invested
capital; (vii) after-tax or pre-tax return on stockholders' equity; (viii)
economic value added targets; (ix) fair market value of the shares of Holdings
Common Stock; and (x) the growth in the value of an investment in Holdings
Common Stock assuming the reinvestment of dividends. In addition, such
performance goals may be based upon the attainment of specified levels of
Holdings (or a subsidiary, division or other operational unit of Holdings)
performance under one or more of the measures described above relative to the
performance of other corporations. To the extent permitted under the Code, the
Compensation Committee may: (i) designate additional business criteria on which
the performance goals may be based; or (ii) adjust, modify or amend the
aforementioned business criteria.
Term and Amendment of the Incentive Plan. The Incentive Plan will be
effective for all fiscal years following the Time of Distribution (including the
initial short fiscal year). The Incentive Plan may be amended or discontinued by
the Holdings Board at any time. However, stockholder approval of Holdings is
required for an amendment that increases the maximum payment which may be made
to any individual for any fiscal year above the award limits outlined above and
specified in the Incentive Plan, materially alters the business criteria on
which performance goals are based, increases the maximum annual measuring factor
for deferred amounts, changes the class of eligible employees or otherwise
requires stockholder approval under Code Section 162(m).
Future Plan Awards. Because Holdings did not exist as a stand-alone
business until recently and because future awards under the proposed Incentive
Plan will be based upon the future performance of Holdings, actual payments
cannot be determined at this time.
EMPLOYMENT AGREEMENTS
Following is a description of employment agreements between Holdings and
the Named Executives.
Andrew L. Farkas
Andrew L. Farkas will be employed by Holdings pursuant to an employment
agreement, effective as of the Time of Distribution (the "Farkas Employment
Agreement"), which provides for him to serve as Chairman of the Board of
Directors and Chief Executive Officer of Holdings until the date three years
from the Time of Distribution (the "Expiration Date"), or such earlier date as
provided therein. Mr. Farkas is to receive an annual salary of $750,000 (the
"Base Salary"), subject to such discretionary increases as may be determined by
the Holdings' Board and a bonus to be determined annually by the Holdings Board.
Mr. Farkas also will be entitled to certain perquisites. Mr. Farkas has agreed
that for one year after the termination of the Farkas Employment Agreement, he
will not solicit business from any of Holdings' customers or clients with whom
he has had "material contact" (as defined in the Farkas Employment Agreement)
during the twelve month period preceding the date of cessation of his employment
with Holdings, and he will neither solicit employees of Holdings to work for any
direct competitor of Holdings nor purchase any limited partner units of
partnerships controlled directly or indirectly by Holdings for two years after
the termination of the Farkas Employment Agreement.
Mr. Farkas's employment will be terminated in the event that Mr. Farkas is
disabled during his employment with Holdings, whereupon Insignia will pay 75% of
his Base Fee for a period of time equal to twice the remaining term under the
Farkas Employment Agreement immediately prior to his termination (but not less
than four years). If Mr. Farkas dies during the term of the Farkas Employment
Agreement, Holdings will pay to his estate his salary through the Expiration
Date. If Mr. Farkas is terminated without cause and such termination is not in
connection with a Significant Transaction (as defined below), Holdings will pay
the Base Salary through the Expiration Date. In addition, if Mr. Farkas dies, is
disabled or is terminated without
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cause during the term of the Farkas Employment Agreement, Holdings will continue
to pay all perquisites to which Mr. Farkas is entitled and will pay all bonuses
to be paid upon the occurrence of a Significant Transaction (as defined below)
or a Material Asset Disposition (as defined below), to Mr. Farkas or his estate
if the Significant Transaction or the Material Asset Disposition giving rise to
such payment occurs, or a definitive agreement regarding such event has been
executed, before or within 180 days after his death or disability or, in the
case of a termination without cause, on or before the Expiration Date.
The Farkas Employment Agreement provides that upon the occurrence of any
one of several events or transactions involving Holdings set forth in the Farkas
Employment Agreement (each, a "Significant Transaction"), including, but not
limited to, any change of control of Holdings, Holdings shall pay to Mr. Farkas
an amount equal to 1.0% of the total equity market capitalization of Holdings on
the date the Significant Transaction occurred. Upon the occurrence of a
Significant Transaction and/or upon termination without cause, all options,
warrants and restricted stock in Holdings granted to Mr. Farkas will vest
immediately and be exercisable. The Farkas Employment Agreement also provides
that in the event that Holdings enters into a transaction resulting in (i) a
majority of the equity interest in Holdings being beneficially owned by a person
or persons who is not an affiliate of Holdings, (ii) the sale or other
disposition to a third party of one or more of Insignia's subsidiaries,
divisions or operating businesses or (iii) the consummation of the Merger (each,
a "Material Asset Disposition"), Holdings shall pay to Mr. Farkas a cash bonus
equal to 1.0% of the consideration received by Holdings and its stockholders or,
in the event of the consummation of the Merger, 1.0% of the consideration
received by Insignia and its stockholders (not including the value of the
Distribution), as a result of such Material Asset Disposition. As a result,
Holdings will pay Mr. Farkas a lump sum payment of $5,049,000 after the
consummation of the Merger. In addition, upon the consummation of the Merger,
Mr. Farkas will be paid a pro rata portion of the annual bonus he received from
Insignia with respect to 1997 based on the period from January 1, 1998 to the
effective time of the Merger.
To the extent Mr. Farkas would be subject to the excise tax under Section
4999 of the Code, on amounts or benefits to be received from Holdings required
to be included in the calculation of parachute payments for purposes of Sections
280G and 4999 of the Code, the amounts of any such payments will be
automatically reduced to an amount one dollar less than an amount that would
subject Mr. Farkas to the excise tax under Section 4999 of the Code, provided
that the automatic reduction shall apply only if the reduced payments received
by Mr. Farkas (after taking into account further reductions for applicable
taxes) would be greater than his unreduced payments, after applicable taxes.
Stephen B. Siegel
Holdings, Insignia/ESG and Stephen B. Siegel are parties to a second
amended and restated employment agreement, dated as of July 31, 1998 (the
"Siegel Employment Agreement"), which expires on December 31, 2002, subject to
earlier termination or extension as provided for in the agreement. The Siegel
Employment Agreement provides that Mr. Siegel shall serve as President of
Holdings and Chairman and Chief Executive Officer of Insignia/ESG, among other
duties. Under the Siegel Employment Agreement, Mr. Siegel (i) receives a base
salary of $1,000,000 per annum, (ii) receives 30% of all promotional commission
revenues earned, received and retained by Insignia/ESG in which Mr. Siegel has
rendered services recognized by Insignia/ESG, and (iii) receives 50% of all net
commission revenues earned, received and retained by Insignia/ESG in which Mr.
Siegel has rendered services recognized by Insignia/ESG. The Siegel Employment
Agreement also provides that Mr. Siegel will receive, for each year or part
thereof during the employment term, an amount up to a maximum of $400,000
annually equal to 0.6% of the gross commissions earned, received and retained by
Insignia/ESG, but only to the extent that Insignia/ESG and all of its wholly
owned subsidiaries meet or exceed its annual Net EBITDA (as defined below)
budget, as established by Holdings' Compensation Committee, after reduction for
all bonus compensation paid to employees of Insignia/ESG (including the imputed
bonus of Mr. Siegel), all Insignia/ESG overhead allocations and all other
compensation paid to Mr. Siegel, which annual Net EBITDA budget shall be
increased by Holdings' Compensation Committee for each subsequent year by an
amount of no more than 10% of the annual Net EBITDA budget for the immediately
preceding year. "Net EBITDA" means earnings
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<PAGE> 62
before interest, taxes, depreciation and amortization, computed in accordance
with generally accepted accounting principles, consistently applied. The Siegel
Employment Agreement further provides that Mr. Siegel will receive for each year
an annual bonus of 10%, or such lesser percentage as Holdings' Compensation
Committee, in its sole and absolute discretion, shall determine, of the increase
in annual Net EBITDA reduced by all bonus compensation paid to the employees of
Insignia/ESG (including the imputed bonus of Mr. Siegel), all Insignia/ESG
overhead allocations and all compensation paid to Mr. Siegel over the annual Net
EBITDA for the immediately preceding year. Such bonus shall be paid to Mr.
Siegel within 120 days after the end of Holdings' fiscal year.
In addition, upon the consummation of a transaction resulting in a change
in the ownership of a majority of the issued and outstanding shares of Holdings
Common Stock and a change in the majority of the Holdings Board, Mr. Siegel will
receive a payment in the amount of 0.5% of the consideration received by
Holdings and its shareholders in such transaction (excluding the assumption of
liabilities), which payment shall be made upon the earlier of the termination of
Mr. Siegel's employment with Holdings, other than for cause or voluntary
termination, or the expiration of the term of Mr. Siegel's employment agreement.
Holdings has made a loan to Mr. Siegel in the amount of $1,000,000.
Holdings will forgive the loan ratably over a three-year period beginning July
1, 1998 provided that Mr. Siegel remains employed by Holdings and is not in
material breach of the provisions of the Siegel Employment Agreement. In
addition, Insignia/ESG will purchase, at Insignia/ESG's expense, term life
insurance on the life of Mr. Siegel with a death benefit of $5,000,000, the
beneficiaries of which are to be designated by Mr. Siegel.
Mr. Siegel has agreed not to compete with either Holdings or Insignia/ESG
for two years after the termination of the Siegel Employment Agreement. Upon Mr.
Siegel's death, Holdings or Insignia/ESG shall pay Mr. Siegel's estate
$1,000,000 per annum during the remaining term of the Siegel Employment
Agreement, not to exceed one year. If Mr. Siegel is terminated for cause (as
defined in the Siegel Employment Agreement), Holdings and ESG shall pay Mr.
Siegel his base salary, as in effect, up to and including the date on which the
termination occurred. If Mr. Siegel is terminated without cause, Mr. Siegel
shall, at his election, either observe the non-compete agreement and receive the
compensation provided for in the Siegel Employment Agreement until December 31,
2002 or accept other employment that violates the non-compete provision and
receive $1,000,000 per year until December 31, 2002, less the aggregate amount
of compensation payable to him for such new employment.
Upon the consummation of the Distribution, Mr. Siegel's options to purchase
Insignia Common Stock will be (i) in the case of options granted to Mr. Siegel
by Insignia after Insignia purchased ESG, assumed by Holdings at a price subject
to adjustment of the exercise price in connection with the Distribution; and
(ii) in the case of options granted to Mr. Siegel by ESG that Insignia assumed
when Insignia purchased ESG, purchased by Insignia for a per option cash payment
equal to the difference between the exercise price of such option and $25.
The Siegel Employment Agreement also provides that Mr. Siegel will receive
a grant of options to purchase 100,000 shares of Holdings Common Stock. In
addition, Mr. Siegel is eligible to obtain a loan in the amount of $1,000,000 to
purchase shares of Holdings Common Stock which loan shall be secured by such
shares purchased.
Edward S. Gordon
Holdings also will assume an employment agreement between Insignia,
Insignia/ESG and Edward S. Gordon which expires on June 30, 2001, subject to
earlier termination or extension as provided for in the agreement. Mr. Gordon
(i) receives an annual base salary of $1,000,000 per annum, (ii) received a
one-time grant of options to purchase up to 250,000 shares of Insignia Common
Stock at $27.125 per share that vest in five equal installments commencing on
January 1, 1997 (the "Gordon Options"), and (iii) received the payment of
commissions earned on or prior to December 31, 1996, at certain rates and for
certain identified transactions, each as set forth in the agreement. The
agreement also provides for an annual bonus payment for each year or part
thereof which is subject to a bonus plan (the "Gordon Bonus Plan") which was
approved by Insignia stockholders. The Gordon Bonus Plan provides for an annual
bonus for each year (or part thereof) during the term of the employment
agreement in an amount equal to 0.75% of Insignia/ESG's gross revenues
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for such year (or part thereof), if Insignia/ESG's EBITDA, after adjustment for
any bonus payable under the Gordon Bonus Plan with respect to such year (or part
thereof), is not less than the Target Amount (as defined below) for such year
(or pro rata portion for partial years); provided, however, that in the event
Insignia/ ESG's EBITDA as so calculated is less than the Target Amount (or pro
rata portion for partial years), the amount of such bonus shall be reduced by
the amount of such deficiency. With respect to any year "Target Amount" is
defined as Insignia/ESG's budgeted EBITDA for such year as determined by
Holding's Compensation Committee prior to the commencement of such year (and
which was $14 million for the year ended December 31, 1997) provided, however,
that budgeted EBITDA for any year shall not be more than 110% of the budgeted
EBITDA for the immediately preceding year, and provided further, that the Target
Amount may be increased or decreased from time to time if Holding's Compensation
Committee reasonably determined that anticipated increases or decreases in
Insignia/ESG's EBITDA must be reflected as a result of any acquisitions or
dispositions, respectively, by Insignia/ESG.
Mr. Gordon has agreed not to compete with either Holdings or Insignia/ESG
for five years after the termination of the agreement. As compensation
therefore, Mr. Gordon received a $1,000,000 advance payment on July 1, 1996 to
be allocated over five years.
If Mr. Gordon is terminated for cause (as defined in the agreement),
Insignia/ESG shall pay Mr. Gordon his base salary, as in effect, up to and
including the date on which the termination occurred. Upon termination without
cause, Insignia/ESG shall pay Mr. Gordon $1,200,000 per year until June 30,
2001. Upon termination due to death, Insignia/ESG shall pay Mr. Gordon's estate
$1,200,000 per annum during the remaining term of the agreement, not to exceed
two years.
The Gordon Options will be assumed by Holdings at the Time of Distribution,
and the exercise price will be adjusted to an amount equal to the average
closing price of Holdings Common Stock during a certain period of initial
trading days, as determined by the Insignia Board.
James A. Aston and Frank M. Garrison
Messrs. James A. Aston and Frank M. Garrison are employed by Holdings
pursuant to employment agreements with Holdings, effective as of the Time of
Distribution (the "Executive Employment Agreements"), which provide for Mr.
Aston to serve as a member of the Office of the Chairman and Chief Financial
Officer of Holdings and for Mr. Garrison to serve as a member of the Office of
the Chairman of Holdings until the date three years from the Time of
Distribution (the "Expiration Time") or such earlier date as provided therein.
Messrs. Aston and Garrison each are to receive a base salary of $400,000 per
year subject to such discretionary increases as may be determined by the
Holdings Board, and a bonus to be determined annually by the Holdings Board.
Messrs. Aston and Garrison also will be entitled to certain perquisites. Messrs.
Aston and Garrison each has agreed that for one year after the termination of
his Executive Employment Agreement he will not solicit business from any of
Holdings' customers or clients with whom he has had "material contact" (as
defined in the Executive Employment Agreements) during the twelve month period
preceding the date of cessation of his employment with Holdings, and he will
neither solicit employees of Holdings to work for any direct competitor of
Holdings nor purchase any limited partner units of partnerships controlled
directly or indirectly by Holdings for two years after the termination of his
Executive Employment Agreement.
Each of the Executive Employment Agreements provides that it will be
terminated in the event that either of Messrs. Aston or Garrison, as applicable,
is disabled during his employment with Holdings, whereupon Holdings will pay his
salary through the Expiration Time and will pay all bonuses to be paid upon the
occurrence of a Significant Transaction or a Material Asset Disposition (as
described below) if the event giving rise to such payment occurs, or a
definitive agreement regarding such event is executed before or within 180 days
after such termination. If Messrs. Aston or Garrison dies during the term of his
Executive Employment Agreement, Holdings will pay to his estate his salary
through the Expiration Time, and will pay all bonuses to be paid upon the
occurrence of a Significant Transaction or a Material Asset Disposition if the
event giving rise to such payment occurs, or a definitive agreement regarding
such event is executed before or within 180 days after his death. If Messrs.
Aston or Garrison is terminated without cause, Holdings will pay his salary and
all bonuses to be paid upon the occurrence of a Significant Transaction or a
Material Asset Disposition through the Expiration Time. Upon termination without
cause, or due to Messrs. Aston's or
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Garrison's death or disability, all options and warrants granted to Messrs.
Aston or Garrison will vest immediately and be exercisable.
Upon the occurrence of a Significant Transaction, Messrs. Aston and
Garrison each may elect to convert his Executive Employment Agreement into a
consulting agreement with the same terms and conditions. The Executive
Employment Agreements also provide that upon the occurrence of a Material Asset
Disposition, Holdings will pay each of Messrs. Aston and Garrison a cash bonus
equal to 0.5% (or 0.25% in the event the Executive Employment Agreements are
converted to consulting agreements) of the consideration received by Holdings
and its stockholders (not including the value of the Distribution) or, in the
event of the consummation of the Merger, 0.25% of the consideration received by
Insignia and its stockholders, as a result of such Material Asset Disposition.
As a result, Holdings will pay Messrs. Aston and Garrison a lump sum payment of
$2,524,500 after the consummation of the Merger. In addition, upon the
consummation of the Merger, Messrs. Aston and Garrison will be entitled to a
bonus payment in an amount equal to the pro-rated portion of the 1997 bonus that
each of them received from Insignia, based on the period from January 1, 1998 to
the effective time of the Merger.
To the extent Messrs. Aston or Garrison would be subject to the excise tax
under Section 4999 of the Code on amounts or benefits to be received from
Insignia required to be included in the calculation of parachute payments for
purposes of Sections 280G and 4999 of the Code, the amounts of any such payments
will be automatically reduced to an amount one dollar less than an amount that
would subject Messrs. Aston or Garrison to the excise tax under Section 4999 of
the Code, provided that the automatic reduction shall apply only if the reduced
payments received by Messrs. Aston or Garrison (after taking into account
further reductions for applicable taxes) would be greater than the unreduced
payments to be received by Messrs. Aston or Garrison, after applicable taxes.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, Messrs. Denison and Merril M. Halpern (non-employee directors)
served as members of the Insignia Compensation Committee. None of the proposed
Holdings Compensation Committee members or executive officers have any
relationships which must be disclosed under this caption.
CERTAIN TRANSACTIONS
Affiliates of Apollo Real Estate Investment Fund, L.P. ("Apollo") own an
aggregate of 1,392,916 warrants (the "Apollo/Insignia Warrants") representing
the right to purchase 1,392,916 shares of Insignia Common Stock. At the time of
Distribution, Insignia is expected to distribute to Apollo 928,610 warrants (the
"Apollo/Holdings Warrants") to purchase shares of Holdings Common Stock at an
exercise price of $8.25 per share, which represent two-thirds of the number of
the Apollo/Insignia Warrants.
Upon the consummation of the Distribution, the exercise price of the
Apollo/Insignia Warrants is expected to be adjusted as follows: (a) 77,916
Apollo/Insignia Warrants with an exercise price of $7.50 per share will be
adjusted to an exercise price of $2.00 per share; (b) 875,000 Apollo/Insignia
Warrants with an exercise price of $8.00 per share will be adjusted to an
exercise price of $2.50 per share; and (c) 440,000 Apollo/Insignia Warrants with
an exercise price of $9.50 per share will be adjusted to an exercise price of
$4.00 per share.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sole outstanding share of Holdings capital stock currently is and until
immediately prior to the Distribution will continue to be, held beneficially by
Insignia through its wholly-owned subsidiary Insignia Capital Corporation. The
following table sets forth, as of July 31, 1998 or such other date as indicated
in the footnotes to the table, the beneficial ownership of Insignia Common Stock
by each director, Named Executive Officer, the executive officers and directors
of Holdings as a group, and each stockholder known to management of Insignia to
beneficially own more than five percent of the outstanding Insignia Common
Stock. Also set forth below are the number of shares of Holdings Common Stock
that each such person, entity and group will own immediately after the
Distribution, on a pro forma basis, assuming no change in ownership of the
outstanding shares of Insignia Common Stock. The beneficial ownership of
Holdings Common Stock following the Distribution shown in the table below does
not include shares issuable upon the exercise of stock options that will be
granted upon the conversion of outstanding Insignia stock options because the
number of such shares is presently indeterminable. Unless otherwise indicated,
Insignia and Holdings believe that each beneficial owner set forth in the table
has sole voting and investment power.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF
INSIGNIA COMMON STOCK HOLDINGS COMMON STOCK
------------------------- -----------------------
NAME AND ADDRESS SHARES PERCENT SHARES PERCENT
---------------- --------- ------- ---------- -------
<S> <C> <C> <C> <C>
Metropolitan Acquisition Partners IV,
L.P....................................... 2,237,258 7.0% 1,491,505 7.0%
c/o Metro Shelter Directives, Inc.
One Insignia Financial Plaza
Greenville, South Carolina 29602
Andrew L. Farkas............................ 5,828,834(1) 17.8% 3,347,223(14) 15.7%
Insignia Financial Group, Inc.
375 Park Avenue, Suite 3401
New York, New York 10152
Apollo Real Estate Investment Fund, L.P..... 3,994,686(2) 12.0% 2,663,124(15) 12.0%
c/o Apollo Real Estate Fund, L.P.
2 Manhattanville Road
Purchase, New York 10577
The Capital Group Companies, Inc............ 3,274,230(3) 10.1% 1,899,800 8.9%
333 South Hope Street
Los Angeles, California 90071
Robert J. Denison(4)........................ 403,724(5) 1.3% 262,483 1.2%
Robin L. Farkas(4)(6)....................... 166,777 * 95,185 *
James A. Aston.............................. 337,066(7) 1.0% 61,111 *
Frank M. Garrison........................... 249,222(8) * 27,926 *
Edward S. Gordon............................ 680,879(9) 2.1% 453,919(9) 2.1%
Robert G. Koen.............................. 24,000(10) * -- *
Stephen B. Siegel........................... 186,055(11) * 33,933(16) *
Strauss Zelnick............................. -- * -- *
All directors and executive officers as a
group (12 individuals)(13)................ 8,223,736(1)(12) 24.2% 4,113,427 19.2%
</TABLE>
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- ---------------
* Indicates less than one percent.
(1) Includes shares owned by (i) Metropolitan Acquisition Partners IV, L.P.
("MAP IV"), (ii) Metropolitan Acquisition Partners V, L.P. ("MAP V"), (iii)
Metro Shelter Directives, Inc. and MV, Inc., the general partners of MAP IV
and MAP V, respectively, (iv) certain stockholders who have granted proxies
to MAP IV and MAP V, and (v) certain stockholders (including Charterhouse
Equity Partners, L.P. ("CEP") and affiliates of Apollo Real Estate
Advisors, L.P.) who are party to a stockholders agreement with Andrew L.
Farkas. Includes 808,000 shares subject to options and warrants which are
or will become exercisable within 60 days. Includes 3,334 shares of
restricted stock which will vest within 60 days.
(2) Includes securities owned by various affiliates of Apollo Real Estate
Investment Fund, L.P., including 1,392,916 shares subject to warrants which
are or will become exercisable within 60 days.
(3) The Capital Group Companies, Inc. ("Capital") is the parent holding company
of a group of investment management companies. Capital does not have
investment power or voting power over any of the securities reported
herein. Capital Guardian Trust Company, a bank as defined in Section 3(a)6
of the Exchange Act and a wholly owned subsidiary of Capital, is the
beneficial owner of the reported shares as a result of serving as the
investment manager of various institutional accounts. The reported shares
include 424,530 shares resulting from the assumed conversion of 225,000
shares of the Convertible Preferred Securities issued by Insignia Financing
I, a subsidiary of Insignia. The foregoing is based upon a Schedule 13G
filed by Capital with the Securities and Exchange Commission on or about
February 10, 1998.
(4) Messrs. Denison and Robin L. Farkas are each limited partners in MAP IV.
(5) Includes 133,600 shares held by First Security Associates L.P., a limited
partnership of which Mr. Denison is the sole general partner, and 246,100
shares held by First Security Company II, L.P., a limited partnership of
which Mr. Denison is the sole general partner. Includes 10,000 shares
subject to options and warrants which are exercisable or will become
exercisable within 60 days, but excludes 43,600 shares held by First
Security International Fund, Ltd., a Cayman Islands company, for which
First Security Management, Inc., a New York corporation, serves as the
investment advisor. Mr. Denison is the President of First Security
Management, Inc.
(6) Includes 24,000 shares subject to options which are or will become
exercisable within 60 days and 88,129 shares owned by a general partnership
for which Mr. Farkas shares voting power.
(7) Includes 245,400 shares subject to options and warrants which are or will
become exercisable within 60 days. Includes 833 shares of restricted stock
which will vest within 60 days.
(8) Includes 206,500 shares subject to options and warrants which are or will
become exercisable within 60 days. Includes 833 shares of restricted stock
which will vest within 60 days.
(9) Includes 100,000 shares subject to options which are or will become
exercisable within 60 days.
(10) Includes 24,000 shares subject to options which are or will become
exercisable within 60 days.
(11) Includes 181,680 shares subject to options which are or will become
exercisable within 60 days. Includes 4,375 shares of restricted stock which
will vest within 60 days.
(12) Includes 1,837,880 shares subject to options and warrants which are or will
become exercisable within 60 days. Includes 10,208 shares of restricted
stock which will vest within 60 days.
(13) No director or executive officer beneficially owns any of the outstanding
Convertible Preferred Securities.
(14) Includes 2,223 shares of restricted stock which will vest within 60 days.
(15) Includes 206,500 shares subject to options and warrants which are or will
become exercisable within 60 days. Includes 833 shares of restricted stock
which will vest within 60 days.
(16) Includes 31,016 options which are exercisable and 2,917 shares of
restricted stock which will vest within 60 days.
60
<PAGE> 67
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Holdings consists of 100,000,000 shares of
capital stock, par value $.01 per share, of which (i) 80,000,000 shares are
Common Stock, par value $.01 per share, with one share currently outstanding,
and (ii) 20,000,000 shares are Preferred Stock, par value $.01 per share
("Holdings Preferred Stock"), of which none are currently outstanding.
The following description of the capital stock of Holdings is a summary and
is qualified in its entirety by the provisions of Holdings' Certificate of
Incorporation (the "Certificate") and Holdings' By-laws (the "By-laws"), copies
of which are filed as exhibits to the Registration Statement of which this
Information Statement forms a part.
COMMON STOCK
The shares of Holdings Common Stock to be distributed in the Distribution
will be, when issued, fully paid and nonassessable. The holders of shares of
Holdings Common Stock elect all directors and are entitled to one vote per
share. There are no cumulative voting rights. Subject to the prior rights of the
holders of Preferred Stock, holders of Holdings Common Stock are entitled to
receive dividends when, as, and if declared by the Holdings Board out of funds
legally available therefrom, and to share ratably in the assets of Holdings
legally available for distribution to the stockholders in the event of
liquidation or dissolution. There are no shares of Preferred Stock currently
outstanding. Holders of Holdings Common Stock have no preemptive, subscription
or redemption rights.
PREFERRED STOCK
Pursuant to the Certificate, the Holdings Board is authorized, subject to
any limitations prescribed by law, from time to time to issue up to an aggregate
of 20,000,000 shares of Holdings Preferred Stock, in one or more series, and to
determine the designation, number of shares and rights and preferences,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, of each such series.
The issuance of Holdings Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have an adverse effect on holders of Holdings Common Stock,
depending upon the rights of such Holdings Preferred Stock, by delaying or
preventing a change in control of Holdings, making removal of the present
management of Holdings more difficult, or resulting in restrictions upon the
payment of dividends or other distributions to holders of Holdings Common Stock.
NYSE LISTING
The shares of Holdings Common Stock to be distributed in the Distribution
have been approved for listing on the NYSE, subject to official notice of
issuance, under the symbol "IEG." The current rules of the NYSE effectively
preclude the listing on the NYSE of any securities of an issuer which has issued
securities or taken other corporate action that would have the effect of
nullifying, restricting or disparately reducing the per share voting rights of
holders of an outstanding class or classes of equity securities registered under
Section 12 of the Exchange Act. Holdings does not intend to issue any additional
shares of any class of stock that would make the Holdings Common Stock
ineligible for continued listing or cause the Holdings Common Stock to be
delisted from the NYSE. Holdings is also considering applying to list the
Holdings Common Stock on the London Stock Exchange.
TRANSFER AGENT AND REGISTRAR
Holdings has appointed First Union National Bank, Insignia's current
transfer agent, as the Transfer Agent and Registrar for the Holdings Common
Stock.
THE DELAWARE BUSINESS COMBINATION ACT
Holdings is a Delaware corporation and, from and after the Time of
Distribution, will be subject to the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "DGCL"). In
61
<PAGE> 68
general, Section 203 provides that a Delaware corporation may not, for a period
of three years, engage in any of a broad range of business combinations with a
person or affiliate or associate of such person who is an "interested
stockholder" (defined generally as a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of a corporation's
outstanding voting stock) unless: (a) the transaction resulting in a person's
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (b) the interested stockholder acquires 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder; or (c) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock. The Holdings Board has approved the
acquisition in the Distribution of shares of Holdings Common Stock by Andrew L.
Farkas and his affiliates, and thereby has exempted such persons from the
application of DGCL Section 203.
CERTAIN CERTIFICATE AND BY-LAWS PROVISIONS
General
Certain provisions of the Certificate and the By-laws could have an
antitakeover effect. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Holdings Board and in the
policies formulated by the Holdings Board and to discourage certain types of
transactions described below, which may involve an actual or threatened change
of control of Holdings. The provisions are designed to reduce the vulnerability
of Holdings to an unsolicited proposal for a takeover of Holdings that does not
contemplate the acquisition of all of its outstanding shares or an unsolicited
proposal for the restructuring or sale of all or part of Holdings. The
provisions are also intended to discourage certain tactics that may be used in
proxy fights. The Holdings Board believes that, as a general rule, such takeover
proposals would not be in the best interests of Holdings and its stockholders.
Classified Board
The Certificate provides for the Holdings Board to be divided into three
classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Holdings Board will be elected each year. In
addition, under the DGCL, the directors on a classified board may be removed
from office only for cause and only by the affirmative vote of holders of a
majority of the outstanding voting stock. The overall effect of the provisions
in the Certificate with respect to the classified board may be to render more
difficult a change in control of Holdings or the removal of incumbent
management.
Special Meetings of Stockholders; Action by Written Consent
The Certificate provides that no action may be taken by stockholders except
at an annual or special meeting of stockholders and prohibits action by written
consent in lieu of a meeting. As authorized by the Certificate, the By-laws
provide that special meetings of stockholders of Holdings may be called only by
the Chairman, President or Chief Executive Officer or by a majority of the
members of the Holdings Board. This provision will make it more difficult for
stockholders to take action opposed by the Holdings Board.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
The By-laws establish an advance notice procedure for the nomination, other
than by or at the direction of the Holdings Board or a committee thereof, of
candidates for election as directors as well as for other stockholder proposals
to be considered at stockholders' meetings. These limitations on stockholder
proposals do not restrict a stockholder's right to include proposals in Holdings
annual proxy materials pursuant to rules promulgated under the Exchange Act. The
purpose of requiring advance notice is to afford the Holdings Board an
opportunity to consider the qualification of the proposed nominees or the merits
of other stockholder proposals and, to the extent deemed necessary or desirable
by the Holdings Board, to inform stockholders about those matters.
62
<PAGE> 69
Certificate and By-laws Amendments
The Certificate requires the affirmative vote of the holders of at least
80% of the voting power of Holdings capital stock in order to amend certain of
its provisions, including any provisions concerning (i) the classified board,
(ii) the amendment of the By-laws, (iii) any proposed compromise or arrangement
between Holdings and its creditors, (iv) the authority of stockholders to act by
written consent or to call a special meeting, (v) the liability of directors,
(vi) the indemnification of directors, officers and others and (vii) the
percentage of votes represented by capital stock required to approve certain
amendments to the Certificate. These voting requirements will make it more
difficult for stockholders to make changes in the Certificate which would be
designed to facilitate the exercise of control over Holdings. In addition, the
requirement of approval by at least a 80% stockholder vote will enable the
holders of a minority of the voting securities of Holdings to prevent the
holders of a majority or more of such securities from amending such provisions.
In addition, the Certificate provides that the By-laws may only be amended by
stockholders by the affirmative vote of 80% of Holdings outstanding voting
stock. After giving effect to the Distribution, the directors and executive
officers of Holdings will hold in the aggregate approximately 19.8% of the
voting power of Holdings. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT."
Indemnification and Insurance
Pursuant to authority conferred by DGCL Section 102(b)(7), the Certificate
contains a provision providing that no director of Holdings shall be liable to
it or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent that such exemption from liability or limitation
thereof is not permitted under the DGCL, as then in effect or as the same may be
amended. This provision is intended to eliminate the risk that a director might
incur personal liability to Holdings or its stockholders for breach of the duty
of care.
DGCL Section 145 contains provisions permitting, and in some situations
requiring, Delaware corporations, such as Holdings, to provide indemnification
to their officers and directors for losses and litigation expenses incurred in
connection with their service to the corporation in those capacities. The
Certificate and By-laws contain provisions requiring indemnification by Holdings
of its directors, officers, employees and agents, and of persons serving at the
request of Holdings as a director, officer, incorporator, employee, partner,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise (including an employee benefit plan), to the fullest extent
permitted by law. Among other things, these provisions provide indemnification
for such persons against liabilities for judgments in and settlements of
lawsuits and other proceedings and for the advance and payment of fees and
expenses reasonably incurred by the director or officer in defense of any such
lawsuit or proceeding.
Holdings intends to purchase and maintain insurance on behalf of any person
who is or was a director or officer of Holdings, or is now or was a director or
officer of Holdings serving at the request of Holdings as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not Holdings would have the power or the obligation
to indemnify him against such liability under the provisions of the By-laws.
63
<PAGE> 70
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.:
- ------------------------------------------------------------
Unaudited Condensed Combined Financial Statements for the
Spin-off Entities:
Condensed Combined Balance Sheets as of March 31, 1998 and
December 31, 1997...................................... F-3
Condensed Combined Statements of Income for the Three
Months Ended March 31, 1998 and 1997................... F-4
Condensed Combined Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1997................... F-5
Notes to Condensed Combined Financial Statements.......... F-6
Combined Financial Statements for the Spin-off Entities:
Report of Ernst & Young LLP Independent Auditors.......... F-10
Combined Balance Sheets as of December 31, 1997 and
1996................................................... F-11
Combined Statements of Operations for the years ended
December 31, 1997, 1996 and 1995....................... F-12
Combined Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995....................... F-13
Notes to Combined Financial Statements.................... F-14
EDWARD S. GORDON COMPANY, INCORPORATED AND EDWARD S. GORDON
COMPANY OF NEW JERSEY, INC.:
- ------------------------------------------------------------
Unaudited Condensed Combined Financial Statements for Edward
S. Gordon Company, Incorporated and Edward S. Gordon
Company of New Jersey, Inc.:
Condensed Combined Statements of Operations for the Six
Months Ended June 30, 1996 and 1995.................... F-31
Condensed Combined Statements of Cash Flows for the Six
Months Ended June 30, 1996 and 1995.................... F-32
Notes to Unaudited Condensed Combined Financial
Statements............................................. F-33
Combined Financial Statements for Edward S. Gordon Company,
Incorporated and Edward S. Gordon Company of New Jersey,
Inc.:
Report of PricewaterhouseCoopers, independent
accountants............................................ F-35
Combined Statements of Operations for the years ended
December 31, 1995, 1994, and 1993...................... F-36
Combined Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993....................... F-37
Notes to Combined Financial Statements.................... F-38
REALTY ONE:
- ------------------------------------------------------------
Combined Financial Statements for Realty One, Inc.
Report of Plante & Moran, LLP, independent auditors....... F-42
Combined Balance Sheets as of December 31, 1996 and
1995................................................... F-43
Combined Statements of Income for the years ended December
31, 1996 and 1995...................................... F-44
Combined Statements of Changes in Stockholders' Equity for
the years ended December 31, 1996 and 1995............. F-45
Combined Statements of Cash Flows for the years ended
December 31, 1996 and 1995............................. F-46
Notes to Combined Financial Statements.................... F-47
Report of Plante & Moran, LLP, independent auditors....... F-55
Combined Balance Sheets as of September 30, 1997 and
1996................................................... F-56
Combined Statements of Income for the nine months ended
September 30, 1997 and 1996............................ F-57
Combined Statements of Changes in Stockholders' Equity for
the nine months ended September 30, 1997............... F-58
Combined Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996...................... F-59
Notes to Combined Financial Statements.................... F-60
BARNES, MORRIS, PARDOE & FOSTER:
- ------------------------------------------------------------
Unaudited Financial Statements for Barnes, Morris, Pardoe &
Foster Management Services, LLC
Unaudited Balance Sheets as of October 31, 1997 and
1996................................................... F-66
Unaudited Statements of Income for the ten months ended
October 31, 1997 and 1996.............................. F-67
Unaudited Statements of Cash Flows for the ten months
ended October 31, 1997 and 1996........................ F-68
Notes to Consolidated Financial Statements................ F-69
Consolidated Financial Statements for Barnes, Morris, Pardoe
& Foster, Inc.
Unaudited Consolidated Balance Sheets as of the nine
months ended October 31, 1997 and 1996................. F-70
Unaudited Consolidated Income Statements for the nine
months ended October 31, 1997 and 1996................. F-72
</TABLE>
F-1
<PAGE> 71
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Unaudited Consolidated Statements of Cash Flows for the
nine months ended October 31, 1997 and 1996............ F-73
Notes to Consolidated Financial Statements................ F-74
Report of Beers & Cutler PLLC, the auditors............... F-75
Balance Sheets as of January 31, 1997..................... F-76
Income Statement for the year ended January 31, 1997...... F-78
Statement of Changes in Stockholders' Equity for the year
ended January 31, 1997................................. F-79
Statement of Cash Flows for the year ended January 31,
1997................................................... F-80
Notes to the Financial Statements......................... F-81
Financial Statements for Barnes, Morris, Pardoe & Foster
Management Services, LLC
Report of Beers & Cutler PLLC, the independent auditors... F-86
Balance Sheet as of December 31, 1996..................... F-87
Statement of Income for the year ended December 31,
1996................................................... F-88
Statement of Changes in Members' Capital for the year
ended December 31, 1996................................ F-89
Statement of Cash Flows for the year ended December 31,
1996................................................... F-90
Notes to Financial Statements............................. F-91
RICHARD ELLIS:
- ------------------------------------------------------------
Annual Report and Financial Statements for Richard Ellis
Holdings Limited:
Report of the Directors................................... F-96
Report of BDO Stoy Hayward, the Auditors.................. F-99
Consolidated Profit and Loss Accounts for the years ended
April 30, 1997 and 1996................................ F-100
Consolidated Balance Sheets at April 30, 1997 and 1996.... F-101
Balance Sheets at 30 April 1997 and 1996.................. F-102
Consolidated Cash Flow Statements for the years ended
April 30, 1997 and 1996................................ F-103
Notes to Financial Statements............................. F-104
Richard Ellis Partnership Accounts:
Profit and Loss Accounts for the years ended April 30,
1997 and 1996.......................................... F-122
Balance Sheets as of April 30, 1997 and 1996.............. F-123
Notes to Partnership Accounts............................. F-124
Report of Independent Auditors............................ F-130
Annual Report and Financial Statements for Richard Ellis
Holdings Limited:
Report of the Directors................................... F-132
Report of BDO Stoy Hayward, the Auditors.................. F-135
Consolidated Profit and Loss Accounts for the years ended
April 30, 1996 and 1995................................ F-136
Consolidated Balance Sheets at April 30, 1996 and 1995.... F-137
Balance Sheets at 30 April 1996 and 1995.................. F-138
Consolidated Cash Flow Statements for the years ended
April 30, 1996 and 1995................................ F-139
Notes to Financial Statements............................. F-140
Richard Ellis Partnership Accounts:
Profit and Loss Accounts for the years ended April 30,
1996 and 1995.......................................... F-153
Balance Sheets as of April 30, 1996 and 1995.............. F-154
Notes to Partnership Accounts............................. F-155
Report of BDO Stoy Hayward, the Auditors.................. F-161
Annual Report and Financial Statements for Richard Ellis
Group Limited:
Report of the Directors................................... F-163
Report of BDO Stoy Hayward, the Auditors.................. F-166
Consolidated Profit and Loss Account for the Eight Months
Ended December 31, 1997................................ F-167
Consolidated Balance Sheet at December 31, 1997........... F-168
Balance Sheet at December 31, 1997........................ F-169
Consolidated Cash Flows Statement for the Eight Months
Ended December 31, 1997................................ F-170
Notes to Financial Statements............................. F-171
Unaudited Consolidated Financial Statements for Richard
Ellis Group Limited:
Consolidated Profit and Loss Accounts for the Eight Months
Ended December 31, 1997 and 1996....................... F-187
Consolidated Balance Sheets as at December 31, 1997 and
1996................................................... F-188
Consolidated Statements of Cash Flows for the Eight Months
Ended December 31, 1997 and 1996....................... F-189
</TABLE>
The schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
F-2
<PAGE> 72
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
CONDENSED COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
MARCH 31, DECEMBER 31,
1998 1997(1)
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 15,051 $ 9,250
Receivables................................................. 129,115 101,653
Property and equipment...................................... 13,473 11,235
Co-investments in real estate............................... 19,637 19,454
Property management contracts............................... 46,825 48,614
Costs in excess of net assets of acquired businesses........ 209,947 138,019
Other assets................................................ 16,859 6,269
-------- --------
Total assets...................................... $450,907 $334,494
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable.......................................... $ 13,912 $ 9,673
Commissions payable....................................... 56,404 51,285
Accrued and sundry liabilities............................ 60,308 43,811
Notes payable............................................. 31,208 20,891
-------- --------
Total liabilities................................. 161,832 125,660
Minority interests.......................................... 355 390
Investment and net advances from Insignia................... 288,720 208,444
-------- --------
Total liabilities and net advances from
Insignia........................................ $450,907 $334,494
======== ========
</TABLE>
See accompanying notes.
- ---------------
(1) The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
F-3
<PAGE> 73
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
CONDENSED COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Fee based services........................................ $102,511 $43,866
Interest.................................................. 282 --
Other..................................................... 8 --
-------- -------
102,801 43,866
Expenses:
Fee based services........................................ 89,212 37,869
Overhead allocations from Insignia........................ 1,746 1,293
Administrative............................................ 818 --
Interest.................................................. 382 --
Depreciation and amortization............................. 5,184 3,268
-------- -------
97,342 42,430
-------- -------
5,459 1,436
Equity earnings............................................. (476) 351
Minority interests.......................................... 33 --
-------- -------
Income before income taxes.................................. 5,016 1,787
Provision for income taxes.................................. 2,257 715
-------- -------
Net income.................................................. $ 2,759 $ 1,072
======== =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 74
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 2,759 $ 1,072
Adjustments to reconcile net income to net cash (used in)
operating activities:
Depreciation and amortization, including amounts allocated
from Insignia.......................................... 5,184 3,268
Equity earnings........................................... 476 (351)
Minority interests........................................ (34) --
Foreign currency translation.............................. 6 --
Changes in operating assets and liabilities:
Accounts receivable.................................... (9,607) (5,035)
Other assets........................................... (1,931) 473
Accounts payable and accrued expenses.................. (11,083) (4,985)
Commissions payable.................................... 2,452 (472)
-------- -------
Net cash (used in) operating activities..................... (11,778) (6,030)
INVESTING ACTIVITIES
Additions to property and equipment, net.................... (1,623) (1,072)
Payments made for acquisitions of businesses................ (26,634) (3,089)
Proceeds from Balcor dispositions........................... 196 674
Purchase of co-investment real estate....................... (3,648) (41)
Net increase in mortgage loans.............................. (5,110) --
Distributions from co-investments real estate............... 538 1,028
Advances made under note agreements......................... (927) (886)
Collections on notes receivable............................. 363 269
-------- -------
Net cash used in investing activities....................... (36,845) (3,117)
FINANCING ACTIVITIES
Payments on notes payable................................... (1,061) --
Proceeds from notes payable................................. 840 --
Net transactions with Insignia.............................. 54,645 9,116
-------- -------
Net cash provided by financing activities................... 54,424 9,116
Net increase (decrease) in cash and cash equivalents........ 5,801 (31)
Cash and cash equivalents at beginning of period............ 9,250 44
-------- -------
Cash and cash equivalents at end of period.................. $ 15,051 $ 13
======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 75
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
BUSINESS
Insignia Financial Group, Inc. ("Insignia") entities which will be spun-off
into Insignia/ESG Holdings, Inc. ("Holdings"), which subsequently will become a
separate public company. Holdings will consist of Insignia's domestic commercial
real estate services division; Richard Ellis Group Limited, a real estate
services and investment firm acquired in February 1998 and located in the United
Kingdom; the 60% investment in CAGISA, a privately held property management
company in Italy; Insignia Management Services-New York, Inc., a New York based
cooperative and condominium apartment management company; Realty One, Inc. and
its subsidiaries, a single-family home brokerage and mortgage origination
business; equity co-investment; and other related businesses.
The financial statements of Holdings primarily include wholly-owned
subsidiaries or divisions of Insignia, and therefore, these subsidiaries or
divisions either did not have outstanding shares of capital stock or only had a
nominal number of shares outstanding. As such, earnings per share data is not
considered to provide meaningful information about the results of operations of
Holdings.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed combined financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the combined
financial statements and footnotes thereto included elsewhere herein.
COMPREHENSIVE INCOME
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income ("Statement 130"). As of January 1, 1998,
Holdings adopted Statement 130. Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of Statement 130 had no impact on Holdings' net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on Holdings'
available-for-sale securities and foreign currency translation adjustments,
reported separately in shareholders' equity, to be included in other
comprehensive income. Total comprehensive income for each of the three month
periods ended March 31, 1998 and 1997 was immaterial.
COMMITMENTS AND CONTINGENCIES
The following is a summary of Holdings' material contingencies as of March
31, 1998:
On March 24, 1998, certain persons claiming to own limited partner
interests in certain limited partnerships whose general partners (the "General
Partners") are affiliates of Insignia (the "Partnerships") filed a purported
class and derivative action in California Superior Court in the County of San
Mateo against Insignia, the General Partners, Apartment Investment and
Management Company ("AIMCO"), certain persons and entities who purportedly
formerly controlled the General Partners, and additional entities affiliated
with individuals who are officers, directors and/or principals of several of the
defendants. The complaint contains allegations that, among other things, (i) the
defendants breached their fiduciary duties to the plaintiffs by selling or
agreeing to sell their "fiduciary positions" as stockholders, officers and
directors of the General Partners for a profit and retaining said profit rather
than distributing it to the plaintiffs; (ii) the
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INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
defendants breached their fiduciary duties by mismanaging the Partnerships and
misappropriating the assets of the Partnerships by (a) manipulating the
operations of the Partnerships to depress the trading price of limited
partnership units (the "Units") of the Partnerships; (b) coercing and
fraudulently inducing unitholders to sell Units to certain of the defendants at
depressed prices; and (c) using the voting control obtained by purchasing Units
at depressed prices to entrench certain of the defendants' positions of control
over the Partnerships; and (iii) the defendants breached their fiduciary duties
to the plaintiffs by (a) selling assets of the Partnerships such as mailing
lists of unitholders; and (b) causing the General Partners to enter into
exclusive arrangements with their affiliates to sell goods and services to the
partnerships, the unitholders and tenants of Partnership properties. The
complaint also alleges that the foregoing allegations constitute violations of
various California securities, corporate and partnership statutes, as well as
conversion and common law fraud. The complaint seeks unspecified compensatory
and punitive damages, an injunction blocking the sale of control of the General
Partners to AIMCO and a court order directing the defendants to discharge their
fiduciary duties to the plaintiffs. The last day for defendants to serve an
answer or a demurrer to the complaint is June 25, 1998. It is the current
intention of the defendants to file demurrers to the complaint. Based upon the
allegations of the complaint, neither Insignia nor AIMCO is able to quantify the
relief sought. Both Insignia and AIMCO intend to defend the action vigorously.
Neither Insignia nor AIMCO believe that the outcome of the litigation will have
a material adverse impact either on their financial condition, their results of
operations or their abilities to consummate the Merger.
Holdings and certain subsidiaries are defendants in lawsuits arising in the
ordinary course of business. Such lawsuits are primarily insured claims arising
from accidents at managed properties. Claims may demand substantial compensatory
and punitive damages.
Management believes that the aforementioned contingencies will be resolved
without material loss to Holdings or its subsidiaries.
ACQUISITIONS
Richard Ellis Group Limited Acquisition
In February 1998, the shareholders of Richard Ellis Group Limited ("Richard
Ellis") accepted Insignia's offer to acquire 100% of the stock of Richard Ellis.
Richard Ellis is a real estate services and investment firm located in the
United Kingdom. The purchase price is valued at approximately $82.9 million, of
which $14.7 million is contingent on future performance measures of Richard
Ellis. The transaction was completed on February 26, 1998. Insignia funded the
acquisition by borrowing approximately $35 million from its revolving credit
facility, issuing 617,371 shares of Class A Common Stock, par value $.01 per
share, of Insignia ("Insignia Class A Common Stock"), and assuming existing
options which will enable Richard Ellis employees to purchase 853,741 shares of
Insignia Class A Common Stock.
MERGER AND SPIN-OFF
Insignia and Holdings entered into an Amended and Restated Agreement and
Plan of Merger (as amended, the "Merger Agreement") with AIMCO and AIMCO
Properties, L.P., a Delaware limited partnership, pursuant to which Insignia
will merge with and into AIMCO, with AIMCO as the survivor (the "Merger").
Consummation of the Merger is subject to certain conditions, including
regulatory approval and the approval of the stockholders of Insignia (but not
the approval of the stockholders of AIMCO).
Prior to the Merger, Insignia will spin off to its stockholders the stock
of Holdings (the "Distribution"). Pursuant to an amended and restated
indemnification agreement entered into by AIMCO and Holdings (as amended, the
"Indemnification Agreement") in connection with the Merger Agreement, Holdings
will provide indemnification for certain liabilities arising under the Merger
Agreement.
F-7
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INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Assuming the stockholders of AIMCO approve the Merger, shares of Insignia
Class A Common Stock will be converted into the right to receive an aggregate
number of shares of Class E Preferred Stock, par value $.01 per share, of AIMCO
(the "Class E Preferred") approximately equal to $303 million divided by the
AIMCO Index Price. In addition to receiving the same dividends as holders of
Class A Common Stock, par value $.01 per share, of AIMCO ("AIMCO Common Stock"),
holders of Class E Preferred are entitled to receive a preferred dividend of
approximately $50 million in the aggregate to be paid on or before January 15,
1999 and when paid, the Class E Preferred will automatically convert into AIMCO
Common Stock on a one-for-one basis, subject to certain antidilution
adjustments. The actual number of Class E Preferred issued in the Merger will be
determined by a formula based on the AIMCO Index Price, which will be the
average market price of AIMCO Common Stock during a fixed period prior to the
Merger, subject to a fixed maximum AIMCO Index Price of $38 per share. If the
AIMCO Index Price during that period is less than $36.50 per share, AIMCO may
elect to pay up to $15 million of the purchase price in cash.
In addition, approximately $458 million of debt and other liabilities of
Insignia and its subsidiaries, including $149.5 million of convertible
subordinated debt underlying the 6.5% Trust Convertible Preferred Securities
("Convertible Preferred Securities") issued by Insignia Financing I, a
subsidiary of Insignia, will remain outstanding as obligations of AIMCO and its
subsidiaries after the Merger.
If the stockholders of AIMCO do not approve the Merger, the Merger may
nonetheless be consummated. However, instead of receiving only Class E
Preferred, holders of Insignia Class A Common Stock would receive a number of
shares of Class E Preferred approximately equal to $203 million divided by the
AIMCO Index Price and a number of shares of Class F Preferred Stock, par value
$.01 per share, of AIMCO (the "Class F Preferred") approximately equal to $100
million divided by the AIMCO Index Price. In either case, holders of Class E
Preferred would be entitled to receive the approximately $50 million preferred
dividend. Holders of Class F Preferred are entitled to receive the greater of
(i) the same dividends as holders of AIMCO Common Stock and (ii) preferred cash
distributions of 10% of the liquidation value of the Class F Preferred, with the
distribution rate escalating 1% each year until a 15% annual distribution rate
is achieved. Upon the approval by the stockholders of AIMCO, the Class F
Preferred will convert into AIMCO Common Stock on a one-to-one basis, subject to
certain antidilution adjustments. For purposes of the foregoing valuations, each
share of AIMCO Class E Preferred Stock and AIMCO Class F Preferred Stock is
valued at the AIMCO Index Price. Also, the Merger Agreement provides that
following the Merger, AIMCO is required to offer to purchase the outstanding
shares of beneficial interest of Insignia Properties Trust, a majority owned
subsidiary of Insignia ("IPT"), at a price of at least $13.25 per IPT share. IPT
is a 61% owned subsidiary of Insignia; the 39% interest of IPT not owned by
Insignia is valued at an aggregate of approximately $100 million, assuming a
value of $13.25 per share.
As a condition to execution of the Merger Agreement, certain of Insignia's
executive officers executed voting agreements and irrevocable proxies in favor
of AIMCO, pursuant to which each of the foregoing individuals agreed to vote the
shares of Insignia Class A Common Stock owned of record by each of them (but not
beneficially), including shares under options and warrants to the extent
exercisable on March 17, 1993 in favor of the Merger and the Merger Agreement
and against any competing transaction. In addition, each of Metropolitan
Acquisition Partners IV, L.P. and Metropolitan Acquisition Partners V, L.P.
(collectively, the "MAPs") also executed voting agreements and irrevocable
proxies, pursuant to which each has agreed to vote certain shares of Insignia
Class A Common Stock to which Insignia's Chairman, Chief Executive Officer and
President would be entitled in a distribution of shares of Insignia Class A
Common Stock made by the MAPs, in favor of the Merger and the Merger Agreement
and against any competing transaction.
F-8
<PAGE> 78
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
THE WARRANT DISTRIBUTION
On May 4, 1998, Insignia approved, contingent upon the completion of the
Distribution to its stockholders of all of the outstanding common stock, par
value $.01 per share, of Holdings ("Holdings Common Stock"), a special
distribution of warrants to purchase shares of Holdings Common Stock (the
"Warrant Distribution") to the holders of Convertible Preferred Securities
issued by Insignia Financing I. The Warrant Distribution is contingent upon the
completion of the Distribution and the determination by Insignia's Board that
(i) all the conditions to the Merger have been satisfied, and (ii) the closing
of the Merger is imminent. The proposed Warrant Distribution would consist of
the distribution to each holder of record as of the record date for the
Distribution of Convertible Preferred Securities of warrants to purchase
Holdings Common Stock (four warrants for each $500 liquidation amount of
Convertible Preferred Securities held by them) (the "Warrants"). The Warrants
will have an exercise price of 120% of the market price of Holdings Common Stock
following the Distribution. The term of each Warrant will be five years, and no
Warrant will be exercisable before two years after it is granted. There are
expected to be approximately 1,196,000 Warrants outstanding immediately
following the Warrant Distribution.
F-9
<PAGE> 79
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Insignia Financial Group, Inc.
We have audited the accompanying combined balance sheets of the Insignia
Financial Group, Inc. entities to be spun-off into Insignia/ESG Holdings, Inc.
as of December 31, 1997 and 1996 and the related combined statements of
operations, and cash flows for each of the three years in the period ended
December 31, 1997 (see Note 1). These financial statements are the
responsibility of the management of the combined entities. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Insignia
Financial Group, Inc. entities to be spun-off into Insignia/ESG Holdings, Inc.
at December 31, 1997 and 1996, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Greenville, South Carolina
April 22, 1998
F-10
<PAGE> 80
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 9,250 $ 44
Receivables................................................. 101,653 37,185
Property and equipment...................................... 11,235 5,512
Co-investments in real estate............................... 19,454 4,465
Property management contracts............................... 48,614 48,937
Costs in excess of net assets of acquired businesses........ 138,019 72,616
Other assets................................................ 6,269 3,028
-------- --------
Total assets...................................... $334,494 $171,787
======== ========
LIABILITIES AND INVESTMENT AND NET ADVANCES FROM INSIGNIA
Liabilities:
Accounts payable.......................................... $ 9,673 $ 233
Commissions payable....................................... 51,285 18,736
Accrued and sundry liabilities............................ 43,811 15,041
Notes payable............................................. 20,891 --
-------- --------
125,660 34,010
Minority interests.......................................... 390 --
Investment and net advances from Insignia................... 208,444 137,777
-------- --------
Total liabilities and investment and net advances
from Insignia.................................... $334,494 $171,787
======== ========
</TABLE>
See accompanying notes.
F-11
<PAGE> 81
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Fee based services, including fees from affiliated
partnerships of $8,154 (1997), $3,153 (1996) and $2,905
(1995)................................................. $295,258 $122,005 $38,658
Interest.................................................. 457 -- --
Other..................................................... 38 -- --
-------- -------- -------
295,753 122,005 38,658
Costs and expenses:
Fee based services........................................ 251,268 103,942 35,956
Overhead allocations from Insignia........................ 6,770 3,502 1,598
Administrative............................................ 587 -- --
Interest.................................................. 318 18 --
Depreciation and amortization............................. 15,244 9,197 3,778
Termination of employment agreements...................... -- -- 1,000
-------- -------- -------
274,187 116,659 42,332
-------- -------- -------
21,566 5,346 (3,674)
Equity earnings............................................. 151 273 --
Minority interests.......................................... 41 -- --
-------- -------- -------
Income (loss) before income taxes........................... 21,758 5,619 (3,674)
Provision (benefit) for income taxes........................ 8,703 2,135 (1,396)
-------- -------- -------
Net income (loss)........................................... $ 13,055 $ 3,484 $(2,278)
======== ======== =======
</TABLE>
See accompanying notes.
F-12
<PAGE> 82
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 13,055 $ 3,484 $ (2,278)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization, including amounts allocated
from Insignia.......................................... 15,490 9,326 3,846
Equity earnings........................................... (151) (273) --
Minority interests........................................ (41) -- --
Deferred income taxes..................................... 3,415 506 (1,424)
Changes in operating assets and liabilities:
Accounts receivable.................................... (6,646) 755 (320)
Commissions receivable................................. (43,466) (33,372) --
Other assets........................................... (667) (542) 1,714
Accounts payable and accrued expenses.................. 16,794 9,289 (3,539)
Commissions payable.................................... 32,549 18,134 602
-------- ------- --------
Net cash provided by (used in) operating activities......... 30,332 7,307 (1,399)
INVESTING ACTIVITIES
Additions to property and equipment, net.................... (5,882) (4,806) (1,717)
Payments made for acquisition of businesses................. (62,672) (73,879) (17,185)
Proceeds from Balcor dispositions........................... 3,006 893 --
Purchase of co-investment real estate....................... (17,014) (3,584) (894)
Distributions from co-investments real estate............... 2,208 286 --
Advances made under note agreements......................... (5,776) (1,254) --
Collections on notes receivable............................. 3,237 5,150 --
-------- ------- --------
Net cash used in investing activities....................... (82,893) (77,194) (19,796)
FINANCING ACTIVITIES
Payments on notes payable................................... (2,985) -- --
Proceeds from notes payable................................. 7,140 -- --
Net transactions with Insignia.............................. 57,612 69,895 21,221
-------- ------- --------
Net cash provided by financing activities................... 61,767 69,895 21,221
-------- ------- --------
Net increase in cash and cash equivalents................... 9,206 8 26
Cash and cash equivalents at beginning of year.............. 44 36 10
-------- ------- --------
Cash and cash equivalents at end of year.................... $ 9,250 $ 44 $ 36
======== ======= ========
</TABLE>
See accompanying notes.
F-13
<PAGE> 83
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BASIS OF PRESENTATION
On March 17, 1998, Insignia Financial Group, Inc. ("Insignia") entered into
an Agreement and Plan of Merger ("Merger Agreement") with Apartment Investment
and Management Company ("AIMCO"), pursuant to which Insignia will merge with and
into AIMCO, with AIMCO as the survivor (the "Merger"). Consummation of the
Merger is subject to certain conditions, including regulatory approval and the
approval of the stockholders of Insignia. Prior to the Merger, Insignia will
spin-off ("spin-off") to its stockholders the stock of Insignia/ESG Holdings,
Inc. ("Holdings") an entity that will become a separate public company. Holdings
will consist of Insignia's domestic commercial real estate services division;
Richard Ellis Group Limited ("Richard Ellis"), a real estate services and
investment firm acquired in February 1998 and located in the United Kingdom; the
60% investment in CAGISA, a privately held property management company in Italy;
Insignia Residential-New York, a New York based cooperative and condominium
apartment management company; Insignia's single-family home brokerage and
mortgage origination operations and other related businesses.
These financial statements present the combined financial position, results
of operations and cash flows of the Insignia entities to be spun-off into
Holdings (also herein referred to as Holdings or the "combined entities") as if
a separate entity for all periods presented. Insignia's historical cost bases in
the assets and liabilities of the combined entities have been reflected in these
financial statements. The financial information in these financial statements is
not necessarily indicative of results that would have occurred had the combined
entities been a separate stand-alone entity during the periods presented or of
future results of Holdings. Changes in Investment and Net Advances from Insignia
represent the net income or loss of the combined entities plus the net change in
cash transferred between the combined entities and Insignia and certain non-
cash items.
The combined entities have utilized Insignia's centralized systems for cash
management, payroll, employee benefit plans, insurance and various
administrative services. As a result, substantially all cash received by these
entities was deposited in and commingled with Insignia's general corporate
funds. Similarly, fee-based services and administrative expenses, capital
expenditures and other cash requirements of these entities were paid by Insignia
and charged directly or allocated to these entities. The fee-based services and
administrative expenses, which included, among other things, investment banking,
information technology, legal, finance, accounting, and facilities, were
allocated to the combined entities. These allocations were $6,770,000 (1997),
$3,502,000 (1996) and $1,598,000 (1995). The allocations were based upon
detailed analysis of the operations of Insignia using various methods, including
acquisition activities, employee headcount, estimated personnel, and estimated
management time devoted to the operations of the combined entities. Certain
assets and liabilities related to the operations of the combined entities are
managed and controlled by Insignia on a centralized basis. Such assets and
liabilities have been allocated to the respective entity based on the use of, or
interest in, those assets and liabilities. In the opinion of management, the
methods for allocating expenses, assets and liabilities are believed to be
reasonable and would not differ materially from the overhead expenses to be
incurred by Holdings on a stand-alone basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The combined financial statements include the accounts of the combined
entities as defined in Note 1. All significant intercompany balances and
transactions have been eliminated.
F-14
<PAGE> 84
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The amount of cash on deposit in federally insured institutions
periodically exceeds the limit on insured deposits. The combined entities
consider all highly liquid investments with original maturities of three months
or less to be cash equivalents.
Co-investments in Real Estate
Co-investments in real estate represent co-investment partnership interests
in commercial real estate and land held for development. These investments are
accounted for by the equity method. Equity in earnings from these partnerships
amounted to approximately $151,000 (1997) and $273,000 (1996).
Minority Interest
Minority interests consist of the 40% minority equity of CAGISA.
Advertising Expense
The cost of advertising is expensed as incurred. The combined entities
incurred approximately $2,800,000, $1,007,000 and $341,000 in advertising costs
during 1997, 1996 and 1995, respectively.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation
of $2,598,000 (1997), and $1,357,000 (1996). Property and equipment consists of
office furniture and fixtures, data processing equipment, computer software, and
leasehold improvements.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of the assets. Direct as well as allocated depreciation
expense was approximately $2,539,000 (1997), $1,455,000 (1996) and $779,000
(1995).
Interest Expense
The interest expense reflected in the combined statements of operations is
based upon the historical debt of the combined entities. The combined statements
do not include an interest expense allocation from Insignia's indebtedness.
Property Management Contracts and Costs in Excess of Net Assets of Acquired
Businesses
Property management contracts are stated at cost, net of accumulated
amortization of $13,713,000 (1997) and $7,801,000 (1996). The combined entities
capitalize costs paid or payable to third parties in the successful pursuit of
acquiring management contracts. These contracts are amortized by the
straight-line method over three to ten years. All costs related to unsuccessful
attempts to acquire management contracts are expensed.
Costs in excess of net assets of acquired businesses are amortized by the
straight-line method primarily over 15 to 25 years. Accumulated amortization is
$6,085,000 (1997) and $2,178,000 (1996).
F-15
<PAGE> 85
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The combined entities follow FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of" (FAS 121), which requires
impairment losses to be recognized for long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows are not
sufficient to recover the assets' carrying amount. The impairment loss is
measured by comparing the fair value of the asset to its carrying amount. No
significant asset impairments have been recorded.
Revenue Recognition
Fee based services includes property management, commercial leasing, loan
origination, loan servicing and investment banking fees, and commission revenue
related to real estate sales. Such revenues are recorded when the related
services are performed, unless significant contingencies exist, or at contract
closing in the case of real estate sales.
Foreign Currency Translation
The financial statement of CAGISA was prepared in its respective local
currency and translated into U.S. dollars based on the current exchange rate at
the end of the period for the balance sheet and a weighted-average rate for the
period on the statement of income. Translation adjustments in 1997 were not
material.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"), which is effective for
years beginning after December 15, 1997. Statement 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. Statement 131 is effective
for financial statements for fiscal years beginning after December 15, 1997, and
therefore Holdings will adopt the new requirements in 1998. Management of the
combined entities has not completed its review of Statement 131, but does
anticipate that the adoption of this statement will modify its segment
disclosures.
3. EARNINGS PER SHARE
The financial statements of the combined entities include primarily
wholly-owned subsidiaries or divisions of Insignia, and therefore, these
subsidiaries or divisions did not have separate outstanding shares of capital
stock. As such, earnings per share data is not considered to provide meaningful
information about the results of operations of the combined entities.
4. ACQUISITIONS
Significant acquisitions during the last three years are discussed below.
All acquisitions were accounted for as purchases.
1997 Acquisitions
Frain, Camins & Swartchild, Inc.
On April 1, 1997, Frain, Camins & Swartchild, Inc. ("FC&S") was acquired.
FC&S is a full service commercial, retail and industrial real estate brokerage
firm located in Chicago, Illinois. The purchase price was approximately $4.4
million, and in addition, up to $4.5 million in contingent payments may be paid
based on certain future performance measures. The contingent payments, if paid,
will be recorded as additional
F-16
<PAGE> 86
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition costs. The operations of FC&S have been included in the operations
of the combined entities since April 1, 1997.
Realty One, Inc. and Affiliates
Effective October 1, 1997, the outstanding stock of Realty One, Inc. and
affiliated companies ("Realty One"), including First Ohio Mortgage Corporation
were acquired. Realty One is a full service residential real estate brokerage
firm headquartered in Cleveland, Ohio and serving primarily the northern region
of Ohio. First Ohio Mortgage Corporation originates single family home mortgages
for both Realty One clients and third parties. The cost of the acquisition was
approximately $64.1 million including approximately $24.2 million of Realty One
liabilities assumed and $825,000 of acquisition costs. The operations of Realty
One have been included in the operations of the combined entities since October
1, 1997.
Barnes, Morris, Pardoe & Foster
On October 30, 1997, substantially all of the assets of Barnes, Morris,
Pardoe & Foster ("Barnes Morris"), a commercial real estate services firm
located in the greater Washington, D.C. area were acquired. The purchase price
was approximately $17.0 million. The operations of Barnes Morris have been
included in the operations of the combined entities since October 30, 1997.
1996 Acquisitions
Edward S. Gordon Company, Inc.
On June 30, 1996, the business and substantially all of the assets of
Edward S. Gordon Company, Incorporated ("ESG") were acquired. ESG's services
include commercial real estate leasing, including tenant and landlord
representation, real estate consulting services and commercial real estate
brokerage as well as commercial property management in the New York City
metropolitan area. The purchase price was $80.2 million. Additionally, $875,000
in acquisition costs were incurred and a short-term loan of $5 million was
granted at the time of the purchase to ESG and one of its affiliates, which has
subsequently been repaid.
Paragon Group Property Services, Inc.
On June 30, 1996, the commercial real estate services business of Paragon
Group Property Services, Inc. ("Paragon") were acquired. Paragon's services
include property management, leasing and tenant improvement services for managed
properties as well as brokerage, fee development and real estate consulting
services performed for various institutional clients. The purchase price was
$18.1 million in cash, plus an additional $4 million in future contingent
purchase price (without interest). Additionally, $930,000 of acquisition costs
were incurred and a net deferred tax liability of $1.2 million was recorded.
The operations of Paragon and ESG have been included in the operations of
the combined entities since June 30, 1996.
1995 Acquisitions
Douglas Elliman-Gibbons & Ives and Kreisel Company, Inc.
On September 5, 1995, the residential property management business of
Douglas Elliman-Gibbons & Ives and all of the outstanding stock of Kreisel
Company, Inc. (collectively "DEK") were acquired. The purchase price was $13.1
million. In addition, a deferred tax liability of $3.1 million and other
liabilities of $2.6 million were recorded. The operations of DEK have been
included in the operations of the combined entities since September 5, 1995.
F-17
<PAGE> 87
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
O'Donnell Property Services, Inc.
On May 1, 1995, all of the outstanding common stock of O'Donnell Property
Services, Inc. ("OPSI") was acquired for consideration having an aggregate value
as of the date of acquisition of approximately $7.0 million. The operations of
OPSI have been included in the operations of the combined entities since May 1,
1995.
Other Information
Pro forma results of operations for the years ended December 31, 1997, 1996
and 1995 assuming consummation of the FC&S, Realty One, and Barnes Morris
acquisitions at January 1, 1997 and 1996, assuming consummation of the ESG and
Paragon acquisitions at January 1, 1996 and 1995, and assuming consummation of
the DEK and OPSI acquisitions at January 1, 1995, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues........................................... $396,307 $314,915 $171,070
Net income......................................... 17,125 10,841 3,056
</TABLE>
The acquisitions made by the combined entities were funded utilizing the
working capital of Insignia and no debt or interest was allocated to the
combined entities.
These results do not purport to represent the operations of the combined
entities nor are they necessarily indicative of the results that actually would
have been realized by the combined entities if the purchase of the operating
entities had been in effect the entire period.
The cost of the FC&S, Realty One, Barnes Morris (1997), ESG, Paragon,
(1996) and DEK and OPSI (1995) acquisitions are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable........................................ $16,735 $ -- $ --
Insignia common stock................................ 4,200 24,450 3,711
Accrued and sundry liabilities....................... 14,453 1,805 1,789
Deferred tax liability, net.......................... -- 1,150 3,115
Cash paid at the closing dates....................... 50,474 73,879 17,185
------- -------- -------
$85,862 $101,284 $25,800
======= ======== =======
</TABLE>
The cost was allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash acquired........................................ $ 1,383 $ -- $ --
Accounts receivable.................................. 2,623 -- --
Notes receivable..................................... -- 5,000 --
Single-family mortgage loans receivable.............. 8,414 -- --
Property and equipment............................... 2,123 -- --
Property management contracts........................ 6,343 19,759 24,324
Non-compete agreements............................... -- 1,700 --
Goodwill............................................. 62,415 74,232 --
Other assets......................................... 2,529 593 1,476
Investment in limited partnership units.............. 32 -- --
------- -------- -------
$85,862 $101,284 $25,800
======= ======== =======
</TABLE>
F-18
<PAGE> 88
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable......................................... $ 9,180 $ 2,709
Commissions receivable...................................... 76,838 33,372
Single-family mortgage loans receivable..................... 11,991 --
Notes receivable:
Brokerage employees with interest at prime plus 1%........ 1,894 1,104
Affiliate................................................. 1,750 --
-------- -------
3,644 1,104
-------- -------
$101,653 $37,185
======== =======
</TABLE>
Accounts receivable consist primarily of management fees. Commissions
receivable consist of commercial lease commissions from users of the combined
entities' real estate services. The receivables are not collateralized, but
credit losses have been insignificant and within management's estimate.
Long-term commissions receivable have been discounted to their present value.
Principal collections on notes and commissions receivable are scheduled as
follows (in thousands):
<TABLE>
<CAPTION>
NOTES COMMISSIONS
RECEIVABLE RECEIVABLE
---------- -----------
<S> <C> <C>
1998........................................................ $1,894 $69,506
1999........................................................ -- 6,390
2000........................................................ 1,750 815
2001........................................................ -- 89
2002........................................................ -- 14
Later years................................................. -- 24
------ -------
$3,644 $76,838
====== =======
</TABLE>
F-19
<PAGE> 89
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. CO-INVESTMENTS IN REAL ESTATE
The combined entities have equity investments in real estate properties,
primarily through co-investment partnerships, which own real estate consisting
primarily of commercial property. The capital ownership percentages of such
investments as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL
REAL ESTATE PARTNERSHIPS LOCATION TYPE OWNERSHIP %
------------------------ ------------------ ---------- -----------
<S> <C> <C> <C>
Courtyard Plaza Associates, L.P......... San Antonio, TX Retail 20%
101 Marietta Street Associates.......... Atlanta, GA Office 10%
Mockingbird Associates, L.P............. Indianapolis, IN Office 10%
Brickyard Investors, L.P................ Dallas, TX Industrial 19%
Brookhollow Associates, L.P............. San Antonio, TX Retail 20%
Bingham Partners, L.P................... Arizona & Michigan Office 10%
Nashpike Partners, L.P.................. Nashville, TN Retail 30%
Sleepy Lake Partners, L.P............... Lakeland, FL Retail 20%
Northpoint Partners, L.P................ Houston, TX Office 10%
Clayton Investors Associates, LLC....... Clayton, MO Office 20%
Fresh Meadows Development, LLC.......... Queens, NY Apartment 35%
Glades Plaza, L.P....................... Boca Raton,FL Retail 20%
Hiawassee Oak Partners, L.P............. Orlando, FL Retail 30%
</TABLE>
These partnerships own 22 properties comprising approximately 3.7 million
square feet of commercial space and 3,300 residential units.
In addition, at December 31, 1997, the combined entities had acquired two
properties for development at a cost of approximately $6.1 million.
F-20
<PAGE> 90
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information of the unconsolidated partnerships is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
CONDENSED STATEMENTS OF EARNINGS INFORMATION
Revenues.................................................... $ 27,267 $ 9,747
Property operating expenses................................. 11,946 3,417
Depreciation and amortization............................... 3,231 884
Interest.................................................... 8,522 2,228
Administrative.............................................. 1,411 892
-------- -------
Total operating expenses.................................... 25,110 7,421
-------- -------
Net income........................................ $ 2,157 $ 2,326
======== =======
CONDENSED BALANCE SHEET INFORMATION
Cash and investments........................................ $ 13,578 $ 1,684
Receivables and deposits.................................... 14,605 3,036
Other assets................................................ 9,705 2,138
Real estate................................................. 376,048 56,308
Less accumulated depreciation............................... (3,843) (170)
-------- -------
Net real estate............................................. 372,205 56,138
-------- -------
Total assets................................................ $410,093 $62,996
======== =======
Mortgage notes payable...................................... $329,057 $40,872
Other liabilities........................................... 14,028 2,120
-------- -------
Total liabilities........................................... 343,085 42,992
Partners' capital........................................... 67,008 20,004
-------- -------
Total liabilities and partners' capital........... $410,093 $62,996
======== =======
</TABLE>
7. ACCRUED AND SUNDRY LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Employee compensation....................................... $21,121 $ 4,442
Estimated acquisition liabilities........................... 10,836 810
Deferred taxes.............................................. 5,816 2,270
Deferred revenue............................................ 772 550
Accrued vacation............................................ 416 282
Other....................................................... 4,850 6,687
------- -------
$43,811 $15,041
======= =======
</TABLE>
F-21
<PAGE> 91
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. NOTES PAYABLE
Notes payable and the resulting interest expense of the combined entities
consists of the notes payable of Realty One and Affiliates.
Notes payable consist of the following at December 31, 1997:
<TABLE>
<S> <C>
First Ohio Mortgage Corporation $15 million line of credit
with a bank expiring on April 30, 1998, with interest
equal to the prime rate, and collateralized by
substantially all assets of First Ohio Mortgage
Corporation and guaranteed by Realty One and Affiliates... $12,495
Realty One $5.5 million revolving credit agreement with a
bank, collateralized by property and receivables, with
interest payable monthly at 6.4%, and maturity date of
September 30, 1999........................................ 3,500
Realty One $4.5 million term loan with a bank, expiring on
June 1, 2001, collateralized by property and receivables,
payable in monthly installments of $75,000 plus interest
at 6.4%................................................... 2,625
Realty One affiliate has a $3 million revolving line,
collateralized by accounts receivable and due on demand,
with interest at 8.2%..................................... 1,349
Realty One, other notes with interest rates from
5.1% -- 7.7% due at various times through 2001............ 922
-------
$20,891
=======
</TABLE>
At December 31, 1997, First Ohio Mortgage Corporation had total assets of
approximately $15.5 million, excluding intangible assets of approximately $1
million, and equity of approximately $3.3 million. Realty One's net book value
of property, plant and equipment was approximately $2.3 million and receivables
were approximately $3.1 million.
Interest paid on the Realty One debt was approximately $309,000 for the
period October 1, 1997 to December 31, 1997.
Scheduled principal maturities on notes payable after December 31, 1997 are
as follows (thousands of dollars):
<TABLE>
<S> <C>
1998.................................................... $15,095
1999.................................................... 1,145
2000.................................................... 4,552
2001.................................................... 99
2002.................................................... --
Later years............................................... --
-------
$20,891
=======
</TABLE>
Certain note agreements contain various restrictive covenants requiring,
among other things, minimum consolidated net worth, minimum liquidity, and
various other financial ratios. Realty One is in compliance with these
restrictive covenants.
First Ohio Mortgage Corporation has a $2,000,000 line of credit with a bank
that expires on April 28,1998. The line is collateralized by substantially all
of the assets of First Ohio Mortgage Corporation and is guaranteed by Realty One
and Affiliates. The interest rate on all advances under the line is prime plus
1.0%. There were no outstanding advances under this line of credit at December
31, 1997.
F-22
<PAGE> 92
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, the stock of the significant companies comprising
the combined entities was pledged as collateral on a revolving credit facility
of Insignia. In conjunction with the Merger Agreement and Spin-off, the Insignia
revolving credit agreement will be revised (see Note 12).
9. INVESTMENT AND NET ADVANCES FROM INSIGNIA
The following analyzes Insignia's Net Investment in the combined entities
for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- -------
<S> <C> <C> <C>
Balance at beginning of year......................... $137,777 $ 39,948 $17,294
Net earnings......................................... 13,055 3,484 (2,278)
Equity assumed in acquisitions....................... -- 24,450 3,711
Net transactions with Insignia....................... 57,612 69,895 21,221
-------- --------- -------
Balance at end of year............................... $208,444 $ 137,777 $39,948
======== ========= =======
</TABLE>
Included in Insignia's Net Investment in the combined entities are accounts
payable and receivable between Insignia and the combined entities. Insignia's
average Net Investment in the combined entities was $146,210, $99,032 and
$27,441 for the years ended December 31, 1997, 1996 and 1995, respectively.
Insignia's Net Investment in the combined entities has no due date and does not
require an interest expense charge.
10. COMPENSATION PLANS
The combined entities had no stock options outstanding as of December 31,
1997. Subsequent to the spin-off, Holdings intends to adopt its own Stock
Incentive, Employee Stock Purchase and Executive Performance Plans.
Holdings will apply Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations in
accounting for its employee stock based compensation because the alternative
fair value accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options and warrants.
11. INCOME TAXES
The combined entities are included in the consolidated federal income tax
return of Insignia. The income tax provision reflects the portion of Insignia's
historical income tax provision attributable to the operations of the combined
entities as if they were not included in Insignia's consolidated federal income
tax return. Management believes the income tax provision, as reflected, is
comparable to what the income tax provision would have been if the combined
entities had filed a separate return during the periods presented.
F-23
<PAGE> 93
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Acquisition related intangibles........................... $(8,018) $(3,800)
Tax over book depreciation................................ (1,249) (256)
Other, net................................................ -- (285)
------- -------
Total deferred tax liabilities.................... (9,267) (4,341)
Deferred tax assets:
Net operating losses...................................... 2,263 2,071
Partnership earnings differences.......................... 721 --
Other, net................................................ 767 --
------- -------
Total deferred tax assets................................... 3,751 2,071
Valuation allowance for deferred tax assets................. (300) --
------- -------
Deferred tax assets, net of valuation allowance............. 3,451 2,071
------- -------
Net deferred tax (liabilities).................... $(5,816) $(2,270)
======= =======
</TABLE>
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current (payable):
Federal............................................... $4,595 $1,408 $ --
State................................................. 693 221 28
------ ------ -------
Total current................................. 5,288 1,629 28
Deferred:
Federal............................................... 2,765 707 (1,188)
State................................................. 650 (201) (236)
------ ------ -------
Total deferred................................ 3,415 506 (1,424)
------ ------ -------
$8,703 $2,135 $(1,396)
====== ====== =======
</TABLE>
In 1996, Holdings utilized a net operating loss of approximately $1,800,000
which was generated in 1995.
F-24
<PAGE> 94
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of income tax (benefit) attributable to continuing
operations computed at the U.S. statutory rate to income tax expense (benefit)
is shown below (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates........... $7,615 35.0% $1,967 35.0% $(1,285) 35.0%
Effect of incremental tax rates....... (100) (0.5) (41) (0.7)
State income taxes, net of Federal tax
benefit............................. 1,074 4.9 168 3.0 (103) 2.8
Effect of permanent differences....... 478 2.2 93 1.6 (4) 0.1
Change in valuation reserve........... 300 1.4
Change in state tax rates............. (32) (0.2) (52) (0.9) (4) 0.1
Other................................. (632) (2.8)
------ ---- ------ ---- ------- ----
$8,703 40.0% $2,135 38.0% $(1,396) 38.0%
====== ==== ====== ==== ======= ====
</TABLE>
Income tax payments allocated to the combined entities were approximately
$11,786,000 (1997), $134,000 (1996), and $28,000 (1995). Income taxes payable
and receivable are charged directly against the investment from Insignia. Income
taxes payable of $1,495,000(1996) and income taxes receivable of $5,003,000
(1997) have been charged against the investment from Insignia.
As a result of the acquisition of Paragon Group Properties Services, Inc.,
net operating losses of approximately $5,000,000 were acquired. These losses
carryforward to the calendar year ended December 31, 2010. The carryforward is
subject to provisions of the Internal Revenue Code, which limit the use of the
carryforward to the lesser of the value of the stock multiplied by the Federal
long-term tax-exempt rate or the subsidiary's income.
12. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
The combined entities are defendants in lawsuits arising in the ordinary
course of business. Claims may demand substantial compensatory and punitive
damages. Management believes that the lawsuits will be resolved without material
impact to the financial position or results of operations of the combined
entities.
Environmental Liabilities
Under various Federal and state environmental laws and regulations, a
current or previous owner or operator of real estate may be required to
investigate and clean up certain hazardous or toxic substances or petroleum
product releases at the property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and cleanup
costs incurred by such parties in connection with contamination. In addition,
some environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
The owner or operator of a site may be liable under common law to third parties
for damages and injuries resulting from environmental contamination emanating
from the site. There can be no assurance that the combined entities, or any
assets owned or controlled by the combined entities, currently are in compliance
with all of such laws and regulations, or that the combined entities will not
become subject to liabilities that arise in whole or in part out of any such
laws, rules, or regulations. Management is not currently aware of any
environmental liabilities which are expected to have a material adverse effect
on the combined entities' operations or financial condition.
F-25
<PAGE> 95
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Operating Leases
The combined entities lease office space and equipment under noncancelable
operating leases. Minimum annual rentals under operating leases for the five
years ending after December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $12,370
1999........................................................ 11,139
2000........................................................ 9,753
2001........................................................ 7,932
2002........................................................ 6,288
Thereafter.................................................. 14,749
-------
Total minimum payments required............................. $62,231
=======
</TABLE>
Direct as well as allocated rental expense was approximately $9,967,000
(1997), $4,796,000 (1996) and $1,936,000 (1995).
Certain of the leases are subject to annual escalation based on the
Consumer Price Index.
Holdings is expected to complete lease negotiations in May 1998, for
additional office space in New York and Chicago. The average minimum annual
payments will be approximately $2.6 million for a period of approximately 10
years.
401(k) Retirement Plan
The combined entities participated in Insignia's 401(k) savings plan which
covered substantially all of its employees. The combined entities were allocated
approximately $1,302,000, $954,000 and $771,000 during 1997, 1996 and 1995,
respectively for its share of contributions.
Holdings intends to adopt its own 401(k) savings plan. Employees of
Insignia who will become employees of Holdings and who have accounts under the
Insignia 401(k) plan will have those accounts transferred to accounts under the
Holdings 401(k) Plan.
Property Dispositions
In November 1994, a portion of the assets (consisting primarily of
management contracts) of Allegiance Realty Group, a wholly owned subsidiary of
the Balcor Company, Inc. ("Balcor") were acquired. Balcor announced in the
second quarter of 1996 its intention to sell a large portion of the properties
covered by these management contracts. An agreement was entered into with Balcor
whereby an advisory fee would be paid to the combined entities based on the
property sales for services rendered in the sales transactions. The Advisory
Agreements have terms of one year and the fees range from .75% to 1.25% of the
sales price of the property. The fees are and will continue to be paid in cash
after the close of each transaction. Management believes that the unamortized
purchase price relating to properties managed for Balcor properly reflects the
asset value and that no impairment exists.
Indemnification Agreement
In connection with the Merger Agreement, Holdings and AIMCO entered into an
Indemnification Agreement. The Indemnification Agreement provides generally that
following consummation of the Merger, Holdings will indemnify and hold harmless
AIMCO from and against all losses in excess of $9.1 million resulting from (i)
breaches of representations, warranties or covenants of Insignia or Holdings in
the Merger
F-26
<PAGE> 96
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Agreement, (ii) actions taken by or on behalf of Insignia prior to consummation
of the Merger and (iii) the Distribution. Holdings is also required to indemnify
AIMCO against all losses (without regard to any dollar value limitation)
resulting from (a) amounts paid or payable to employees of Insignia actually
paid by AIMCO, other than those employees AIMCO has agreed to retain following
the consummation of the Merger, (b) obligations to third parties for goods,
services, taxes or indebtedness incurred prior to the consummation of the
Merger, other than as agreed to by AIMCO or included in the approximately $308
million of indebtedness and liabilities which AIMCO succeeded to in the Merger
and (c) Insignia's ownership of Holdings.
The Indemnification Agreement also provides generally that following
consummation of the Merger, AIMCO will indemnify and hold harmless Holdings from
all losses that arise out of the operation of the business of Insignia being
acquired by AIMCO following consummation of the Merger and for all losses in
excess or $9.1 million arising from breach of any representation, warranty or
covenant of AIMCO in the Merger Agreement.
In addition, Holdings will indemnify AIMCO for taxes resulting from the
consummation of the spin-off to the extent that such taxes arise from a gain
realized on that portion of the fair market value of Holdings Common Stock at
the time of the spin-off which is greater than a specified per share amount to
be determined prior to the spin-off.
Other
Subsequent to the spin-off, Holdings will guarantee Insignia's obligations
under Insignia's revolving credit facility, and the assets of Holdings will be
subject to liens in favor of Insignia's revolving credit facility lenders.
Insignia will use its reasonable best efforts to obtain the release of Holdings
as guarantor under the revolving credit facility and the removal of the liens.
13. INDUSTRY SEGMENTS
The combined entities represent a fully integrated real estate services
company, which currently operates in principally two business segments,
commercial and residential services. The commercial services business segment
provides property and asset management services, leasing and brokerage,
investment sales and development, and tenant representation services. The
commercial services business segment also includes co-investment partnerships in
which the combined entities have significant investments. The residential
services business segment provides property management services, originates
loans, and brokers residential real estate.
The following table summarizes certain information by industry segment:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Identifiable assets:
Commercial services............................... $245,948 $152,666 $25,160
Residential services.............................. 87,284 18,159 17,611
Other............................................. 1,262 962 303
-------- -------- -------
$334,494 $171,787 $43,074
======== ======== =======
Gross revenues and equity earnings:
Commercial services............................... $247,548 $ 98,766 $31,309
Residential services.............................. 48,356 23,512 7,349
-------- -------- -------
$295,904 $122,278 $38,658
======== ======== =======
</TABLE>
F-27
<PAGE> 97
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating profit (loss):
Commercial services............................... $ 27,697 $ 7,597 $(2,537)
Residential services.............................. 1,108 1,542 461
-------- -------- -------
28,805 9,139 (2,076)
Interest.......................................... (318) (18)
Overhead allocations from Insignia................ (6,770) (3,502) (1,598)
Minority interests................................ 41
-------- -------- -------
$ 21,758 $ 5,619 $(3,674)
======== ======== =======
Depreciation and amortization expense:
Commercial services............................... $ 12,946 $ 7,745 $ 3,377
Residential services.............................. 2,298 1,452 401
-------- -------- -------
$ 15,244 $ 9,197 $ 3,778
======== ======== =======
Capital expenditures:
Commercial services............................... $ 4,990 $ 2,933 $ 1,270
Residential services.............................. 650 1,308 592
Other............................................. 300 659 35
-------- -------- -------
$ 5,940 $ 4,900 $ 1,897
======== ======== =======
</TABLE>
Assets of the commercial services business segment include the
co-investments in real estate and the revenues of this segment include equity
earnings. These investees represent partnerships owning commercial real estate
consisting of commercial property. Other assets include primarily property and
equipment. The $1,000,000 employment agreement termination expense has been
included in the commercial services business segment.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value estimates of financial instruments presented below are not
necessarily indicative of the amounts the combined entities might pay or receive
in actual market transactions. Potential taxes and other taxes have also not
been considered in estimating fair value. The carrying amount reported on the
balance sheet for cash and cash equivalents approximates its fair value.
Receivables reported on the balance sheet consist of property and lease
commission receivables, mortgage loans receivable and various note receivables.
The property receivables approximate their fair values. Lease commissions
receivable are carried at their discounted present value, therefore the carrying
amount and fair value amount are the same. The mortgage loans receivable and
notes receivable earn interest at either fixed or variable rates. Interest rates
approximate current market interest rates for similar instruments, therefore,
the carrying amount approximates their fair value. Notes payable were analyzed
individually to calculate fair value based on current interest rates and market
value, if applicable.
F-28
<PAGE> 98
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Summary
The carrying amounts and fair values of the combined entities' financial
instruments at December 31, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------- ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents.................... $ 9,250 $ 9,250 $ 44 $ 44
Receivables.................................. 101,653 101,653 37,185 37,185
Commissions payable.......................... 51,285 51,285 18,736 18,736
Notes payable................................ 20,891 21,023 -- --
</TABLE>
15. SUBSEQUENT EVENTS
Acquisitions
Cohen Financial
On January 7, 1998, the rights to perform property management, leasing and
construction supervision services for approximately 4.1 million square feet of
commercial real estate were acquired from Cohen Financial which is based in
Chicago, Illinois. The purchase price was approximately $1 million.
Goldie B. Wolfe & Company
On January 20, 1998, 100% of the stock of Goldie B. Wolfe & Company, a
commercial real estate services firm based in Chicago, Illinois was acquired.
The purchase price was approximately $5.3 million.
Richard Ellis Group Limited Acquisition
In February 1998, 100% of the stock of Richard Ellis Group Limited
("Richard Ellis") was acquired. Richard Ellis is a real estate services and
investment firm headquartered in London with offices throughout the United
Kingdom. The purchase price was approximately $68.2 million. In addition,
contingent payments of approximately $14.7 million could be paid based upon
future performance measures.
Litigation
On March 24, 1998, certain persons claiming to own limited partner interest
in certain limited partnerships whose general partners (the "General Partners")
are affiliates of Insignia (the "Partnerships") filed a purported class and
derivative action in California Superior Court in the County of San Mateo
against Insignia, the General Partners, AIMCO, certain persons and entities who
purportedly formerly controlled the General Partners, and additional entities
affiliated with the individuals who are officers, directors and/or principals of
several of the defendants. The complaint contains allegations that, among other
things, (i) the defendants breached their fiduciary duties to the plaintiffs by
selling or agreeing to sell their "fiduciary positions" as stockholders,
officers and directors of the General Partners for a profit and retaining said
profit rather than distributing it to the plaintiffs; (ii) the defendants
breached their fiduciary duties by mismanaging the Partnerships and
misappropriating the assets of the Partnerships by (a) manipulating the
operations of the Partnerships to depress the trading price of limited
partnership units (the "Units") of the Partnerships; (b) coercing and
fraudulently inducing unitholders to sell Units to certain of the defendants at
depressed prices; and (c) using the voting control obtained by purchasing Units
at depressed prices to entrench certain of the defendants' positions of control
over the Partnerships; and (iii) the defendants breached their fiduciary duties
to the plaintiffs by (a) selling assets of the Partnership such as mailing lists
of unitholders; and (b) causing the General Partners to enter into exclusive
arrangements with their affiliates to sell goods and
F-29
<PAGE> 99
INSIGNIA FINANCIAL GROUP, INC. ENTITIES TO BE SPUN-OFF INTO
INSIGNIA/ESG HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
services to the General Partners, the unitholders and tenants of Partnership
properties. The complaint also alleges that the foregoing allegations constitute
violations of various California Securities, corporate and partnership statutes,
as well as conversion and common law fraud. The complaint seeks unspecified
compensatory and punitive damages, an injunction blocking the sale of control of
the General Partners to AIMCO and a court order directing the defendants to
discharge their fiduciary duties to the plaintiffs. As of the date of this
response, defendants have not served or filed a reply to the complaint.
F-30
<PAGE> 100
EDWARD S. GORDON COMPANY, INCORPORATED AND
EDWARD S. GORDON COMPANY OF NEW JERSEY, INC.
CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Revenue:
Revenue before co-brokers' commissions.................... $ 53,610,167 $49,021,216
Co-brokers' commissions................................... 6,832,442 2,720,354
------------ -----------
Net revenue....................................... 46,777,725 46,300,862
Salespersons' commissions................................. 20,187,306 21,849,355
------------ -----------
26,590,419 24,451,507
------------ -----------
Expenses:
Payroll and related benefits.............................. 16,215,722 15,726,507
Deferred compensation and stock option plan............... 37,663,570 759,232
Professional fees......................................... 1,178,690 779,329
Rent...................................................... 2,393,133 2,284,827
Depreciation and amortization............................. 1,446,873 778,130
General and administrative................................ 4,149,562 4,855,676
------------ -----------
63,047,550 25,183,701
------------ -----------
Department loss................................... (36,457,131) (732,194)
------------ -----------
Other income (expenses):
Interest and dividend income.............................. 20,402 23,303
Interest expense.......................................... (676,687) (43,660)
------------ -----------
Other expenses, net............................... (656,285) (20,357)
------------ -----------
Loss before provision for income taxes............ (37,113,416) (752,551)
------------ -----------
(Benefit) provision for income taxes:
Current................................................... (80,000) 201,783
Deferred.................................................. (3,448,017) (288,367)
------------ -----------
(3,528,017) (86,584)
------------ -----------
Net loss.......................................... $(33,585,399) $ (665,967)
============ ===========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-31
<PAGE> 101
EDWARD S. GORDON COMPANY, INCORPORATED AND
EDWARD S. GORDON COMPANY OF NEW JERSEY, INC.
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(33,585,399) $ (665,967)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 1,446,873 778,130
Discount on non-current commission receivables and
payables.............................................. 247,509 (16,840)
Provision for uncollectible accounts................... 110,279 187,500
Deferred income taxes.................................. (3,448,017) (288,367)
Straight-line rent adjustment.......................... (137,624) (277,171)
Stock option and deferred compensation plan............ 37,663,570 759,232
Change in assets and liabilities:
(Increase) decrease in accounts receivable........... (4,534,285) 9,012,041
Decrease (increase) in employee notes receivable,
other current assets and other assets............... 71,573 (1,655,395)
Increase in commissions payable...................... 7,265,237 2,191,657
Increase in accounts payable, accrued expenses and
other liabilities................................... 1,271,795 1,801,487
Increase in income taxes payable..................... 69,496 24,846
------------ -----------
Total adjustments................................. 40,026,406 12,517,120
------------ -----------
Net cash provided by operating activities......... 6,441,007 11,851,153
------------ -----------
Cash flows from investing activities:
Capital expenditures...................................... (1,187,384) (577,384)
Purchases of investment bonds............................. (125,000)
------------ -----------
Net cash used in investing activities............. (1,187,384) (702,384)
------------ -----------
Cash flows from financing activities:
Payments on demand note payable........................... (5,600,000) (8,275,000)
------------ -----------
Net cash used in financing activities............. (5,600,000) (8,275,000)
------------ -----------
Net (decrease) increase in cash and cash
equivalents.................................... (346,377) 2,873,769
Cash and cash equivalents, at beginning of period........... 1,042,671 804,712
------------ -----------
Cash and cash equivalents, at end of period....... $ 696,294 $ 3,678,481
============ ===========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-32
<PAGE> 102
EDWARD S. GORDON COMPANY, INCORPORATED AND
EDWARD S. GORDON COMPANY OF NEW JERSEY, INC.
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996
1. INTERIM FINANCIAL STATEMENTS:
The accompanying unaudited condensed combined financial statements include
the accounts of Edward S. Gordon Company, Incorporated and Edward S. Gordon
Company of New Jersey, Inc. (the "Company") and have been prepared by the
Company pursuant to the rules of the Securities and Exchange Commission ("SEC")
and, in the opinion of the Company, include all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of results of
operations and cash flows. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such SEC rules.
The Company believes that the disclosures made are adequate to make the
information presented not misleading. The condensed combined statements of
income for the six months ended June 30, 1996 and 1995 are not necessarily
indicative of the results to be expected for the full year. It is suggested that
these financial statements be read in conjunction with the latest audited
financial statements and notes thereto.
2. SALE OF THE COMPANY:
Effective June 30, 1996, the Company agreed to sell certain fixed assets,
contracts and the Company name to the Insignia Financial Group, Inc. (the
"Acquiror") for $49,300,000 in cash, $24,450,000 in common stock options of the
Acquiror plus a contingent purchase price feature. This transaction falls under
the definition of an Event in the stock option and deferred compensation
agreement. Therefore, the outstanding stock options became fully vested upon the
consummation of the sale. The Company, however, prohibited the exercise of the
stock options by giving the option holders written notice before the
commencement of the exercise period and paying the option holders an amount
equal to the excess of the fair market value of the consideration which the
option holders would have received if the exercise of the stock options were not
prohibited over the exercise price of the shares. This payment amounted to
$40,278,570 and has been offset by the reversal of the accrual for deferred
compensation on the unaudited condensed combined Statements of Operations.
3. INCOME TAXES:
The Company has elected, for federal and state income tax purposes, to be
treated under the provisions of the Internal Revenue Code as an "Electing Small
Business Corporation" ("S" Corporation). An "S" Corporation is generally not
subject to federal or state income taxes.
However, the Company is subject to New York City income taxes. Therefore,
the effective income tax rate is substantially less than the statutory federal
income tax rate. The annual corporate income, whether distributed or not, is
taxed currently to the individual stockholders according to their ownership
interest in the shares of the respective "S" Corporation.
For income tax purposes, the Company utilizes the cash receipts and
disbursements method, whereas the accrual method is used for financial
reporting. Deferred New York City corporation income taxes are reflected in the
financial statements primarily to recognize the effects of these different
methods. No provision is reflected for income tax liabilities of individual
stockholders related to their share of the Company's income.
F-33
<PAGE> 103
EDWARD S. GORDON COMPANY, INCORPORATED AND
EDWARD S. GORDON COMPANY OF NEW JERSEY, INC.
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. INCOME TAXES: (CONTINUED) --
Deferred income taxes arise from temporary differences between the tax
bases of assets and liabilities and their reported amounts in the combined
financial statements. At June 30, 1996, the components of the net deferred
income tax assets is as follows:
<TABLE>
<S> <C>
ASSETS:
Allowance for uncollectable accounts...................... $ 95,300
Accounts payable and accrued expenses..................... 583,745
Due to deferred compensation and stock option plan
participants........................................... 4,027,857
Commissions payable....................................... 2,086,351
Deferred rent payable..................................... 166,613
----------
6,959,866
----------
LIABILITIES:
Fixed assets.............................................. 444,070
Accounts receivable....................................... 4,507,074
Other assets.............................................. 397,960
----------
5,349,104
----------
Net deferred tax asset............................ $1,610,762
==========
</TABLE>
The Company has recorded a current deferred tax asset of $2,241,356 and a
noncurrent deferred tax liability of $630,594 at June 30, 1996.
4. CONTINGENCIES:
The Company is involved in litigation and disputes which are normal in the
real estate leasing industry. Management is of the opinion that the ultimate
liability, if any, resulting from litigation, will not have a material adverse
effect on the Company's combined financial condition or results of operations.
F-34
<PAGE> 104
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Edward S. Gordon Company, Incorporated and
Edward S. Gordon Company of New Jersey, Inc.:
We have audited the accompanying combined statements of operations and cash
flows of EDWARD S. GORDON COMPANY, INCORPORATED and EDWARD S. GORDON COMPANY of
NEW JERSEY, INC. (the "Company") for the three years ended December 31, 1995,
1994 and 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the combined results of operations and cash flows of
Edward S. Gordon Company, Incorporated and Edward S. Gordon Company of New
Jersey, Inc. for the years ended December 31, 1995, 1994 and 1993, in conformity
with generally accepted accounting principles.
PricewaterhouseCoopers LLP
New York, New York
April 1, 1996
F-35
<PAGE> 105
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
Revenue:.............................................
Revenue before co-brokers' commissions............. $97,193,603 $104,973,015 $71,205,126
Co-brokers' commissions............................ (5,129,023) (8,696,977) (5,175,090)
----------- ------------ -----------
Net revenue................................ 92,064,580 96,276,038 66,030,036
Salespersons' commissions............................ 39,562,989 40,180,629 26,432,223
----------- ------------ -----------
52,501,591 56,095,409 39,597,813
----------- ------------ -----------
Expenses:
Payroll and related benefits....................... 32,804,688 33,692,677 24,783,134
Professional fees.................................. 1,607,314 1,411,811 906,048
Rent............................................... 4,181,664 4,558,599 4,895,717
Depreciation and amortization...................... 2,476,200 1,788,749 1,889,748
General and administrative......................... 9,486,178 9,941,765 9,330,445
----------- ------------ -----------
50,556,044 51,393,601 41,805,092
----------- ------------ -----------
Department income (loss)................... 1,945,547 4,701,808 (2,207,279)
----------- ------------ -----------
Other income (expenses):
Interest and dividend income....................... 84,259 58,676 201,171
Interest expense................................... (339,072) (396,362) (781,993)
Sublease income.................................... 209,604 401,823
Loss on write-off of investment.................... (45,000)
----------- ------------ -----------
Other expenses, net........................ (254,813) (128,082) (223,999)
----------- ------------ -----------
Income (loss) before provision for income
taxes.................................... 1,690,734 4,573,726 (2,431,278)
----------- ------------ -----------
Provision (benefit) for income taxes:
Current............................................ 241,979 396,653 229,629
Deferred........................................... 398,898 408,582 (381,290)
----------- ------------ -----------
640,877 805,235 (151,661)
----------- ------------ -----------
Net income (loss).......................... $ 1,049,857 $ 3,768,491 $(2,279,617)
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-36
<PAGE> 106
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ 1,049,857 $ 3,768,491 $(2,279,617)
----------- ------------ -----------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................... 2,476,200 1,788,749 1,889,748
Discount on non-current commission receivables
and payables.................................. 76,248 (18,975) 480,610
Write-off of investment......................... 45,000
Contribution of investment bonds................ 192,620 75,000
Provision for uncollectible accounts............ 1,016,523 17,510 681,968
Deferred income taxes........................... 398,898 408,582 (381,290)
Straight-line rent adjustment................... (355,968) (568,900) (235,454)
Deferred compensation........................... 1,274,000 1,341,000
Income tax reserve.............................. (1,250,000)
Change in assets and liabilities:
(Increase) decrease in accounts receivable.... (3,819,024) (10,525,161) 2,071,479
Increase in employee notes receivable and
other current assets....................... (2,482,209) (69,183) (2,666,843)
Decrease in other assets...................... 1,504,360
Increase in commissions payable............... 2,162,931 4,320,417 1,059,994
Increase in accounts payable, accrued expenses
and other liabilities...................... 1,290,709 (174,664) 79,129
(Decrease) increase in income taxes payable... (40,160) 37,693
----------- ------------ -----------
Total adjustments.......................... 788,308 (3,328,165) 4,641,394
----------- ------------ -----------
Net cash provided by operating
activities............................... 1,838,165 440,326 2,361,777
----------- ------------ -----------
Cash flows from investing activities:
Repayment of advance to stockholder................ 100,000
Advance to stockholder............................. (2,445,000)
Purchases of artwork............................... (5,640)
Capital expenditures............................... (6,299,102) (389,456) (708,672)
Proceeds from sales of fixed assets................ 6,500
Purchases of investment bonds...................... (126,104) (10,000) (110,000)
----------- ------------ -----------
Net cash used in investing activities...... (6,425,206) (392,956) (3,169,312)
----------- ------------ -----------
Cash flows from financing activities:
Demand note payable borrowings..................... 5,600,000 8,275,000 8,200,000
Payments on demand note payable.................... (8,275,000) (8,200,000) (7,333,000)
Long-term debt borrowings.......................... 7,500,000
----------- ------------ -----------
Net cash provided by financing
activities............................... 4,825,000 75,000 867,000
----------- ------------ -----------
Net increase in cash and cash
equivalents.............................. 237,959 122,370 59,465
Cash and cash equivalents, at beginning of year...... 804,712 682,342 622,877
----------- ------------ -----------
Cash and cash equivalents, at end of
year..................................... $ 1,042,671 $ 804,712 $ 682,342
=========== ============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................ $ 237,824 $ 415,337 $ 341,383
Income taxes.................................... 309,155 483,723 104,948
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
1) During 1993, the Company made a deemed distribution of $6,006,426 to a
stockholder by reducing the advance due from that stockholder.
The accompanying notes are an integral part of the combined financial
statements.
F-37
<PAGE> 107
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of combination:
The accompanying combined financial statements include the accounts of
Edward S. Gordon Company, Incorporated and Edward S. Gordon Company of New
Jersey, Inc. (together, the "Company"). These financial statements have been
prepared on a combined basis because each company is owned and controlled by the
same stockholder and are in the same industry. Inter-entity accounts and
transactions are eliminated in the combination.
Commission income and expense:
The income of the Company is derived principally from commissions in
connection with the leasing of commercial office space, consulting services,
property management services and the sale of properties primarily in the New
York City metropolitan area. Income and the related commission expense are
recognized upon the signing of a lease or sales document.
Imputed interest:
Interest has been imputed on non-current commissions receivable and payable
arising during the years ended December 31, 1995, 1994 and 1993 at rates of 9%,
8% and 6%, respectively.
Fixed assets:
Fixed assets are recorded at cost and are being depreciated over their
estimated useful lives, which range from 5 to 13 years, principally by the
straight-line and double-declining-balance methods. Leasehold improvements are
amortized by the straight-line method over the lesser of their estimated useful
lives or the remaining lease terms. Fixed assets are written off in the year
after they have become fully depreciated.
Income taxes:
The Company has elected, for federal and state income tax purposes, to be
treated under the provisions of the Internal Revenue Code as an "Electing Small
Business Corporation" ("S" Corporation). An "S" Corporation is generally not
subject to federal or state income taxes.
However, the Company is subject to New York City income taxes. Therefore,
the effective income tax rate is substantially less than the statutory federal
income tax rate. The annual corporate income, whether distributed or not, is
taxed currently to the individual stockholders according to their ownership
interest in the shares of the respective "S" Corporation.
For income tax purposes, the Company utilizes the cash receipts and
disbursements method, whereas the accrual method is used for financial
reporting. Deferred New York City corporation income taxes are reflected in the
financial statements primarily to recognize the effects of these different
methods. No provision is reflected for income tax liabilities of individual
stockholders related to their share of the Company's income.
Cash and cash equivalents:
The Company considers all highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents.
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 revenue and expenses during the reported
period. The most significant estimates and
F-38
<PAGE> 108
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
assumptions relate to the realizability of accounts receivable and the
recoverability of fixed assets. Actual results could differ from those
estimates.
New Pronouncements:
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and For Long-Lived Assets To Be Disposed Of." This statement
addresses the accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used. This statement will be effective for the Company in fiscal year 1996. This
statement, when adopted, is not expected to have a material effect on the
Company's statements of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." This statement establishes fair value-based financial accounting
and reporting standards for all transactions in which a company acquires goods
or services by issuing its equity instruments or by incurring a liability to its
supplier in amounts based on the price of its common stock or other equity
instruments. This statement will be effective for the Company in fiscal year
1996. This statement, when adopted, is not expected to have a material effect on
the Company's statements of operations.
2. COMMITMENTS AND CONTINGENCIES:
a. The Company is leasing office space under the terms of various leases,
which have been accounted for as operating leases. These obligations extend for
various periods through June 2005. One of the leases provides the option to
extend the term for two successive periods of five years each. The Company was
granted an abatement of rent at the beginning of one of the lease obligations
for nine months, during which time no rent payments were required or made. For
financial statement purposes, the total rent due under this lease has been
allocated ratably over its term.
Rent expense was $4,181,664 in 1995, $4,558,599 in 1994 and $4,895,717 in
1993. Sublease income for 1994 and 1993 amounted to $209,604 and $401,823,
respectively. The leases require the Company to pay a proportionate share of
real estate tax and operating expense increments, which amounted to $849,071,
$800,971 and $848,654 for 1995, 1994 and 1993, respectively.
The Company's obligations under these operating leases as of December 31,
1995 for the next five years and thereafter are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
- -----------
<S> <C>
1996................................................... $ 3,814,352
1997................................................... 3,814,352
1998................................................... 3,692,780
1999................................................... 3,389,845
2000................................................... 3,260,300
Thereafter............................................. 14,619,901
-----------
Total minimum payments required.............. $32,591,530
===========
</TABLE>
b. The Company had recorded a $1,250,000 reserve for potential assessments
that could result from a New York State sales tax audit. The audit was completed
in 1995 and no assessment was made against the Company. Accordingly, the reserve
of $1,250,000 was reversed and has been reflected as a reduction of general and
administrative expenses in the accompanying 1995 combined statements of
operations.
F-39
<PAGE> 109
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
c. The Company is involved in litigation and disputes which are normal in
the real estate leasing industry. Management is of the opinion that the ultimate
liability, if any, resulting from litigation, will not have a material adverse
effect on the Company's combined financial condition or results of operations.
3. RELATED PARTIES:
The Company subleased office space to a business partially owned by a
person related to a stockholder of the Company. The sublease expired on February
28, 1994.
4. SAVINGS PLAN:
The Company has a contributory savings plan for the benefit of its
employees. It is the intention of the Company that this plan meet all
requirements for profit-sharing plan qualification under Sections 401(a) and
401(b) of the Internal Revenue Code. Employees may make contributions of up to
16% of their compensation. The Company makes a matching contribution equal to a
maximum of 50% of the first 6% of employee compensation. Participants are always
100% vested in their contributions while they vest at 20% per year in regards to
the Company matching contribution for each year that they perform over 1,000
hours of service. For the years ended December 31, 1995, 1994 and 1993, the
Company's matching contribution was $340,362, $208,572 and $197,884,
respectively.
5. STOCK OPTIONS AND DEFERRED COMPENSATION AGREEMENT:
In 1994, the Company amended and restated its stock option and deferred
compensation agreement ("Agreement") with certain employees. The Agreement
grants stock options to purchase an aggregate of 2,954,000 shares of the
Company's common stock. There is no limit on the amount of options available for
grant. The options, which do not expire, fully vest only upon the occurrence of
certain defined events (an "Event"). The exercise price of the options is based
upon the calculated fair market value of the Company's common stock on the stock
option grant date. At December 31, 1995, the exercise prices per share range
from $5.75 to $13.28 for Edward S. Gordon Company, Incorporated and from $0.00
to $0.126 for Edward S. Gordon Company of New Jersey, Inc. The Company has the
right to prohibit the exercise of the options by giving the option holder
written notice prior to the commencement of the exercise period. In the event
that the Company prohibits the exercise of stock it must pay the option holder
an amount equal to the excess of the fair market value of the consideration
which the option holder would have received with respect to the shares upon the
consummation of the Event over the exercise price of the shares. The Company has
also granted the same employees receiving stock options the right to receive
deferred compensation equal to their pro-rata share of defined profit and loss
upon termination of employment. For certain option holders, the right to receive
deferred compensation vests in increments of 20% on the anniversary of the grant
in each of the subsequent five years. See Note 1.
Information with respect to stock options granted is as follows:
<TABLE>
<S> <C>
Options outstanding, January 1, 1993........................ 662,000
Granted................................................... 195,000
Forfeited................................................. (17,500)
---------
Options outstanding, December 31, 1993...................... 839,500
Granted................................................... 1,814,500
---------
Options outstanding, December 31, 1994...................... 2,654,000
Granted................................................... 350,000
Forfeited................................................. (50,000)
---------
Options outstanding, December 31, 1995...................... 2,954,000
=========
</TABLE>
F-40
<PAGE> 110
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, to facilitate tax requirements for certain states, the
majority shareholder of the Company requested the minority shareholders of
Edward S. Gordon Company of New Jersey, Inc. to exchange 395,000 shares of
common stock for 350,000 stock options. The options are convertible back into
common stock of Edward S. Gordon Company of New Jersey, Inc. at a zero exercise
price.
6. CONCENTRATION OF RISK:
Financial Risk:
The Company maintains its cash and cash equivalents at five financial
institutions which management believes are of high quality.
Geographic Concentration:
The Company's revenue is generated primarily in the New York City
metropolitan area. This concentration imposes on the Company certain risks,
which include local economic conditions, that are not within management's
control.
7. SUBSEQUENT EVENT:
Effective June 30, 1996, the Company agreed to sell certain fixed assets,
contracts and the Company name to the Insignia Financial Group Inc. (the
"Acquiror") for $49,300,000 in cash, $24,450,000 in common stock options of the
Acquiror plus a contingent purchase price feature. This transaction falls under
the definition of an Event in the stock option and deferred compensation
agreement (Note 5). Therefore, the outstanding stock options became fully vested
upon the consummation of the sale. The Company, however, prohibited the exercise
of the stock options by giving the option holders written notice before the
commencement of the exercise period and paying the option holders an amount
equal to the excess of the fair market value of the consideration which the
option holders would have received if the exercise of the stock options were not
prohibited over the exercise price of the shares. This payment amounted to
$40,278,570.
F-41
<PAGE> 111
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Realty One, Inc. and Affiliated Companies
We have audited the accompanying combined balance sheets of Realty One,
Inc. and affiliated companies as of December 31, 1996 and 1995 and the related
combined statements of income, changes in stockholders' equity and cash flows
for the years then ended. These combined financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Realty One,
Inc. and affiliated companies as of December 31, 1996 and 1995 and the combined
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As disclosed in Note 12 to the combined financial statements, all of the
Companies' outstanding common stock was acquired by Insignia Financial Group,
Inc. effective October 1, 1997.
PLANTE & MORAN, LLP
Cleveland, Ohio
June 23, 1998
F-42
<PAGE> 112
REALTY ONE, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
ASSETS (Notes 5 and 6)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 3,683,569 $ 1,191,756
Mortgage loans held for sale.............................. 9,089,634 6,033,780
Commissions receivable.................................... 9,215,650 9,220,521
Accounts receivable:
Trade.................................................. 2,631,370 1,480,827
Sales associates....................................... 636,530 526,918
Fees earned on closed loans............................ 436,769 272,956
Affiliates (Note 2).................................... 79,126 100,664
Other.................................................. 344,426 679,518
Prepaid expenses and other current assets................. 446,716 423,854
----------- -----------
Total current assets.............................. 26,563,790 19,930,794
PROPERTY AND EQUIPMENT -- Net (Notes 3 and 7)............... 9,437,485 8,717,654
OTHER ASSETS
Intangible assets -- Net.................................. 2,573,374 2,683,940
Investments (Note 4)...................................... 732,731 643,892
Deposits and other........................................ 75,875 139,145
----------- -----------
Total other assets................................ 3,381,980 3,466,977
----------- -----------
Total assets...................................... $39,383,255 $32,115,425
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable -- Trade (Note 2)........................ $ 1,336,912 $ 2,020,303
Accounts payable -- Escrow agent.......................... 624,297 --
Lines of credit (Note 5).................................. 12,534,074 8,310,097
Commissions payable -- Sales agents....................... 5,450,488 5,484,291
Accrued expenses.......................................... 711,424 867,801
Accrued bonus............................................. 3,553,567 3,646,025
Current portion of long-term debt (Note 6)................ 1,570,061 1,839,250
Current portion of capital lease obligations (Note 7)..... 431,902 298,621
----------- -----------
Total current liabilities......................... 26,212,725 22,466,388
LONG-TERM LIABILITIES
Long-term debt -- Net of current portion (Note 6)......... 4,790,819 2,475,752
Capital lease obligations -- Net of current portion (Note
7)..................................................... 924,838 574,944
----------- -----------
Total long-term liabilities....................... 5,715,657 3,050,696
----------- -----------
Total liabilities................................. 31,928,382 25,517,084
STOCKHOLDERS' EQUITY (Note 12)
Voting common stock, no par value:
Authorized -- 12,250 shares
Issued and outstanding -- 11,750 shares................ 410,964 410,964
Nonvoting common stock, no par value:
Authorized -- 190,000 shares
Issued and outstanding -- 190,000 shares............... 2,953,817 2,953,817
Additional paid-in capital................................ 175,000 175,000
Retained earnings......................................... 3,915,092 3,058,560
----------- -----------
Total stockholders' equity........................ 7,454,873 6,598,341
----------- -----------
Total liabilities and stockholders' equity........ $39,383,255 $32,115,425
=========== ===========
</TABLE>
See Notes to Combined Financial Statements.
F-43
<PAGE> 113
REALTY ONE, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
REVENUE (Note 2)
Brokerage commissions..................................... $137,747,743 $126,456,224
Less co-broker commissions................................ 62,294,684 55,649,283
------------ ------------
Net brokerage commissions......................... 75,453,059 70,806,941
Net management revenue.................................... 1,715,967 1,591,480
Gain on sale of loans and servicing release fees.......... 5,131,740 4,288,534
Loan origination fees..................................... 1,297,809 1,139,251
Interest on mortgages..................................... 571,646 172,936
Application and loan fees................................. 783,815 594,250
Escrow fees............................................... 1,099,600 1,009,355
Other revenue............................................. 1,586,999 1,191,007
------------ ------------
Gross revenue..................................... 87,640,635 80,793,754
COMMISSIONS EXPENSE AND OTHER DIRECT COSTS OF REVENUE....... 47,838,923 45,093,224
------------ ------------
39,801,712 35,700,530
NET REVENUE
OPERATING EXPENSES
Compensation and benefits................................. 15,644,168 14,337,265
Facilities (Note 2)....................................... 4,946,155 4,781,313
General and administrative................................ 7,526,255 6,974,532
Marketing and promotion................................... 5,683,390 5,606,666
Communications............................................ 1,615,452 1,485,415
------------ ------------
Total operating expenses.......................... 35,415,420 33,185,191
------------ ------------
4,386,292 2,515,339
OPERATING INCOME
OTHER INCOME (EXPENSES)
Amortization expense...................................... (152,190) (161,515)
Interest expense.......................................... (1,335,185) (911,068)
Interest income........................................... 60,706 36,056
Income from investments................................... 47,240 --
------------ ------------
Total other expenses.............................. (1,379,429) (1,036,527)
------------ ------------
NET INCOME.................................................. $ 3,006,863 $ 1,478,812
============ ============
</TABLE>
See Notes to Combined Financial Statements.
F-44
<PAGE> 114
REALTY ONE, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
VOTING NONVOTING ADDITIONAL TOTAL
COMMON COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
-------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE -- January 1, 1995........ $410,964 $2,953,817 $175,000 $ 3,031,738 $ 6,571,519
Net income........................ -- -- -- 1,478,812 1,478,812
Distributions..................... -- -- -- (1,451,990) (1,451,990)
-------- ---------- -------- ----------- -----------
BALANCE -- December 31, 1995...... 410,964 2,953,817 175,000 3,058,560 6,598,341
Net income........................ -- -- -- 3,006,863 3,006,863
Distributions..................... -- -- -- (2,150,331) (2,150,331)
-------- ---------- -------- ----------- -----------
BALANCE -- December 31, 1996...... $410,964 $2,953,817 $175,000 $ 3,915,092 $ 7,454,873
======== ========== ======== =========== ===========
</TABLE>
See Notes to Combined Financial Statements.
F-45
<PAGE> 115
REALTY ONE, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 3,006,863 $ 1,478,812
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization.......................... 2,202,650 1,896,277
Loss on sale of property and equipment................. 11,391 18,332
Gain on investment..................................... (47,240) --
Changes in assets and liabilities:
Mortgage loans held for sale......................... (3,055,854) (6,033,780)
Commissions receivable............................... 4,871 (1,189,811)
Accounts receivable:
Trade............................................. (1,150,543) (631,327)
Sales associates.................................. (109,612) (36,448)
Fees earned on closed loans....................... (163,813) 851,750
Affiliates........................................ 21,538 73,774
Other............................................. 335,092 (27,688)
Prepaid expenses and other current assets............ (22,862) (22,701)
Deposits and other................................... 68,886 (70,472)
Accounts payable..................................... (59,094) 741,140
Commission payable -- Sales agents................... (33,803) 903,696
Accrued expenses..................................... (156,377) (90,147)
Accrued bonus........................................ (92,458) (381,833)
----------- -----------
Net cash provided by (used in) operating
activities.................................. 759,635 (2,520,426)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment....................... (1,921,221) (2,739,267)
Proceeds from sale of property and equipment.............. 13,248 10,360
Increase in cash surrender value of life insurance
policies............................................... (18,816) (18,028)
Increase in investments................................... (70,023) --
----------- -----------
Net cash used in investing activities........... (1,996,812) (2,746,935)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt.............................. 10,570,475 3,627,895
Payments on long-term debt................................ (8,524,597) (1,673,837)
Payments on capital lease obligations..................... (390,534) (231,427)
Proceeds from lines of credit, net of repayments.......... 4,223,977 5,608,216
Distributions paid........................................ (2,150,331) (1,451,990)
----------- -----------
Net cash provided by financing activities....... 3,728,990 5,878,857
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 2,491,813 611,496
CASH AND CASH EQUIVALENTS -- Beginning of year.............. 1,191,756 580,260
----------- -----------
CASH AND CASH EQUIVALENTS -- End of year.................... $ 3,683,569 $ 1,191,756
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION -- Cash paid for
interest.................................................. $ 1,364,513 $ 890,728
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES -- Leases
capitalized............................................... $ 873,709 $ 205,044
=========== ===========
</TABLE>
See Notes to Combined Financial Statements.
F-46
<PAGE> 116
REALTY ONE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization -- The combined financial statements include the accounts of
Realty One, Inc. (ROI), Corporate Relocation Management, Inc. (CRM), First Ohio
Mortgage Corporation, Inc. (FOM) and First Ohio Escrow Corporation, Inc. (FOE)
(collectively, "the Companies"). The Companies are related through substantially
common ownership. ROI is engaged in real estate brokerage in the northern Ohio
area and provides management services for commercial, residential and
condominium properties. CRM is engaged in relocation management and marketing
assistance activities including, but not limited to, the acquisition and resale
of real estate throughout the United States. FOM is engaged in the origination
of single-family mortgages in the northern Ohio area for sale to outside
investors. FOE provides closing and mortgage escrow services on residential real
estate transactions in the northern Ohio area. All significant intercompany
balances and transactions have been eliminated in the combined financial
statements.
Cash Equivalents -- The Companies consider all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
Mortgage Loans Held for Sale -- Mortgage loans held for sale are valued at
the lower of cost or market, determined on an aggregate basis, based on
commitments from investors to purchase such loans and on prevailing market
rates. Mortgage loans at December 31, 1996 and 1995 are due primarily from
individual homeowners in northern Ohio.
Revenue Recognition -- ROI recognizes commission revenue and commission
expense related to real estate sales transactions at the time a purchase and
sale agreement is signed. Allowances are recorded for amounts that are
determined to be not realizable. FOM recognizes fee income on sales of mortgage
loans when the related mortgage loans are sold. Fee income from loan origination
is recognized on the mortgage closing date. Interest deemed to be collectible on
mortgage loans held for sale is credited to income as accrued. Interest expense
on related borrowings is expensed as incurred. Due to the short length of time
most loans are held and the nature of the costs, there is not a material impact
on net income from applying the provisions of Statements of Financial Accounting
Standards ("SFAS") No. 91, Accounting for Nonrefundable Fees and Costs of
Originating and Acquiring Loans and Initial Direct Costs of Leases, and,
accordingly, there is no deferral of net fees or costs.
Property and Equipment -- Property and equipment are recorded at cost.
Depreciation is computed on the straight-line method over the estimated useful
lives of the purchased assets. Depreciation on leased assets is computed on the
straight-line method over the lesser of the useful life or lease term. Costs of
maintenance and repairs are charged to expense when incurred.
Intangible Assets -- As of December 31, 1996, intangible assets include
goodwill of $2,348,374 (net of accumulated amortization of $804,582) and a
covenant not to compete of $225,000 (net of accumulated amortization of
$525,000). Intangible assets as of December 31, 1995 include goodwill of
$2,383,940 (net of accumulated amortization of $716,920) and a covenant not to
compete of $300,000 (net of accumulated amortization of $450,000). Goodwill and
the covenant are being amortized on the straight-line method over 40 years and
10 years, respectively. Amortization expense totaled $152,190 and $161,515 for
1996 and 1995, respectively.
Income Taxes -- The Companies have elected to be taxed under the provisions
of Subchapter S of the Internal Revenue Code. In lieu of corporate income taxes,
the stockholders of an S Corporation are taxed on their proportionate share of
the Companies' taxable income.
Customer Deposits and Custodial Funds Held in Escrow -- The Companies have
a fiduciary responsibility for real estate escrow and custodial funds in the
amount of $3,919,321 and $3,350,265 at December 31,
F-47
<PAGE> 117
REALTY ONE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1996 and 1995, respectively. The related trust cash accounts and corresponding
custodial liability are not included in the accompanying combined balance sheet.
401(k) Plan -- The Companies offer a 401(k) plan to employees. Under the
plan, employees can elect to have a portion of their wages deferred and set
aside for retirement. The Companies match eligible employee contributions as
defined in the plan document. The Companies contributed $73,717 and $80,707 to
the Plan in 1996 and 1995, respectively.
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 disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 2 -- RELATED PARTY TRANSACTIONS
The Companies share similar ownership and management with several
partnerships and corporations.
Revenue earned from affiliates includes maintenance and other management
services. ROI has also entered into an agreement to lease its corporate offices
from an affiliate. In addition, ROI advances funds to certain related entities
on a short-term basis.
Receivables from affiliates consist of receivables from various related
entities, due on demand, for maintenance performed, management fees and other
operating expenses.
Included in accounts payable at December 31, 1996 and 1995 is $39,736 and
$114,734, respectively, payable to an entity related through common ownership,
pursuant to a lease agreement.
The following transactions occurred during 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Revenue:
Maintenance fees.......................................... $ 963,003 $ 727,505
Management fees........................................... 628,581 511,059
---------- ----------
Total revenue..................................... $1,591,584 $1,238,564
========== ==========
Expenses -- Office rentals.................................. $1,683,304 $1,415,632
========== ==========
</TABLE>
F-48
<PAGE> 118
REALTY ONE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- PROPERTY AND EQUIPMENT
The Companies own the following real and tangible personal property as of
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
ESTIMATED
1996 1995 LIFE -- YEARS
----------- ----------- -------------
<S> <C> <C> <C>
Land....................................... $ 843,610 $ 843,610 --
Buildings and improvements................. 2,256,019 2,263,519 20-40
Leasehold improvements..................... 6,504,828 5,968,254 1-10
Furniture and office equipment............. 5,237,027 4,639,353 5
Computer equipment......................... 1,564,792 1,417,432 5
Automobiles................................ 303,598 330,602 5
Equipment under capital leases............. 2,276,170 1,469,889 1-10
Construction in progress................... 493,833 -- --
----------- -----------
Total cost....................... 19,479,877 16,932,659
Less accumulated depreciation and
amortization............................. 10,042,392 8,215,005
----------- -----------
Net carrying amount.............. $ 9,437,485 $ 8,717,654
=========== ===========
</TABLE>
Depreciation expense, including depreciation for equipment under capital
leases, totaled $2,050,460 and $1,734,762 in 1996 and 1995, respectively.
NOTE 4 -- INVESTMENTS
ROI has invested in Realty One Land Company, which has purchased certain
properties for residential development. ROI uses the equity method of accounting
for investment in the land company. Under this method, the investment is carried
at cost, adjusted for ROI's proportionate share of undistributed earnings and
losses.
Investments in land are recorded at cost and the Companies capitalize all
costs incurred with maintaining the properties. Investments consist of the
following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Realty One Land Company..................................... $439,371 $370,906
Land........................................................ 187,166 187,166
Cash surrender value of officers' life insurance............ 104,636 85,820
Other....................................................... 1,558 --
-------- --------
Total............................................. $732,731 $643,892
======== ========
</TABLE>
NOTE 5 -- LINES OF CREDIT
CRM has a $3,000,000 line of credit with a bank that is collateralized by
accounts receivable and documents of title and is guaranteed by ROI. Borrowings
bear interest at CRM's option of prime or LIBOR plus 2.5 percent. Borrowings on
this line as of December 31, 1996 and 1995 were $2,320,485 and $1,269,546,
respectively.
FOM maintains a $13,000,000 line of credit with a bank that expired on
April 30, 1997. The line of credit is collateralized by substantially all assets
of FOM and guaranteed by ROI. Advances on the line of credit can only be drawn
with evidence of a committed residential mortgage and each advance is limited to
the committed sale price of the related mortgage loan. Repayment of each advance
is to be made within 14 business days of the funding. The line of credit cannot
be used to fund any single residential mortgage in
F-49
<PAGE> 119
REALTY ONE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
excess of $400,000. The interest rate on all advances under the line of credit
shall be at a rate per annum equal to the prime rate plus .25 percent (8.5
percent at December 31, 1996). Borrowings on this line as of December 31, 1996
and 1995 were $10,213,589 and $6,142,377, respectively.
ROI had a $4,000,000 line of credit that expired in 1996 and was not
renewed. This line, which was collateralized by commissions receivable, had
outstanding borrowings at December 31, 1995 of $898,174.
NOTE 6 -- LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Term loan with a bank, with a $4,500,000 borrowing limit,
collateralized by all of ROI's property and receivables,
payable in monthly installments of $75,000 plus interest
at ROI's option of three rates -- (i) prime rate, (ii) the
bank's money market rate plus a specified margin, as
defined, or (iii) the bank's cost of funds rate plus 2.5
percent. The rate in effect at December 31, 1996 was 6.0
percent. Any remaining principal amounts outstanding are
due and payable at the expiration date of June 1, 2001.... $3,415,000 $ --
Revolving credit agreement with a bank with a $5,500,000
borrowing limit. The agreement is collateralized by all of
ROI's property and receivables. Advances on the credit
line are payable at the maturity date of September 30,
1999 and monthly interest payments at ROI's option of
three rates -- (i) the prime rate, (ii) the bank's money
market rate plus a specified margin, as defined, or (iii)
the bank's cost of funds rate plus 2.5 percent. The rate
in effect at December 31, 1996 was 6.0 percent............ 1,983,000 --
Note payable to an individual, unsecured, due on demand, and
interest varying with the prime lending rate. Personally
guaranteed by one of the stockholders..................... 400,000 400,000
Note payable to former owners of an acquired company,
unsecured and payable in monthly installments of $6,250,
noninterest-bearing. Final payment due December 1999...... 225,000 300,000
Notes payable to former owners of an acquired company,
unsecured and payable in monthly installments of $6,251
including interest at 9.0 percent. Final payment due
December 1999. Personally guaranteed by the stockholders
of the Companies.......................................... 196,494 251,127
Notes payable to a bank, collateralized by vehicles, with
monthly installments ranging from $350 to $866, and
interest rates ranging from 7.75 percent to 9.50 percent
maturing through 2000..................................... 60,619 82,085
Note payable to an individual, unsecured, payable in annual
installments ranging from $15,400 to $17,400,
noninterest-bearing. Final payment due January 1998....... 34,600 51,000
Note payable to an individual, collateralized by real
estate, payable in quarterly installments of $6,125 plus
interest at 8 percent. Final payment due September 1997... 18,375 42,875
</TABLE>
F-50
<PAGE> 120
REALTY ONE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Note payable to a former owner of an acquired company,
unsecured and payable in nine annual installments of
$6,000, plus interest accruing at a rate equal to the
greater of (i) the prevailing short-term money market rate
of interest or (ii) the Applicable Federal Rate (AFR)
using long-term rates on annual compounding assumptions
(7.63 percent at December 31, 1996). Final payment due
December 1999............................................. $ 18,000 $ 24,000
Note payable to former owner of an acquired company,
unsecured and payable in monthly installments of $1,354,
noninterest-bearing. Final payment due April 1997......... 5,417 21,667
Note payable to former owner of an acquired company,
unsecured and payable in monthly installments of $292,
noninterest-bearing. Final payment due March 1998......... 4,375 --
Term loan with a financial institution, refinanced in
1996...................................................... -- 3,117,248
Note payable to a financial institution, collateralized by
real estate, payable in quarterly installments of $12,500
plus interest at prime plus .5 percent. Final payment made
June 1996................................................. -- 25,000
---------- ----------
Total long-term debt.............................. 6,360,880 4,315,002
Less current portion.............................. 1,570,061 1,839,250
---------- ----------
Long-term debt -- Net of current portion.......... $4,790,819 $2,475,752
========== ==========
</TABLE>
The term loan and revolving credit agreement contain various covenants that
require, among other things, the maintenance of minimum levels of net worth and
debt service coverage, as defined, and certain restrictions with respect to
additional borrowings.
The revolving credit agreement also calls for a quarterly commitment fee of
.25 percent per annum on the unused credit line for the length of the agreement.
Minimum principal payments on long-term debt to maturity as of December 31,
1996 are as follows:
<TABLE>
<S> <C>
1997........................................................ $1,570,061
1998........................................................ 1,085,835
1999........................................................ 3,052,420
2000........................................................ 652,564
----------
Total............................................. $6,360,880
==========
</TABLE>
F-51
<PAGE> 121
REALTY ONE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- LONG-TERM LEASES AND OTHER COMMITMENTS
Equipment under capital leases is recorded at the cost of the equipment at
the inception of the lease. At December 31, 1996, future minimum lease payments
under capital leases amounted to the following:
<TABLE>
<CAPTION>
<S> <C>
1997........................................................ $ 507,412
1998........................................................ 389,334
1999........................................................ 282,087
2000........................................................ 249,802
2001........................................................ 102,151
----------
Total............................................. 1,530,786
Less amounts representing interest, sales tax and
maintenance charges.................................... 174,046
----------
Present value of net minimum lease payments under capital
leases................................................. 1,356,740
Less current portion...................................... 431,902
----------
Capital lease obligations -- Net of current
portion.......................................... $ 924,838
==========
</TABLE>
The net carrying amount of office equipment recorded under capital leases
included with Companies-owned property and equipment totaled $1,318,310 and
$790,023 at December 31, 1996 and 1995, respectively, net of accumulated
depreciation of $957,860 and $679,866 at December 31, 1996 and 1995,
respectively.
The Companies operate principally in leased premises. Outstanding lease
terms generally range from 5 to 10 years with options of renewal for additional
periods.
At December 31, 1996, the approximate future minimum lease payments under
operating leases, including lease agreements with entities related through
common ownership, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING RELATED
DECEMBER 31 PARTIES OTHER TOTAL
------------ ----------- ----------- -----------
<S> <C> <C> <C>
1997.......................................... $ 1,521,450 $ 2,699,691 $ 4,221,141
1998.......................................... 1,430,455 2,351,611 3,782,066
1999.......................................... 1,350,331 1,861,366 3,211,697
2000.......................................... 1,254,387 1,321,739 2,576,126
2001.......................................... 1,147,548 1,065,851 2,213,399
Thereafter.................................... 3,873,586 2,648,145 6,521,731
----------- ----------- -----------
Total............................... $10,577,757 $11,948,403 $22,526,160
=========== =========== ===========
</TABLE>
Rental expense under all operating leases, including amounts paid to
affiliates (see Note 2) was $3,934,077 and $3,727,807 for 1996 and 1995,
respectively.
NOTE 8 -- CONTINGENCIES
ROI is uninsured for errors and omissions on real estate sales transactions
brokered by ROI or its sales agents. ROI has recorded a liability for future
losses due to errors and omissions claims of $150,000 and $500,000 at December
31, 1996 and 1995, respectively. Total expenses incurred to settle errors and
omissions claims were $63,460 and $31,852 in 1996 and 1995, respectively.
ROI is a defendant in a lawsuit filed by an international franchise
organization and some of its local franchisee companies who have asserted claims
against ROI and another Ohio real estate broker. Those claims include antitrust
allegations, unfair competition allegations and other related claims. The
lawsuit asserts claims for an unspecified amount of damages and equitable
relief. ROI has denied all those claims and asserted its own counterclaims
against the plaintiffs for antitrust violations and unfair competition. On
F-52
<PAGE> 122
REALTY ONE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
March 19, 1996, the District Court granted ROI's motion for summary judgment on
all of the plaintiffs' claims. Additionally, the Court denied the plaintiffs'
motions for summary judgment on one of ROI's counterclaims. The plaintiffs have
appealed the District Court's ruling. Management and legal counsel believe that
the likelihood of ROI suffering a material loss is remote.
NOTE 9 -- STOCK RIGHTS
Under an employment contract between ROI and one of its stockholders, ROI
has the right to repurchase the shares of the stockholder upon his termination
of employment for any reason. The repurchase price is based on a formula
specified by contract.
NOTE 10 -- EMPLOYMENT AGREEMENTS
ROI maintains employment agreements with certain stockholders. These
agreements stipulate the terms of employment and include a three-year covenant
not to compete, which would be effective only in a limited circumstance.
NOTE 11 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
FOM is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. The primary financial
instruments are commitments to extend credit and commitments to sell originated
mortgage loans. These instruments involve elements of credit and market risk in
excess of the amounts recognized in the combined balance sheet.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract between
the time a mortgage loan is approved and closed. Commitments generally have
fixed expiration dates or other termination clauses. For each mortgage loan held
for sale and commitment to extend credit, FOM has obtained a commitment from an
investor to acquire the mortgage loan, thereby reducing market risk and
eliminating future cash requirements. FOM evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained upon
extension of credit, if any, is based on management's credit evaluation of the
counterparty. Collateral held is residential real estate. Commitments to extend
credit totaled approximately $18,000,000 at December 31, 1996.
NOTE 12 -- SUBSEQUENT EVENTS
Effective October 1, 1997, all of the Companies' outstanding common stock
was acquired by Insignia Financial Group, Inc. ("Insignia"). The Stock Purchase
Agreement includes provisions under which the Companies' stockholder will
indemnify Insignia for, and will pay to Insignia or the Companies, the amount of
any loss, liability, claim, damage or expense arising from any liabilities or
obligations related to the period prior to October 1, 1997, including all taxes
related to the Companies' operations through October 1, 1997 and including any
taxes attributable to the sale of the Companies' stock.
On March 17, 1998, Insignia entered into an Agreement and Plan of Merger
with Apartment Investment and Management Company ("AIMCO"), pursuant to which
the Companies will merge with and into AIMCO. Prior to the AIMCO merger,
Insignia will spin off to its stockholders the stock of an entity that will
become a separate public company. The Companies will be included in the spin-off
transaction. Pursuant to the Indemnification Agreement entered into in
connection with the Merger Agreement, the spin-off companies will provide
indemnification for certain liabilities arising under the Merger Agreement. The
merger and spin-off are expected to close in the third quarter of 1998.
F-53
<PAGE> 123
REALTY ONE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- IMPACT OF THE YEAR 2000 (UNAUDITED)
Certain older computer programs use two digits rather than four to define
the applicable year. As a result, those computer systems recognize dates using
"00" as the year 1900 rather than the year 2000. This Year 2000 issue can cause
a system failure or miscalculations resulting in disruptions of operations
including, among other things, a temporary inability to process transactions,
issue invoices or engage in similar normal business activities.
The Companies rely on a number of packaged software systems, which its
vendors have represented will not be affected by the Year 2000 issue. The
Companies have also considered their relationships with significant vendors or
other third parties and are aware of no instances in which such third parties'
failure to address their own Year 2000 issues could adversely impact the
Companies' systems or operations.
Based on its review and assessment of risk associated with the Year 2000
issue, the Companies believe the Year 2000 will not have a material impact on
its operations. However, there can be no guarantee that the software vendors and
other third parties, upon whose representations the Companies are relying, have
identified or will complete all necessary conversions on a timely basis to
insure that the Year 2000 issue does not have an adverse effect on the
Companies' systems or operations.
F-54
<PAGE> 124
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Realty One, Inc. and Affiliated Companies
We have audited the accompanying combined balance sheet of Realty One, Inc.
and affiliated companies as of September 30, 1997 and the related combined
statements of income, changes in stockholders' equity and cash flows for the
nine months then ended. These combined financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these combined financial statements based on our audit. We did not
audit the financial statements of First Ohio Mortgage Corporation, Inc., a
combined entity, whose statements reflect total assets of $10,553,850 as of
September 30, 1997 and total revenue of $6,070,610 for the nine months then
ended. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for First Ohio Mortgage Corporation, Inc., is based solely on the report of the
other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
combined financial statements referred to above present fairly, in all material
respects, the combined financial position of Realty One, Inc. and affiliated
companies as of September 30, 1997 and the combined results of their operations
and their cash flows for the nine months then ended, in conformity with
generally accepted accounting principles.
As disclosed in Note 11 to the combined financial statements, all of the
Company's outstanding common stock was acquired by Insignia Financial Group,
Inc. effective October 1, 1997.
PLANTE & MORAN, LLP
Cleveland, Ohio
June 23, 1998
F-55
<PAGE> 125
REALTY ONE, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1997
(WITH UNAUDITED COMPARATIVE BALANCES AT SEPTEMBER 30, 1996)
ASSETS (Notes 4 and 5)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 1,509,580 $ 2,206,327
Mortgage loans held for sale.............................. 8,413,730 4,758,046
Commissions receivable.................................... 14,205,646 12,746,129
Accounts receivable:
Trade................................................... 1,607,881 3,567,307
Sales associates........................................ 477,723 446,656
Fees earned on closed loans............................. 361,202 422,830
Affiliates.............................................. -- 5,804
Other................................................... 279,718 279,797
Prepaid expenses and other current assets................. 877,802 436,965
----------- -----------
Total current assets............................... 27,733,282 24,869,861
PROPERTY AND EQUIPMENT -- Net (Notes 3 and 6)............... 5,929,998 9,145,423
OTHER ASSETS
Intangible assets -- Net.................................. 2,456,354 2,563,671
Investments............................................... -- 645,450
Deposits and other........................................ 102,565 52,531
----------- -----------
Total other assets................................. 2,558,919 3,261,652
----------- -----------
Total assets....................................... $36,222,199 $37,276,936
=========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable -- Trade................................. $ 4,631,215 $ 1,743,837
Lines of credit (Note 4).................................. 10,670,739 8,819,769
Commissions payable -- Sales agents....................... 7,874,926 7,051,297
Accrued expenses.......................................... 1,508,953 1,024,795
Accrued bonus............................................. 3,565,697 3,618,278
Current portion of long-term debt (Note 5)................ 917,200 613,503
Current portion of capital lease obligations (Note 6)..... 354,718 452,034
----------- -----------
Total current liabilities......................... 29,523,448 23,323,513
LONG-TERM LIABILITIES
Long-term debt -- Net of current portion (Note 5)......... 4,148,000 5,055,678
Capital lease obligations -- Net of current portion (Note
6)..................................................... 644,472 1,013,299
----------- -----------
Total long-term liabilities....................... 4,792,472 6,068,977
----------- -----------
Total liabilities................................. 34,315,920 29,392,490
STOCKHOLDERS' EQUITY (Note 12)
Voting common stock, no par value:
Authorized -- 12,250 shares
Issued and outstanding -- 11,750 shares................ 298,896 410,964
Nonvoting common stock, no par value:
Authorized -- 190,000 shares
Issued and outstanding -- 190,000 shares............... 824,519 2,953,817
Additional paid-in capital................................ -- 175,000
Retained earnings......................................... 782,864 4,344,665
----------- -----------
Total stockholders' equity........................ 1,906,279 7,884,446
----------- -----------
Total liabilities and stockholders' equity........ $36,222,199 $37,276,936
=========== ===========
</TABLE>
See Notes to Combined Financial Statements.
F-56
<PAGE> 126
REALTY ONE, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
(WITH UNAUDITED COMPARATIVE BALANCES FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
REVENUE (Note 2)
Brokerage commissions..................................... $116,790,354 $110,221,423
Less co-broker commissions................................ 51,702,847 50,171,790
------------ ------------
Net brokerage commissions......................... 65,087,507 60,049,633
Net management revenue.................................... 1,277,282 1,370,345
Gain on sale of loans and servicing release fees.......... 3,978,423 3,758,823
Loan origination fees..................................... 969,100 967,282
Interest on mortgages..................................... 458,631 388,580
Application and loan fees................................. 608,083 643,567
Escrow fees............................................... 793,268 848,495
Other revenue............................................. 1,424,648 804,964
------------ ------------
Gross revenue..................................... 74,596,942 68,831,689
COMMISSIONS EXPENSE AND OTHER DIRECT COSTS OF REVENUE....... 41,172,110 38,251,591
------------ ------------
NET REVENUE................................................. 33,424,832 30,580,098
OPERATING EXPENSES
Compensation and benefits................................. 13,650,740 11,641,206
Facilities (Note 2)....................................... 4,264,134 3,772,303
General and administrative................................ 6,153,868 5,688,497
Marketing and promotion................................... 4,768,979 4,109,953
Communications............................................ 1,264,589 1,198,029
------------ ------------
Total operating expenses.......................... 30,102,310 26,409,988
------------ ------------
OPERATING INCOME............................................ 3,322,522 4,170,110
OTHER INCOME (EXPENSES)
Amortization expense...................................... (114,924) (113,987)
Interest expense.......................................... (864,769) (938,701)
Interest income........................................... 34,931 43,965
Income from investment.................................... 165,924 50
------------ ------------
Total other expenses.............................. (778,838) (1,008,673)
------------ ------------
INCOME -- Before provision for taxes........................ 2,543,684 3,161,437
INCOME TAX EXPENSE.......................................... (462,000) --
------------ ------------
NET INCOME.................................................. $ 2,081,684 $ 3,161,437
============ ============
</TABLE>
See Notes to Combined Financial Statements.
F-57
<PAGE> 127
REALTY ONE, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
VOTING NONVOTING ADDITIONAL TOTAL
COMMON COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
--------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE -- January 1, 1997.... $ 410,964 $ 2,953,817 $ 175,000 $ 3,915,092 $ 7,454,873
Net income.................... -- -- -- 2,081,684 2,081,684
Distributions (Note 2)........ (112,068) (2,129,298) (175,000) (5,213,912) (7,630,278)
--------- ----------- --------- ----------- -----------
BALANCE -- September 30,
1997........................ $ 298,896 $ 824,519 $ -- $ 782,864 $ 1,906,279
========= =========== ========= =========== ===========
</TABLE>
See Notes to Combined Financial Statements.
F-58
<PAGE> 128
REALTY ONE, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(WITH UNAUDITED COMPARATIVE BALANCES FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 2,081,684 $ 3,161,437
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization.......................... 1,831,835 1,714,765
Gain on sale of assets................................. (96,278) (1,558)
Changes in assets and liabilities:
Mortgage loans held for sale......................... 675,904 1,275,734
Commissions receivable............................... (5,145,656) (3,525,608)
Accounts receivable:
Trade............................................. 1,023,489 (2,086,480)
Sales associates.................................. 158,807 80,262
Fees earned on closed loans....................... 75,567 (149,874)
Affiliates........................................ 79,126 94,860
Other............................................. 64,552 399,720
Prepaid expenses and other assets.................... (494,040) 79,784
Accounts payable..................................... 2,703,936 (276,467)
Commissions payable -- Sales agents.................. 2,424,438 1,567,006
Accrued expenses..................................... 801,976 156,993
Accrued bonus........................................ 12,130 (27,747)
----------- -----------
Net cash provided by operating activities....... 6,197,470 2,462,827
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment....................... (1,719,751) (1,181,426)
Proceeds from sale of assets.............................. 353,009 --
----------- -----------
Net cash used in investing activities........... (1,366,742) (1,181,426)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt.............................. -- 1,890,476
Payments on long-term debt................................ (1,295,680) (900,000)
Payments on capital lease obligations..................... (335,554) (255,351)
Proceeds from lines of credit, net of repayments.......... (1,863,335) 873,375
Distributions paid........................................ (3,510,148) (1,875,331)
----------- -----------
Net cash used in financing activities........... (7,004,717) (266,831)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (2,173,989) 1,014,570
CASH AND CASH EQUIVALENTS -- Beginning of period............ 3,683,569 1,191,756
----------- -----------
CASH AND CASH EQUIVALENTS -- End of period.................. $ 1,509,580 $ 2,206,326
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION -- Cash paid for
interest.................................................. $ 864,769 $ 938,701
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
LEASES CAPITALIZED.......................................... $ 375,892 $ 847,119
=========== ===========
PROPERTY, NET OF CERTAIN LIABILITIES, DISTRIBUTED TO
STOCKHOLDERS.............................................. $ 4,120,130 $ --
=========== ===========
</TABLE>
See Notes to Combined Financial Statements.
F-59
<PAGE> 129
REALTY ONE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization -- The combined financial statements include the accounts of
Realty One, Inc. (ROI), Corporate Relocation Management, Inc. (CRM), First Ohio
Mortgage Corporation, Inc. (FOM) and First Ohio Escrow Corporation, Inc. (FOE)
(collectively, the "Companies"). The Companies are related through substantially
common ownership. ROI is engaged in real estate brokerage in the northern Ohio
area and provides management services for commercial, residential and
condominium properties. CRM is engaged in relocation management and marketing
assistance activities including, but not limited to, the acquisition and resale
of real estate throughout the United States. FOM is engaged in the origination
of single-family mortgages in the northern Ohio area for sale to outside
investors. FOE provides closing and mortgage escrow services on residential real
estate transactions in the northern Ohio area. All significant intercompany
balances and transactions have been eliminated in the combined financial
statements.
Cash Equivalents -- The Companies consider all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
Mortgage Loans Held for Sale -- Mortgage loans held for sale are valued at
the lower of cost or market, determined on an aggregate basis, based on
commitments from investors to purchase such loans and on prevailing market
rates. Mortgage loans at September 30, 1997 are due primarily from individual
homeowners in northern Ohio.
Revenue Recognition -- ROI recognizes commission revenue and commission
expense related to real estate sales transactions at the time of purchase and
sale agreement is signed. Allowances are recorded for amounts that are
determined to be not realizable. FOM recognizes fee income on sales of mortgage
loans when the related mortgage loans are sold. Fee income from loan origination
is recognized on the mortgage closing date. Interest deemed to be collectible on
mortgage loans held for sale is credited to income as accrued. Interest expense
on related borrowings is expensed as incurred. Due to the short length of time
most loans are held and the nature of the costs, there is not a material impact
on net income from applying the provisions of Statements of Financial Accounting
Standards ("SFAS") No. 91, Accounting for Nonrefundable Fees and Costs of
Originating and Acquiring Loans and Initial Direct Costs of Leases, and,
accordingly, there is no deferral of net fees or costs.
Property and Equipment -- Property and equipment are recorded at cost.
Depreciation is computed on the straight-line method over the estimated useful
lives of the purchased assets. Depreciation on leased assets is computed on the
straight-line method over the lesser of the useful life or lease term. Costs of
maintenance and repairs are charged to expense when incurred.
Intangible Assets -- As of September 30, 1997, intangible assets include
goodwill of $2,287,604 (net of accumulated amortization of $919,506) and a
covenant not to compete of $168,750 (net of accumulated amortization of
$581,250). Goodwill and the covenant are being amortized on the straight-line
method over 40 years and 10 years, respectively. Amortization expense totaled
$114,924 for the nine months ended September 30, 1997.
Income Taxes -- The Companies have elected to be taxed under the provisions
of Subchapter S of the Internal Revenue Code. In lieu of corporate income taxes,
the stockholders of an S Corporation are taxed on their proportionate share of
the Companies' taxable income.
In conjunction with the sale of all of the Companies issued and outstanding
stock as discussed in Note 11, the Companies' S Corporation status under the
Internal Revenue Code and respective state codes terminated effective October 1,
1997. The income tax expense for the period ended September 30, 1997 represents
deferred income taxes for built-in-gains associated with the conversion to C
Corporation status.
F-60
<PAGE> 130
REALTY ONE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Customer Deposits and Custodial Funds Held in Escrow -- The Companies have
a fiduciary responsibility for real estate escrow and custodial funds in the
amount of $5,517,062 at September 30, 1997. The related trust cash accounts and
corresponding custodial liability are not included in the accompanying combined
balance sheet.
401(k) Plan -- The Companies offer a 401(k) plan to employees. Under the
plan, employees can elect to have a portion of their wages deferred and set
aside for retirement. The Companies match eligible employee contributions as
defined in the plan document. Combined contributions for the nine months ended
September 30, 1997 were $69,146.
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 disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 2 -- RELATED PARTY TRANSACTIONS
The Companies share similar ownership and management with several
partnerships and corporations.
Revenue earned from affiliates includes maintenance and other management
services. ROI has also entered into an agreement to lease its corporate offices
from an affiliate. In addition, ROI advances funds to certain related entities
on a short-term basis.
The following transactions occurred during the nine months ended September
30, 1997:
<TABLE>
<S> <C>
Revenue:
Maintenance fees.......................................... $ 542,310
Management fees........................................... 504,203
----------
Total revenue..................................... $1,046,513
==========
Expenses -- Office rentals.................................. $1,303,488
==========
</TABLE>
In addition, during the nine months ended September 30, 1997, the Companies
made cash distributions of $3,510,148 and distributed assets, net of
liabilities, with a net book value of $4,120,130 to the stockholders of ROI. The
net book value of the property distributed approximates the fair value at
September 30, 1997. Certain amounts of the total of these distributions exceeded
the available retained earnings of the individual company. The excess was
charged against paid-in capital to the extent available and then pro rata to
each class of common stock as a return of capital.
F-61
<PAGE> 131
REALTY ONE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- PROPERTY AND EQUIPMENT
The Companies own the following real and tangible personal property as of
September 30, 1997:
<TABLE>
<CAPTION>
ESTIMATED
AMOUNT LIFE -- YEARS
----------- -------------
<S> <C> <C>
Leasehold improvements..................................... $ 6,683,738 1-10
Furniture and office equipment............................. 5,587,526 5
Computer equipment......................................... 1,768,084 5
Automobiles................................................ 36,215 5
Equipment under capital leases............................. 2,652,067 1-10
Construction in progress................................... 8,376 --
-----------
Total cost....................................... 16,736,006
Less accumulated depreciation and amortization............. 10,806,008
-----------
Net carrying amount.............................. $ 5,929,998
===========
</TABLE>
Depreciation expense, including depreciation for equipment under capital
leases, totaled $1,716,911 for the nine months ended September 30, 1997.
NOTE 4 -- LINES OF CREDIT
CRM has a $3,000,000 line of credit with a bank, which is collateralized by
accounts receivable and documents of title and is guaranteed by ROI. Borrowings
bear interest at CRM's option of prime or LIBOR plus 2.5 percent. Borrowings on
this line as of September 30, 1997 were $1,586,608.
FOM maintains a $15,000,000 line of credit with a bank that expired on
April 30, 1998. The line of credit is collateralized by substantially all assets
of FOM and guaranteed by ROI. Advances on the line of credit can only be drawn
with evidence of a committed residential mortgage and each advance is limited to
the committed sale price of the related mortgage loan. Repayment of each advance
is to be made within 14 business days of the funding. The line of credit cannot
be used to fund any single residential mortgage in excess of $400,000. The
interest rate on all advances under the line of credit shall be at a rate per
annum equal to the prime rate plus .25 percent (8.5 percent at September 30,
1997). Borrowings on this line as of September 30, 1997 were $9,084,131.
F-62
<PAGE> 132
REALTY ONE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- LONG-TERM DEBT
Long-term debt consisted of the following at September 30, 1997:
<TABLE>
<S> <C>
Revolving credit agreement with a bank with a $5,500,000
borrowing limit. The agreement is collateralized by all of
ROI's property and receivables. Advances on the credit
line are payable at the maturity date of September 30,
1999. Interest, charged at a variable rate (6.35 percent
at September 30, 1997), is payable monthly................ $3,498,000
Term loan with a bank, with a $4,500,000 borrowing limit,
collateralized by all of ROI's property and receivables,
payable in monthly installments of $75,000 plus interest
at a variable rate (6.35 percent at September 30, 1997).
Any remaining principal amounts outstanding are due and
payable at the expiration date of June 1, 2001............ 1,550,000
Note payable to an individual, unsecured,
noninterest-bearing....................................... 17,200
----------
Total long-term debt.............................. 5,065,200
Less current portion.............................. 917,200
----------
Long-term debt -- Net of current portion.......... $4,148,000
==========
</TABLE>
The term loan and revolving credit agreement contain various covenants that
require, among other things, the maintenance of minimum levels of net worth and
debt service coverage, as defined, and certain restrictions with respect to
additional borrowings.
The revolving credit agreement also calls for a quarterly commitment fee of
.25 percent per annum on the unused credit line for the length of the agreement.
Minimum principal payments on long-term debt to maturity as of September
30, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 917,200
1999........................................................ 4,148,000
----------
Total............................................. $5,065,200
==========
</TABLE>
NOTE 6 -- LONG-TERM LEASES AND OTHER COMMITMENTS
Equipment under capital leases is recorded at the cost of the equipment at
the inception of the lease. At September 30, 1997, future minimum lease payments
under capital leases amounted to the following:
<TABLE>
<S> <C>
1998........................................................ $ 422,423
1999........................................................ 282,133
2000........................................................ 243,077
2001........................................................ 133,208
2002........................................................ 25,229
----------
Total............................................. 1,106,070
Less amounts representing interest, sales tax and
maintenance charges.................................... 106,880
----------
Present value of net minimum lease payments under capital
leases................................................. 999,190
Less current portion...................................... 354,718
----------
Capital lease obligations -- Net of current
portion.......................................... $ 644,472
==========
</TABLE>
The net carrying amount of office equipment recorded under capital leases
included with Companies-owned property and equipment totaled $1,286,080 at
September 30, 1997, net of accumulated depreciation of $1,365,987 at September
30, 1997.
F-63
<PAGE> 133
REALTY ONE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Companies operate principally in leased premises. Outstanding lease
terms generally range from 5 to 10 years with options of renewal for additional
periods.
At September 30, 1997, the approximate future minimum lease payments under
operating leases, including lease agreements with entities related through
common ownership, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING RELATED
SEPTEMBER 30 PARTIES OTHER TOTAL
- ------------ ---------- ----------- -----------
<S> <C> <C> <C>
1998........................................... $1,434,567 $ 2,843,977 $ 4,278,544
1999........................................... 1,364,785 2,284,062 3,648,847
2000........................................... 1,386,260 1,690,818 3,077,078
2001........................................... 1,244,714 1,463,356 2,708,070
2002........................................... 1,124,972 1,318,407 2,443,379
Thereafter..................................... 3,223,464 4,014,952 7,238,416
---------- ----------- -----------
Total................................ $9,778,762 $13,615,572 $23,394,334
========== =========== ===========
</TABLE>
Rental expense under all operating leases, including amounts paid to
affiliates (see Note 2) was $3,537,497 for the nine months ended September 30,
1997.
NOTE 7 -- CONTINGENCIES
ROI is uninsured for errors and omissions on real estate sales transactions
brokered by ROI or its sales agents. ROI has recorded a liability for future
losses due to errors and omissions claims of $150,000 at September 30, 1997.
Total expenses incurred to settle errors and omissions claims were $51,477 for
the nine months ended September 30, 1997.
ROI is a defendant in a lawsuit filed by an international franchise
organization and some of its local franchisee companies who have asserted claims
against ROI and another Ohio real estate broker. Those claims include antitrust
allegations, unfair competition allegations and other related claims. The
lawsuit asserts claims for an unspecified amount of damages and equitable
relief. ROI has denied all those claims and asserted its own counterclaims
against the plaintiffs for antitrust violations and unfair competition. On March
19, 1996, the district court granted ROI's motion for summary judgment on all of
the plaintiffs' claims. Additionally, the court denied the plaintiffs' motions
for summary judgment on one of ROI's counterclaims. The plaintiffs have appealed
the district court's ruling. Management and legal counsel believe that the
likelihood of ROI suffering a material loss is remote.
NOTE 8 -- STOCK RIGHTS
Under an employment contract between ROI and one of its stockholders, ROI
has the right to repurchase the shares of the stockholder upon his termination
of employment for any reason. The repurchase price is based on a formula
specified by contract.
NOTE 9 -- EMPLOYMENT AGREEMENTS
ROI maintains employment agreements with certain stockholders. These
agreements stipulate the terms of employment and include a three-year covenant
not to compete, which would be effective only in a limited circumstance.
NOTE 10 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
FOM is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. The
F-64
<PAGE> 134
REALTY ONE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
primary financial instruments are commitments to extend credit and commitments
to sell originated mortgage loans. These instruments involve elements of credit
and market risk in excess of the amounts recognized in the combined balance
sheet.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract between
the time a mortgage loan is approved and closed. Commitments generally have
fixed expiration dates or other termination clauses. For each mortgage loan held
for sale and commitment to extend credit, FOM has obtained a commitment from an
investor to acquire the mortgage loan, thereby reducing market risk and
eliminating future cash requirements. FOM evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained upon
extension of credit, if any, is based on management's credit evaluation of the
counterparty. Collateral held is residential real estate. Commitments to extend
credit totaled approximately $31,855,000 at September 30, 1997.
NOTE 11 -- SUBSEQUENT EVENTS
Effective October 1, 1997, all of the Companies outstanding common stock
was acquired by Insignia Financial Group, Inc. ("Insignia"). The Stock Purchase
Agreement includes provisions under which the Companies' stockholders will
indemnify Insignia for, and will pay to Insignia or the Companies, the amount of
any loss, liability, claim, damage or expense arising from any liabilities or
obligations related to the period prior to October 1, 1997, including all taxes
related to the Companies' operations through October 1, 1997 and including any
taxes attributable to the sale of the Companies' stock.
On March 17, 1998, Insignia entered into an Agreement and Plan of Merger
with Apartment Investment and Management Company ("AIMCO"), pursuant to which
the Companies will merge with and into AIMCO. Prior to the AIMCO merger,
Insignia will spin off to its stockholders the stock of an entity that will
become a separate public company. The Companies will be included in the spin-off
transaction. Pursuant to the Indemnification Agreement entered into in
connection with the Merger Agreement, the spin-off companies will provide
indemnification for certain liabilities arising under the Merger Agreement. The
merger and spin-off are expected to close in the third quarter of 1998.
NOTE 12 -- IMPACT OF THE YEAR 2000 (UNAUDITED)
Certain older computer programs use two digits rather than four to define
the applicable year. As a result, those computer systems recognize dates using
"00" as the year 1900 rather than the year 2000. This Year 2000 issue can cause
a system failure or miscalculations resulting in disruptions of operations
including, among other things, a temporary inability to process transactions,
issue invoices or engage in similar normal business activities.
The Companies rely on a number of packaged software systems that its
vendors have represented will not be affected by the Year 2000 issue. The
Companies have also considered their relationships with significant vendors or
other third parties and are aware of no instances in which such third parties'
failure to address their own Year 2000 issues could adversely impact the
Companies' systems or operations.
Based on its review and assessment of risk associated with the Year 2000
issue, the Companies believe the Year 2000 will not have a material impact on
its operations. However, there can be no guarantee that the software vendors and
other third parties, upon whose representations the Companies are relying, have
identified or will complete all necessary conversions on a timely basis to
ensure that the Year 2000 issue does not have an adverse effect on the
Companies' systems or operations.
F-65
<PAGE> 135
BARNES, MORRIS, PARDOE & FOSTER MANAGEMENT SERVICES, LLC
BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents................................. $ 174,092 $232,326
Accounts receivable, net of allowance for doubtful
accounts of $20,558.................................... 962,015 459,231
Prepaid rent.............................................. -- 18,650
Prepaid taxes............................................. 5,885 --
---------- --------
Total current assets.............................. 1,141,992 710,207
Property and Equipment, net................................. 215,557 212,934
Other Assets
Deferred costs, net....................................... -- 11,364
---------- --------
Total assets...................................... $1,357,549 $934,505
========== ========
LIABILITIES AND MEMBERS' CAPITAL
Current Liabilities
Notes payable............................................. $ 169,522 $142,333
Accounts payable.......................................... 581,918 23,961
Accounts payable -- related party......................... 295,711 94,828
Accrued payroll........................................... 75,622 229,281
Accrued vacation.......................................... 75,794 85,333
Other accrued expenses.................................... 30,690 6,265
Deferred rent............................................. 70,365 --
Escrow deposits........................................... 7,100 9,250
Due to members............................................ 12,228 215,530
---------- --------
Total current liabilities......................... 1,318,950 806,781
Members' Capital............................................ 38,599 127,724
---------- --------
Total liabilities and members' capital............ $1,357,549 $934,505
========== ========
</TABLE>
See accompanying notes
F-66
<PAGE> 136
BARNES, MORRIS, PARDOE & FOSTER MANAGEMENT SERVICES, LLC
STATEMENTS OF INCOME
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revenues
Management fees........................................... $2,640,800 $2,559,987
Leasing commissions....................................... 1,116,239 1,144,509
Supervision fees.......................................... 497,058 278,123
Processing and other fees................................. 430,363 455,712
---------- ----------
4,684,460 4,438,331
Operating Expenses.......................................... 4,450,245 3,793,564
---------- ----------
Income from Operations...................................... 234,215 644,767
Other Income (Expenses)
Contributions............................................. (1,422) (630)
Interest expense.......................................... (1,594) --
Interest income........................................... 9,147 16,863
---------- ----------
6,131 16,233
Income Before Depreciation and Amortization and Provision
for Income Taxes.......................................... 240,346 661,000
Depreciation and Amortization............................... 103,950 145,925
---------- ----------
Income Before Provision for Income Taxes.................... 136,396 515,075
Provision for Income Taxes.................................. 9,917 37,500
---------- ----------
Net Income.................................................. $ 126,479 $ 477,575
========== ==========
</TABLE>
See accompanying notes
F-67
<PAGE> 137
BARNES, MORRIS, PARDOE & FOSTER MANAGEMENT SERVICES, LLC
STATEMENTS OF CASH FLOWS
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities
Net income................................................ $ 126,479 $ 477,575
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization.......................... 103,950 145,925
Provision for doubtful accounts........................ 20,558 --
Changes in:
Restricted cash...................................... -- 25,000
Accounts receivable.................................. (466,249) 258,885
Prepaid taxes........................................ 17,700 --
Accounts payable..................................... 546,732 (5,882)
Accounts payable -- related party.................... 169,264 --
Income taxes payable................................. -- (35,000)
Accrued payroll...................................... 3,122 185,451
Accrued vacation..................................... (9,539) (25,940)
Other accrued expenses............................... (21,443) (43,488)
Deferred rent........................................ 87,400 8,066
Escrow deposits...................................... (9,650) (15,750)
--------- ---------
Net cash provided by operating activities......... 568,324 974,842
--------- ---------
Cash Flows from Investing Activities
Acquisition of property and equipment..................... (110,158) (162,368)
--------- ---------
Net cash used in investing activities............. (110,158) (162,368)
--------- ---------
Cash Flows from Financing Activities
Repayment of note payable................................. (40,665) --
Proceeds from note payable................................ 87,483... 127,722
Contributions from members................................ -- 20,000
Distributions to members.................................. (527,000) (414,250)
Payments of amounts due to members........................ -- (664,480)
--------- ---------
Net cash used in financing activities............. (480,182) (931,008)
--------- ---------
Net Decrease in Cash........................................ (22,016) (118,534)
Cash and Cash Equivalents, beginning of year................ 196,108 350,860
--------- ---------
Cash and Cash Equivalents, end of year...................... $ 174,092 $ 232,326
========= =========
Supplemental Disclosure of Cash Flow Information:
Interest paid............................................. $ 1,594 $ --
========= =========
Non-cash Financing Activity:
Accrued distributions to members.......................... $ 12,228 $ 102,286
========= =========
</TABLE>
See accompanying notes
F-68
<PAGE> 138
BARNES, MORRIS, PARDOE & FOSTER MANAGEMENT SERVICES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BUSINESS
Barnes, Morris, Pardoe & Foster Management Services, L.P. was formed on
June 1, 1992 pursuant to the laws of the State of Delaware. Effective January 1,
1996, the Partnership converted to a limited liability company pursuant to the
laws of the State of Delaware, titled Barnes, Morris, Pardoe & Foster Management
Services, LLC (the "Company"). The Company was organized to conduct a real
estate property management business and certain related businesses including
parking management, supervising build-out of tenant space, leasing and financing
of managed assets, property consulting and asset management in the Washington,
D.C. regional area. The Company has a finite life and will cease to exist on
December 20, 2096 or earlier if any of the specific events described in the
operating agreement occur. No member is liable for any debts or obligations of
the Company.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed combined financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
SALE OF THE COMPANY
Effective November 1, 1997, the members of the Company sold their ownership
interests to Insignia Financial Group, Inc.
F-69
<PAGE> 139
BARNES, MORRIS, PARDOE & FOSTER, INC.
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1997 AND 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents................................. $ 2,607,863 $ 2,407,602
Marketable securities..................................... -- 10,000
Certificates of deposit................................... 1,050,429 --
Accounts receivable, net of allowance for doubtful
accounts of $736,732 and $285,585, respectively
Leasing commissions.................................... 3,175,650 2,745,219
Stockholders and employees............................. 25,659 4,233
Agents and other....................................... 300,791 530,754
Related parties........................................ 345,687 169,513
Advances to Smith Mack Barnes Morris Management Services,
LLP.................................................... 51,489 --
Distribution receivable................................... -- 216,668
Deferred tax asset........................................ 28,374 --
Prepaid expenses.......................................... 45,595 36,121
Prepaid taxes............................................. 31,448 --
----------- -----------
Total current assets.............................. 7,662,985 6,120,110
----------- -----------
Long-term Leasing Commissions Receivable.................... 938,329 810,764
Property and Equipment
Furniture and fixtures.................................... 1,108,750 1,108,750
Office equipment and vehicle.............................. 1,330,691 1,282,789
Leasehold improvements.................................... 226,530 226,529
Less accumulated depreciation............................. (2,292,000) (2,123,978)
----------- -----------
Total property and equipment...................... 373,971 494,090
----------- -----------
Investment in Barnes, Morris, Pardoe & Foster Management
Services, LLC............................................. 786,670 467,203
Investment in Barnes, Morris, Pardoe & Foster Management
Services Holdings Co., LLC................................ 88,811 13,677
Investment in Smith Mack Barnes Morris Management Service,
LLP....................................................... 3,354 --
----------- -----------
Total Assets...................................... $ 9,854,120 $ 7,905,844
=========== ===========
</TABLE>
See accompanying notes
F-70
<PAGE> 140
BARNES, MORRIS, PARDOE & FOSTER, INC.
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1997 AND 1996
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Current Liabilities
Accounts payable.......................................... $2,319,238 $ 359,667
Commissions payable....................................... 1,915,929 2,404,483
Accrued expenses.......................................... 411,085 188,379
Accrued vacation.......................................... 21,886 19,535
Accrued salary............................................ 682,792 696,162
Accrued pension........................................... 100,000 75,000
Accrued loss on subleases................................. -- 76,778
Income taxes payable...................................... 22,610 170,296
Current portion of long-term debt
Treasury stock note.................................... 5,507 12,173
Other notes payable.................................... 44,544 130,546
Deferred tax liability.................................... -- 223,312
---------- ----------
Total current liabilities......................... 5,523,591 4,356,331
---------- ----------
Other Liabilities
Commissions payable....................................... 856,157 710,133
Security deposits......................................... 1,162 7,570
Deferred rent............................................. 248,754 329,224
---------- ----------
1,106,073 1,046,927
Total liabilities................................. 6,629,664 5,403,258
---------- ----------
Stockholders' Equity
Class A common stock, $.01 par value; 1,000 shares
authorized, 634.68 shares issued and outstanding....... 6 6
Class B common stock, $.01 par value; 1,000 shares
authorized, 365.32 shares issued and outstanding....... 4 4
Additional paid-in capital................................ 1,870,723 1,732,820
Retained earnings......................................... 1,353,723 843,089
---------- ----------
3,224,456 2,575,919
Treasury stock............................................ -- (73,333)
---------- ----------
Total stockholders' equity........................ 3,224,456 2,502,586
---------- ----------
Total Liabilities and Stockholders' Equity........ $9,854,120 $7,905,844
========== ==========
</TABLE>
See accompanying notes
F-71
<PAGE> 141
BARNES, MORRIS, PARDOE & FOSTER, INC.
CONSOLIDATED INCOME STATEMENT
FOR THE NINE MONTHS ENDED OCTOBER 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Revenues
Sales and leasing commissions earned...................... $ 16,470,153 $12,116,701
Financing commissions..................................... 254,800 --
Sales and leasing commissions paid and payable............ (10,635,726) (6,339,499)
------------ -----------
6,089,227 5,777,202
Income from Barnes, Morris, Pardoe & Foster Management
Services, LLC.......................................... 1,577 20,299
Loss from Barnes, Morris, Pardoe & Foster Management
Services Holdings Co., LLC............................. (5,929) (5,165)
Loss on investment in Smith Mack Barnes Morris Management
Services, LLP.......................................... (46,646) --
------------ -----------
6,038,229 5,792,336
------------ -----------
Expenses
Salaries and bonuses...................................... 2,439,346 2,212,718
General and administrative expenses....................... 3,714,293 2,972,784
Depreciation expense...................................... 116,546 153,778
------------ -----------
6,270,185 5,339,280
------------ -----------
(Loss)/Income from Operations............................... (231,956) 453,056
Realized Gain on Investments................................ 8,624 --
Interest Expense............................................ (6,792) (15,531)
Interest Income............................................. 109,015 48,610
------------ -----------
(Loss)/Income Before Provision for Income Taxes............. (121,109) 486,135
------------ -----------
Benefit/(Provision) for Income Taxes
Current tax benefit/(provision)........................... 69,354 (103,951)
Deferred tax benefit...................................... 450,132 22,943
------------ -----------
519,486 (81,008)
Net Income........................................ $ 398,377 $ 405,127
============ ===========
</TABLE>
See accompanying notes
F-72
<PAGE> 142
BARNES, MORRIS, PARDOE & FOSTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income................................................ $ 398,377 $ 405,127
Reconciliation adjustments
Depreciation and amortization.......................... 116,546 153,778
Income from Barnes, Morris, Pardoe & Foster Management
Services, LLC......................................... (1,577) (20,299)
Loss from Barnes, Morris, Pardoe & Foster Management
Services Holdings Co., LLC............................ 5,929 5,165
Loss from Smith Mack Barnes Morris Management Services,
LLP................................................... 46,646 --
Gain on sale of marketable securities.................. (8,624) --
Provision for losses on accounts receivable............ 249,590 285,586
Deferred income benefit................................ (450,131) (80,943)
Noncash commission expense............................. 211,237 --
Changes in:
Accrued interest receivable on certificate of
deposit............................................... (50,429) --
Accounts receivable:
Leasing commissions.................................. (1,038,047) (112,203)
Stockholders and employees........................... (21,565) 497
Agents and other..................................... (107,824) (2,284)
Related parties...................................... (144,250) (169,514)
Advances to Smith Mack Barnes Morris Management
Services, LLP......................................... (51,489) --
Prepaid expenses....................................... (50,793) (31,621)
Accounts payable....................................... 2,160,810 259,001
Commissions payable.................................... 308,277 641,122
Accrued pension........................................ -- 75,000
Accrued expenses....................................... 228,744 (29,621)
Accrued vacation....................................... 2,351 1,563
Accrued salary......................................... 599,767 633,228
Accrued loss on sublease............................... (42,009) (156,310)
Income taxes payable................................... (135,403) 50,105
Deposits............................................... (6,400) 7,570
Deferred rent.......................................... (190,211) (217,034)
----------- ----------
Net cash provided by operating activities................. 2,029,522 1,697,913
----------- ----------
Cash Flows from Investing Activities
Acquisition of property and equipment..................... (42,682) (53,392)
Distributions from Barnes, Morris, Pardoe & Foster
Management Services, LLC............................... 3,184 149,111
Investment in Smith Mack Barnes Morris Management Services
LLP.................................................... (50,000) --
Investment in marketable securities....................... (50,000) (10,000)
Proceeds from sale of marketable securities............... 172,330 --
----------- ----------
Net cash provided by investing activities......... 32,832 85,719
----------- ----------
Repayment of long-term debt............................... (64,821) (90,569)
Repayment of treasury stock note.......................... (908) (12,992)
----------- ----------
Net cash used in financing activities............. (65,729) (103,561)
----------- ----------
Net Increase in Cash and Cash Equivalents................... 1,996,625 1,680,071
Cash and Cash Equivalents, beginning of year................ 611,238 727,531
----------- ----------
Cash and Cash Equivalents, end of year...................... $ 2,607,863 $2,407,602
=========== ==========
Supplemental Cash Flow Disclosures
Cash paid for interest.................................... $ 6,792 $ --
=========== ==========
Cash paid for income taxes................................ $ 31,448 $ 88,000
=========== ==========
</TABLE>
See accompanying notes
F-73
<PAGE> 143
BARNES, MORRIS, PARDOE & FOSTER, MANAGEMENT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BUSINESS
Barnes, Morris, Pardoe & Foster, Inc. (the "Company") was formed for the
purpose of engaging in the business of commercial real estate sales, leasing,
financing, market research, and consulting in the Washington, D.C. regional
area. As such, the Company is directly affected by the well being of the local
real estate industry. The Company is incorporated in the District of Columbia.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed combined financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
SALE OF THE COMPANY
Effective November 1, 1997, the Shareholders of the Company sold their
ownership interests to Insignia Financial Group, Inc.
F-74
<PAGE> 144
REPORT OF THE AUDITORS
To the Board of Directors and Stockholders of
Barnes, Morris, Pardoe & Foster, Inc.
Washington, D.C.
We have audited the accompanying balance sheet of Barnes, Morris, Pardoe &
Foster, Inc., as of January 31, 1997, and the related statements of income,
changes in stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Barnes, Morris, Pardoe &
Foster, Inc. as of January 31, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of general and
administrative expenses on page F-85 is presented for the purpose of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audit
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.
BEERS & CUTLER PLLC
Washington, D.C.
December 5, 1997
F-75
<PAGE> 145
BARNES, MORRIS, PARDOE & FOSTER, INC.
BALANCE SHEET
JANUARY 31, 1997
ASSETS
<TABLE>
<S> <C>
Current Assets
Cash and cash equivalents................................. $ 611,238
Marketable securities..................................... 113,706
Certificates of deposit................................... 1,000,000
Accounts receivable, net of allowance for doubtful
accounts of $487,142
Leasing commissions.................................... 1,812,955
Stockholders and employees............................. 4,094
Agents and other....................................... 267,354
Related parties........................................ 201,437
Distributions receivable.................................. 216,668
Prepaid expenses.......................................... 26,250
-----------
Total current assets.............................. 4,253,702
-----------
Long-term Leasing Commissions Receivable.................... 1,512,567
Property and Equipment
Furniture and fixtures.................................... 1,108,750
Office equipment and vehicle.............................. 1,288,010
Leasehold improvements.................................... 226,529
-----------
2,623,289
Less accumulated depreciation............................. (2,175,455)
-----------
Total property and equipment...................... 447,834
-----------
Investment in Barnes, Morris, Pardoe & Foster Management
Services, LLC ............................................ 571,609
Investment in Barnes, Morris, Pardoe & Foster Management
Services Holdings Co., LLC ............................... 20,354
-----------
Total Assets...................................... $ 6,806,066
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE> 146
BARNES, MORRIS, PARDOE & FOSTER, INC.
BALANCE SHEET
JANUARY 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Current Liabilities
Accounts payable.......................................... $ 158,427
Commissions payable....................................... 1,724,711
Accrued expenses.......................................... 182,341
Accrued vacation.......................................... 19,535
Accrued salary............................................ 83,026
Accrued pension........................................... 100,000
Accrued loss on subleases................................. 42,009
Income taxes payable...................................... 158,013
Current portion of long-term debt
Treasury stock note.................................... 6,415
Other notes payable.................................... 83,333
Deferred tax liability.................................... 421,757
----------
Total current liabilities......................... 2,979,567
----------
Long-term Debt
Notes payable............................................. 26,032
Other Liabilities
Commissions payable....................................... 739,098
Security deposits......................................... 7,562
Deferred rent............................................. 438,965
----------
Total liabilities................................. 4,191,224
----------
Stockholders' Equity
Class A common stock, $.01 par value; 1,000 shares
authorized, 634.68 shares issued and outstanding....... 6
Class B common stock, $.01 par value; 1,000 shares
authorized, 365.32 shares issued, 344.09 shares
outstanding............................................ 4
Additional paid-in capital................................ 1,732,819
Retained earnings......................................... 955,346
----------
2,688,175
Treasury stock............................................ (73,333)
----------
Total stockholders' equity........................ 2,614,842
----------
Total Liabilities and Stockholders' Equity........ $6,806,066
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE> 147
BARNES, MORRIS, PARDOE & FOSTER, INC.
INCOME STATEMENT
YEAR ENDED JANUARY 31, 1997
<TABLE>
<S> <C>
Revenues
Sales and leasing commissions earned...................... $18,334,202
Sales and leasing commissions paid and payable............ 9,912,366
-----------
8,421,836
Income from Barnes, Morris, Pardoe & Foster Management
Services, LLC.......................................... 124,714
Income from Barnes, Morris, Pardoe & Foster Management
Services Holdings Co., LLC............................. 1,512
-----------
8,548,062
-----------
Expenses
Salaries and bonuses...................................... 3,250,291
General and administrative expenses....................... 4,309,500
Depreciation expense...................................... 205,255
-----------
7,765,046
-----------
Income from Operations...................................... 783,016
Unrealized Gain on Investments.............................. 13,706
Interest Expense............................................ (18,348)
Interest Income............................................. 81,177
-----------
Income Before Provision for Income Taxes.................... 859,551
-----------
Provision for Income Taxes
Current tax expense....................................... 224,668
Deferred tax expense...................................... 117,502
-----------
342,170
-----------
Net Income........................................ $ 517,381
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE> 148
BARNES, MORRIS, PARDOE & FOSTER, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED JANUARY 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
-------------- ADDITIONAL
CLASS CLASS PAID-IN RETAINED TREASURY
A B CAPITAL EARNINGS STOCK TOTAL
----- ----- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1996........ $ 6 $ 4 $1,732,819 $437,965 $(73,333) $2,097,461
Net Income....................... -- -- -- 517,381 -- $ 517,381
--- --- ---------- -------- -------- ----------
Balance, January 31, 1997........ $ 6 $ 4 $1,732,819 $955,346 $(73,333) $2,614,842
=== === ========== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE> 149
BARNES, MORRIS, PARDOE & FOSTER, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED JANUARY 31, 1997
<TABLE>
<S> <C>
Cash Flows from Operating Activities
Net income................................................ $ 517,381
Reconciliation adjustments
Depreciation and amortization.......................... 205,255
Income from Barnes, Morris, Pardoe & Foster Management
Services, LLC......................................... (124,714)
Income from Barnes, Morris, Pardoe & Foster Management
Services Holdings Co., LLC............................ (1,512)
Unrealized gain on investments......................... (13,706)
Provision for losses on accounts receivable............ 487,142
Provision for deferred income taxes.................... 117,502
Changes in:
Accounts receivable:
Leasing commissions.................................. (83,073)
Stockholders and employees........................... 637
Agents and others.................................... 261,116
Related parties...................................... (201,437)
Deposits............................................... 7,562
Prepaid expenses....................................... (21,750)
Accounts payable....................................... 57,761
Commissions payable.................................... (9,685)
Income taxes payable................................... 37,822
Accrued expenses....................................... 64,340
Accrued salary......................................... 20,091
Accrued vacation....................................... 1,563
Deferred rent.......................................... (107,293)
Accrued sublease....................................... (191,079)
-----------
Net cash provided by operating activities......... 1,023,923
-----------
Cash Flows from Investing Activities
Purchase of certificate of deposit..................... (1,000,000)
Acquisition of property and equipment.................. (58,827)
Distributions from Barnes, Morris, Pardoe & Foster
Management Services, LLC.............................. 149,111
Investment in marketable securities.................... (100,000)
-----------
Net cash used in investing activities............. (1,009,716)
-----------
Cash Flows from Financing Activities
Repayment of long-term debt............................... (111,750)
Repayment of treasury stock note.......................... (18,750)
-----------
Net cash used in financing activities............. (130,500)
-----------
Net Decrease in Cash and Cash Equivalents................... (116,293)
Cash and Cash Equivalents, beginning of year................ 727,531
-----------
Cash and Cash Equivalents, end of year...................... $ 611,238
===========
Supplemental Cash Flow Disclosures
Cash paid for interest.................................... $ 18,348
===========
Cash paid for income taxes................................ $ 182,346
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<PAGE> 150
BARNES, MORRIS, PARDOE & FOSTER, INC.
NOTES TO THE FINANCIAL STATEMENTS
JANUARY 31, 1997
1. ORGANIZATION
Barnes, Morris, Pardoe & Foster, Inc. (the Company) was formed for the
purpose of engaging in the business of commercial real estate sales, leasing,
financing, market research, and consulting in the Washington, D.C. regional
area. As such, the Company is directly affected by the well being of the local
real estate industry. The Company is incorporated in the District of Columbia.
On November 1, 1997, the shareholders of the Company sold their ownership
interests to an unrelated third party.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting -- The Company's financial statements are prepared
using generally accepted accounting principles.
Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and the disclosure of contingent assets and
liabilities.
Cash and Cash Equivalents -- The term cash and cash equivalents, as used in
the accompanying financial statements, includes currency on hand, demand
deposits and financial institutions, and short-term highly liquid investments
purchased with a maturity of three months or less.
The Company places its cash and temporary investments with financial
institutions which at times exceed federally insured limits. Management believes
the Company is not exposed to any significant credit risk on these accounts.
Escrow Accounts -- The accompanying financial statements do not include
cash of $58,370, which is held in escrow by the Company.
Accounts Receivable -- Accounts receivable generally includes leasing
commissions which the Company has earned for which payment has not yet been
received. Agents' commissions and co-broker fees related to these receivables
are reflected in the accompanying financial statements as commissions payable.
These expenses are payable upon receipt of the related leasing commission.
Leasing commissions earned but payable over the term of the respective
lease are segregated to present amounts due currently and amounts due after
January 31, 1998. Significant leasing commissions receivable over the term of a
long-term lease have been presented at estimated present value of the commission
payments to be collected.
Draws Receivable -- Accounts receivable from agents and others includes
draws advanced to agents and not yet repaid through commissions earned by those
agents.
Investments and Marketable Securities -- Investments are recorded using the
equity method of accounting.
The Company accounts for marketable securities under the provisions of the
Statement of Financial Accounting Standards No. 11 (SFAS 115). In accordance
with this statement, securities are classified as held-to-maturity, available
for sale, or trading. The Company has classified its marketable securities as
trading securities. Unrealized holding gains for trading securities are included
in earnings.
Property and Equipment -- Property and equipment are recorded at cost.
Depreciation of property and equipment is computed using accelerated
depreciation methods over asset lives ranging from 5 to 10 years. Leasehold
improvements are amortized straight-line over the life of the respective lease.
F-81
<PAGE> 151
BARNES, MORRIS, PARDOE & FOSTER, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Rent -- The term deferred rent, as used in the accompanying
financial statements, represents the benefit received from reduced rental
payments in early lease terms which are being amortized over the life of the
leases on a straight-line basis.
3. FINANCING ARRANGEMENTS
As part of a stock redemption agreement executed in January 1993, the
Company purchased 21.23 shares of Class B common stock for a total purchase
price of $73,333. The agreement provides for an initial payment of $14,667 with
the remaining balance evidenced by a 5-year note payable. Payments on the
treasury stock note are to be made in twenty quarterly installments of $2,933
plus interest on the outstanding balance beginning April 13, 1993. Interest is
computed on the outstanding balance at 7%.
The Company has available a $300,000 line of credit, with no outstanding
advances at January 31, 1997. The line is secured by the Company's accounts
receivable and guaranteed by the Company's stockholders. Interest accrues on the
amount outstanding at the prime rate.
The Company has a promissory note dated April 28, 1995 for the purchase of
computer equipment. The balance of the computer note at January 31, 1997 was
$109,365. The note accrues interest at the prime rate and monthly payments are
$6,944 plus interest.
Aggregate maturities of the above notes payable are as follows:
<TABLE>
<S> <C>
Year ending January 31, 1998............................. $ 83,333
1999........................... 26,032
--------
$109,365
========
</TABLE>
4. COMMITMENTS
The Company leases corporate office space and office equipment under
operating leases, none of which require any personal guarantees by the Company's
stockholders. The minimum future rental payments under noncancelable operating
leases as of January 31, 1997 for each of the next five years are as follows:
<TABLE>
<CAPTION>
OFFICE SPACE EQUIPMENT
------------ ---------
<S> <C> <C>
Year ending January 31, 1998................ $1,172,541 $14,220
1999.............. 1,115,313 14,220
2000.............. 1,000,858 4,740
2001.............. 1,000,858 --
2002.............. 135,396 --
---------- -------
$4,424,966 $33,180
========== =======
</TABLE>
The Company has various subleases for the office space which the Company
vacated. For the year ended January 31, 1997, sublease income was $253,978. The
minimum future sublease income due under noncancelable subleases as of January
31, 1997 is $39,716. The Company has recorded an accrued loss on subleases
representing the differential between minimum lease payments on vacated office
space and the minimum sublease payments to be received for such office space.
The Company has employment agreements with certain officers of the Company
which provide for annual salary payments plus bonuses based on the profitability
of the Company.
F-82
<PAGE> 152
BARNES, MORRIS, PARDOE & FOSTER, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
5. INVESTMENTS
During 1992, the Company acquired a limited partnership interest in Barnes,
Morris, Pardoe & Foster Management Services, L.P. (Management Services). On
January 1, 1996, Management Services was converted to a limited liability
company. As of January 31, 1997, the Company owned a 19.6% interest in
Management Services.
During the year ended January 31, 1997, distributions paid by Management
Services were $149,111 and there were distributions receivable from Management
Services of $213,483.
Income of $124,714 from the investment in Management Services was reported
for the year ended January 31, 1997. The Company is also due $128,643 from
Management Services for working capital advances made by the Company.
On January 1, 1996, the Company acquired a 2.123% interest in a newly
formed entity, Barnes, Morris, Pardoe & Foster Management Services Holding Co.,
LLC, (Holdings), which acquired additional ownership interests in Management
Services. During the year, the Company advanced $72,794 to Holdings for working
capital. The Company reported a $1,512 of income from Holdings for the year
ending January 31, 1997 and there were distributions receivable from Holdings of
$3,185 at year-end. The Company and its commonly controlled affiliate, Holdings,
own 90% of Management Services as of January 1, 1996.
6. RETIREMENT PLAN
The Company has a profit-sharing plan including a 401(k) plan feature for
all eligible employees of the Company who elect to participate. Participants may
contribute to the plan, on a pre-tax basis, an amount not to exceed the maximum
allowed by law. The Company's total contribution to the retirement plan was
$100,000 ($50,000 to the profit sharing portion and $50,000 for the employer
matching contribution to the 401(k) portion) for the year ended January 31,
1997.
7. INCOME TAXES
The Company files its federal and state income tax returns using the
accrual basis of accounting. As of February 1, 1997, the Company converted from
a C corporation to an S corporation. State income tax returns are filed for
Maryland, Virginia and District of Columbia operations. The provisions for
income taxes for the year ended January 31, 1997 are as follows:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Federal
Current................................................. $174,430
Deferred tax............................................ 92,100
--------
266,530
--------
State
Current................................................. 50,238
Deferred tax............................................ 25,402
--------
75,640
--------
Total........................................... $342,170
========
</TABLE>
Deferred income taxes are provided for timing differences in reporting
income and expenses for financial statement and income tax purposes. The primary
timing differences are as follows. The Company uses different asset lives to
depreciate leasehold improvements for financial statement and income tax
purposes. For financial reporting purposes, the improvement is depreciated over
the life of the lease while for tax purposes
F-83
<PAGE> 153
BARNES, MORRIS, PARDOE & FOSTER, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
the improvement is depreciated over 39 years. In addition, rent expense for
financial purposes is expensed using the straight-line method while the cash
method is used for tax purposes. The Company also recognizes income at the time
of lease execution for leasing commissions earned and payable over the life of
the lease or for portions payable on occupancy of the space. For income tax
purposes, leasing commissions earned and payable at occupancy or over the term
of the lease are recognized as taxable income when such payments become due.
The net deferred tax assets and liabilities in the accompanying balance
sheet include the following components:
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Deferred tax liabilities................................. $(642,403)
Deferred tax assets...................................... 220,646
---------
$(421,757)
=========
</TABLE>
F-84
<PAGE> 154
BARNES, MORRIS, PARDOE & FOSTER, INC.
SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
YEAR ENDED JANUARY 31, 1997
<TABLE>
<S> <C>
Accounting.................................................. $ 56,486
Advertising................................................. 138,887
Auto........................................................ 36,922
Consulting Fees............................................. 88,354
Contributions............................................... 18,244
Delivery and Postage........................................ 99,192
Dues and Subscriptions...................................... 162,766
Entertainment and Promotion................................. 150,507
Equipment Rental............................................ 50,151
Insurance................................................... 353,982
Legal Fees.................................................. 199,806
Miscellaneous............................................... 83,571
Printing and Stationery..................................... 95,503
Profit Sharing Contribution................................. 100,000
Rent........................................................ 1,351,700
Repairs..................................................... 109,797
Selling..................................................... 119,846
Supplies.................................................... 144,067
Taxes....................................................... 287,249
Telephone................................................... 184,810
Temporary Help.............................................. 130,914
Training.................................................... 57,555
Travel...................................................... 21,472
Uncollectible Accounts...................................... 267,719
----------
$4,309,500
==========
</TABLE>
The accompanying notes are an integral part of this financial schedule.
F-85
<PAGE> 155
INDEPENDENT AUDITORS' REPORT
To the Members of
Barnes, Morris, Pardoe & Foster
Management Services, LLC
Washington, D.C.
We have audited the accompanying balance sheet of Barnes, Morris, Pardoe &
Foster Management Services, LLC, a limited liability company, as of December 31,
1996, and the related statements of income, changes in members' capital, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Barnes, Morris, Pardoe &
Foster Management Services, LLC as of December 31, 1996, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of operating expenses on
page F-94 is presented for the purpose of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit 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.
BEERS & CUTLER PLLC
Washington, D.C.
November 11, 1997
F-86
<PAGE> 156
BARNES, MORRIS, PARDOE & FOSTER MANAGEMENT SERVICES, LLC
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
Current Assets
Cash and cash equivalents................................. $196,108
Accounts receivable....................................... 516,323
Prepaid rent.............................................. 17,035
Prepaid taxes............................................. 23,585
--------
Total current assets.............................. 753,051
Property and Equipment, net................................. 199,148
Other Assets
Deferred costs, net of accumulated amortization of
$754,799............................................... 10,201
--------
Total assets...................................... $962,400
========
LIABILITIES AND MEMBERS' CAPITAL
Current Liabilities
Note payable, current portion............................. $ 45,240
Accounts payable.......................................... 35,185
Accounts payable -- related party......................... 126,447
Accrued payroll........................................... 72,450
Accrued vacation.......................................... 85,333
Accrued other............................................. 52,184
Escrow deposits........................................... 16,750
Due to members............................................ 102,286
--------
Total current liabilities......................... 535,875
Long-term Liabilities
Note payable, net of current portion...................... 77,463
Due to members............................................ 113,244
--------
Total liabilities................................. 726,582
Members' Capital............................................ 235,818
--------
Total liabilities and members' capital............ $962,400
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE> 157
BARNES, MORRIS, PARDOE & FOSTER MANAGEMENT SERVICES, LLC
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Revenues
Management fees........................................... $ 3,078,774
Leasing commissions....................................... 1,336,397
Supervision fees.......................................... 362,468
Processing and other fees................................. 548,685
-----------
5,326,324
Operating Expenses.......................................... (4,551,316)
-----------
Income from Operations...................................... 775,008
Other Income (Expenses)
Contributions............................................. (880)
Interest expense.......................................... (6,458)
Interest income........................................... 18,435
-----------
Income Before Depreciation and Amortization and Provision
for Income Taxes.......................................... 786,105
Depreciation and Amortization............................... (155,272)
-----------
Income Before Provision for Income Taxes.................... 630,833
Provision for Income Taxes.................................. (26,415)
-----------
Net Income........................................ $ 604,418
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-88
<PAGE> 158
BARNES, MORRIS, PARDOE & FOSTER MANAGEMENT SERVICES, LLC
STATEMENT OF CHANGES IN MEMBERS' CAPITAL
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
KAEMPFER
BMP&F BMP&F COLUMBIA MANAGEMENT
MANAGEMENT HOLDINGS, MANAGEMENT & SERVICES,
INC. BMP&F, INC. LLC DEVELOPMENT CO. INC. TOTAL
---------- ----------- --------- --------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996...... $(4,287) $ 549,571 $ -- $(154,936) $(243,662) $ 146,686
Acquisition of Members
Interest by BMP&F Holdings,
LLC from Columbia Management
and Development Co. and
Kaempfer Management
Services, Inc............... -- -- (318,878) 123,949 194,929 --
Capital Contributions......... -- -- 10,000 -- 10,000 20,000
Net Income.................... 2,330 115,307 411,781 26,250 48,750 604,418
Preferred Distributions....... -- -- -- (26,250) (48,750) (75,000)
Distributions................. (2,046) (100,240) (358,000) -- -- (460,286)
------- --------- --------- --------- --------- ---------
Balance, December 31, 1996.... $(4,003) $ 564,638 $(255,097) $ (30,987) $ (38,733) $ 235,818
======= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-89
<PAGE> 159
BARNES, MORRIS, PARDOE & FOSTER MANAGEMENT SERVICES, LLC
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Cash Flows from Operating Activities
Net income................................................ $ 604,418
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization.......................... 155,271
(Increase) decrease in:
Restricted cash...................................... 25,000
Accounts receivable.................................. 201,794
Prepaid rent......................................... 9,680
Prepaid taxes........................................ (23,585)
Increase (decrease) in:
Accounts payable..................................... (89,485)
Accrued expense other................................ 2,381
Accrued vacation..................................... 28,670
Accrued payroll...................................... (25,940)
Accounts payable related party....................... 126,447
Escrow deposits...................................... (8,250)
Income taxes payable................................. (35,000)
---------
Net cash provided by operating activities......... 971,401
---------
Cash Flows from Investing Activities
Acquisition of property and equipment..................... (156,765)
---------
Net cash used in investing activities..................... (156,765)
---------
Cash Flows from Financing Activities
Repayment of note payable................................. (19,630)
Proceeds from note payable................................ 127,722
Contributions from members................................ 20,000
Distributions to members.................................. (433,000)
Payments of amounts due to members........................ (664,480)
---------
Net cash used in financing activities............. (969,388)
---------
Net Decrease in Cash........................................ (154,752)
Cash and Cash Equivalents, beginning of year................ 350,860
---------
Cash and Cash Equivalents, end of year...................... $ 196,108
=========
Supplemental Disclosure of Cash Flow Information:
Interest paid............................................. $ 6,458
=========
Income taxes paid......................................... $ 26,415
=========
Non-cash Financing Activity:
Accrued distributions to members.......................... $ 102,286
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-90
<PAGE> 160
BARNES, MORRIS, PARDOE & FOSTER MANAGEMENT SERVICES, LLC
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION
Barnes, Morris, Pardoe & Foster Management Services, L.P. was formed on
June 1, 1992 pursuant to the laws of the State of Delaware. Effective January 1,
1996, the Partnership converted to a limited liability company pursuant to the
laws of the State of Delaware, titled Barnes, Morris, Pardoe & Foster Management
Services, LLC (the Company). The Company was organized to conduct a real estate
property management business and certain related businesses including parking
management, supervising build-out of tenant space, leasing and financing of
managed assets, property consulting and asset management in the Washington, D.C.
regional area. The Company has a finite life and will cease to exist on December
20, 2096 or earlier if any of the specific events described in the operating
agreement occur. No member is liable for any debts or obligations of the
Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting -- The financial statements are prepared using
generally accepted accounting principles.
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,
liabilities, revenues, expenses and the disclosure of contingent assets and
liabilities.
Cash and Cash Equivalents -- The term cash and cash equivalents as used in
the accompanying financial statements, includes currency on hand, demand
deposits with financial institutions, and short-term highly liquid investments
purchased with a maturity of three months or less.
At December 31, 1996, cash held in banks was insured by the FDIC in the
amount of $170,585.
Deferred Costs -- Costs relating to the acquisition of management contracts
are being amortized using the straight-line method over the length of the
respective contracts.
Property and Equipment -- Property and equipment are recorded at cost.
Depreciation of property and equipment is computed using accelerated
depreciation methods over asset lives ranging from 5 to 39 years. The resulting
depreciation expense does not materially differ from the expense that would
result from the use of management's estimate of actual useful lives as required
by generally accepted accounting principles.
Leasing Commissions -- The Company acts as a co-broker leasing agent with a
commonly controlled affiliated brokerage company for properties the Company
manages. Pursuant to this co-broker leasing agent arrangement, the Company
receives an agreed upon allocation of the total leasing commission earned from
properties the Company manages. The Company records their allocated share of
leasing commission revenue in the accompanying financial statements.
F-91
<PAGE> 161
BARNES, MORRIS, PARDOE & FOSTER MANAGEMENT SERVICES, LLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Automobile............................................... $ 33,480
Computer equipment....................................... 145,151
Furniture and fixtures................................... 181,228
Leasehold improvements................................... 24,925
Software................................................. 28,036
---------
412,820
Less: accumulated depreciation........................... (213,672)
---------
$ 199,148
=========
</TABLE>
4. MEMBERS' CAPITAL
The Company has two classes of members, preferred and common. Two members,
Columbia Management & Development Co., and Kaempfer Management Services, Inc.
hold a preferred interest in the Company. Preferred members are to receive
annual cash distributions of 10% of pretax profits, but not less than the
guaranteed minimum payment specified in the operating agreement. The preferred
members also have a put option for all, but not less than all, of their
preferred membership units beginning January 1, 2001. The preferred interest
members have limited voting rights as described in the operating agreement.
Common members share in the allocation of profits based on their respective
ownership percentages. Management has the discretion regarding distributions to
common members from available cash flow. Distributions to common members are to
be made pro rata based on their ownership percentages. Distributions of $215,530
are due to certain common members at December 31, 1996.
5. LEASE COMMITMENTS
During 1993, the Company leased office space under a noncancellable
operating lease. The original lease and the amendments for additional space have
varying lease periods but all expire on March 31, 2001. The Company has the
right to terminate the lease effective March 31, 1997 or March 31 of any year
thereafter. The original lease and the amendments all have the same structure
with respect to rents. For the first three years, the lease structure is full
service and the Company is only obligated to pay the base rents specified in the
lease. In the fourth year, the lease structure changes to triple net whereby the
Company, in addition to the specified base rents, becomes obligated to pay its
share of real estate taxes and operating expenses. In the fifth year, the base
rents due under the lease are subject to upward adjustment based on increases in
the Consumer Price Index.
On September 30, 1996, the Company elected to terminate the lease to be
effective March 31, 1997. A termination fee of approximately $56,000 is due
March 31, 1997.
The Company entered into a new lease effective April 29, 1997 for space
located at 1015 15th Street. The lease term is five years and there is an option
to terminate the lease on April 30, 2001. The Company may terminate the lease
effective April 30, 2001, in which case a $115,159 termination fee would be
incurred.
The Company's office rent expense for the year ended December 31, 1996
totaled $431,186.
In addition the Company has various operating leases for office equipment.
F-92
<PAGE> 162
BARNES, MORRIS, PARDOE & FOSTER MANAGEMENT SERVICES, LLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Minimum future rental payments are as follows:
<TABLE>
<CAPTION>
OFFICE SPACE EQUIPMENT
------------ ---------
<S> <C> <C>
December 31, 1997............................. $ 386,987 $ 91,667
1998........................... 454,956 47,940
1999........................... 475,102 15,924
2000........................... 482,183 --
2001........................... 489,429 --
thereafter.......................... 165,558 --
---------- --------
$2,454,215 $155,531
========== ========
</TABLE>
6. INCOME TAXES
The Company is not subject to federal income taxes. Each members'
distributive share of income or loss and other tax items is reported on their
respective income tax returns in accordance with the operating agreement and the
Internal Revenue Code. A provision for the District of Columbia franchise tax
for 1996 of $26,415 has been reported in the accompanying financial statements.
7. RELATED PARTY TRANSACTIONS
The Company earned revenues in 1996 totaling $67,958 from entities in which
certain members have ownership interests. During 1996, the Company paid
management finder's fees to a member totaling $78,256.
During 1996, the Company shared its operating expenses with one of the
members.
The Company leases computer equipment from one of the members. Total
payments were $97,945 for 1996.
8. NOTE PAYABLE
The Company has financed automobiles and computer equipment with various
notes. The notes are financed at 8.5% to 9% interest for varying periods and
require monthly principal and interest payments.
Principal payments are due as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31, 1997.......................................... $ 45,240
1998........................................ 48,293
1999........................................ 26,382
2000........................................ 2,788
--------
$122,703
========
</TABLE>
9. RETIREMENT PLAN
The Company has a 401(k) plan for all eligible employees of the Company who
elect to participate. Participants may contribute to the plan, on a pre-tax
basis, an amount not to exceed the lesser of the maximum allowed by law or 15%
of their compensation, as defined by the Plan, by entering into a salary
reduction agreement with the Company. The Company matches 50% of each
participant's salary contribution up to the first 5% deferred. The Company's
contribution to the Plan was $39,973 for 1996.
10. SUBSEQUENT EVENTS
On November 1, 1997, the members of the Company sold their ownership
interests to an unrelated third party.
F-93
<PAGE> 163
BARNES, MORRIS, PARDOE & FOSTER MANAGEMENT SERVICES, LLC
SCHEDULE OF OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Advertising and Promotion................................... $ 37,022
Auto and Parking............................................ 66,552
Books, Dues and Subscriptions............................... 18,439
Commissions................................................. 58,628
Computer Rent............................................... 129,923
Education and Seminars...................................... 28,638
Finder's Fee................................................ 78,256
Insurance................................................... 115,967
General Office.............................................. 90,124
Office Rent................................................. 431,186
Postage and Delivery........................................ 14,616
Professional Fees........................................... 71,920
Recruiting and Temporary Help............................... 137,826
Repairs and Maintenance..................................... 43,044
Salaries, Benefits and Payroll Costs........................ 2,955,274
Supplies.................................................... 68,627
Taxes and Licenses.......................................... 13,066
Telephone................................................... 111,310
Travel and Entertainment.................................... 80,898
----------
$4,551,316
==========
</TABLE>
F-94
<PAGE> 164
RICHARD ELLIS HOLDINGS LIMITED
ANNUAL REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH APRIL 1997
CONTENTS
Directors
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of the directors..................................... F-96
Report of the auditors...................................... F-99
Consolidated profit and loss account........................ F-100
Consolidated balance sheet.................................. F-101
Balance sheet............................................... F-102
Consolidated cash flow statement............................ F-103
Notes forming part of the financial statements.............. F-104
</TABLE>
DIRECTORS
A J M Huntley (Chairman)
A C Froggatt
S A Hubbard
M J Strong
G E Webster
H V A Ellingham
I Harvey
SECRETARY AND REGISTERED OFFICE
P A V S Osman, Berkeley Square House, London, W1X 6AN.
AUDITORS
BDO Stoy Hayward, 8 Baker Street, London, W1M 1DA.
BANKERS
Barclays Bank PLC, 54 Lombard Street, London EC3V 9EX.
F-95
<PAGE> 165
RICHARD ELLIS HOLDINGS LIMITED
REPORT OF THE DIRECTORS
FOR THE YEAR ENDED 30TH APRIL 1997
The directors present their annual report together with the audited
financial statements for the year ended 30th April 1997.
RESULTS AND DIVIDENDS
The results of the group for the year are set out on page F-100.
The directors do not propose the payment of a dividend.
PRINCIPAL ACTIVITIES, TRADING REVIEW AND FUTURE DEVELOPMENTS
During the year the company's principal activity was that of a holding
company. The subsidiaries' activities are disclosed in note 13 to the financial
statements.
The trading results of the group were disappointing, particularly the costs
of merging the group with the Richard Ellis Partnership were higher than
expected.
During the year the group acquired Richard Ellis Facilities Management
Limited, the remaining 70% shareholding in its associate Richmount Enterprise
Zone Managers Limited, and also purchased the remaining minority interests in
Richard Ellis (incorporating Hepper Robinson) Limited, Richard Ellis Regional
Limited, REFS Holdings Limited and Richard Ellis Financial Holdings Limited.
On 2nd May 1997 the Richard Ellis group in the UK carried out a corporate
restructuring. This involved transferring the trade, assets and liabilities of
the former Richard Ellis Partnership, Richard Ellis Services Limited, Richard
Ellis (incorporating Hepper Robinson) Limited, Richard Ellis Regional Limited
and Richard Ellis Midlands Limited into Richard Ellis Holdings Limited, which
became the main UK trading company for the group, trading as Richard Ellis.
Performance of the new trading entity has begun strongly. Conditions in
both property investment and occupier markets continue to improve and this has
increased activity in both transactional and advisory parts of the business.
The absence of costs and extensive time involvement in incorporation and
merger are also likely to benefit the results substantially.
F-96
<PAGE> 166
DIRECTORS
The directors of the company during the year and their interests in the
ordinary share capital of the company were:
<TABLE>
<CAPTION>
10P ORDINARY SHARES
---------------------
1997 1996
--------- ---------
<S> <C> <C>
A J M Huntley............................................... 371,532 371,532
B N Harris (resigned 30th April 1997)....................... 360,532 360,532
J A D Croft (resigned 30th April 1997)...................... 358,257 358,257
D A Sizer (resigned 30th April 1997)........................ 371,532 371,532
B D White (resigned 30th April 1997)........................ 358,257 358,257
M D G Wheldon (resigned 30th April 1997).................... 370,532 370,532
R J F Wildman (resigned 19th August 1997)................... 360,532 360,532
C N G Arding (resigned 30th April 1997)..................... 360,532 360,532
R D Lucas (resigned 30th April 1997)........................ 360,532 360,532
A Forbes (resigned 30th April 1997)......................... 374,526 374,526
R G Glover (resigned 19th August 1997)...................... 365,201 365,201
C P B Roe (resigned 30th April 1997)........................ 358,257 358,257
E T D Luker (resigned 30th April 1997)...................... 358,257 358,257
A C Froggatt................................................ 174,704 174,704
S A Hubbard................................................. 346,432 346,432
A C M Pringle (resigned 30th April 1997).................... 331,432 331,432
J J Shellard (resigned 30th April 1997)..................... 326,432 326,432
M J Strong.................................................. 318,479 318,479
K J Caesar (resigned 30th April 1997)....................... 344,900 344,900
A J Waters (resigned 30th April 1997)....................... 304,631 304,631
G E Webster................................................. 302,900 302,900
J S Worboys (resigned 30th April 1997)...................... 294,631 294,631
J M T Slade (resigned 30th April 1997)...................... 278,708 278,708
C M Warner (resigned 30th April 1997)....................... 278,708 278,708
S L Barter (resigned 30th April 1997)....................... 2,600 2,600
H V A Ellingham............................................. 200,056 200,056
I D Ellis (resigned 30th April 1997)........................ 63,615 63,615
D P Smith (resigned 30th April 1997)........................ 63,615 63,615
S V Clayton (resigned 30th April 1997)...................... -- --
R P Lister (resigned 30th April 1997)....................... -- --
A J Davenport (resigned 31st May 1996)...................... -- --
I Harvey (appointed 24th April 1997)........................ -- --
--------- ---------
8,360,422 8,360,422
========= =========
</TABLE>
F-97
<PAGE> 167
DIRECTORS' RESPONSIBILITIES
Company law requires the directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
group and of the profit or loss of the group for that period. In preparing those
financial statements, the directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgements and estimates that are reasonable and prudent;
- state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the financial
statements; and
- prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the group will continue in business.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
group and to enable them to ensure that the financial statements comply with the
Companies Act 1985. They are also responsible for safeguarding the assets of the
group and hence for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
AUDITORS
BDO Stoy Hayward have expressed their willingness to continue in office and
a resolution to re-appoint them will be proposed at the annual general meeting.
BY ORDER OF THE BOARD
P A V S Osman
Secretary
23rd October 1997
F-98
<PAGE> 168
RICHARD ELLIS HOLDINGS LIMITED
REPORT OF THE AUDITORS
TO THE SHAREHOLDERS OF RICHARD ELLIS HOLDINGS LIMITED
We have audited the financial statements on pages F-100 to F-120 which have
been prepared under the accounting policies set out on pages F-104 to F-105.
Respective responsibilities of directors and auditors
As described on page F-98 the company's directors are responsible for the
preparation of the financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
Basis of opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements give a true and fair view of the
state of affairs of the company and the group as at 30th April 1997 and of the
result of the group for the year then ended and have been properly prepared in
accordance with the Companies Act 1985.
Accounting principles generally accepted in the United Kingdom vary in
certain respects from generally accepted accounting principles in the United
States. These differences are referred to in note 34 to the financial
statements.
BDO STOY HAYWARD
Chartered Accountants
and Registered Auditors
London
23rd October 1997 (final paragraph signed as at 21 July 1998)
F-99
<PAGE> 169
RICHARD ELLIS HOLDINGS LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 30TH APRIL 1997
<TABLE>
<CAPTION>
NOTE 1997 1996
---- ------ ------
L000 L000
<S> <C> <C> <C>
Turnover.................................................... 2 8,583 9,053
Administrative expenses..................................... 3 (8,722) (9,302)
------ ------
LOSS ON ORDINARY ACTIVITIES BEFORE INTEREST AND OTHER
INCOME.................................................... (139) (249)
Investment income........................................... 6 134 196
Interest receivable......................................... 61 96
Interest payable............................................ 7 (167) (160)
Share of profit/(loss) of associated undertakings........... 8 43 (192)
------ ------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION................. (68) (309)
Taxation on loss on ordinary activities..................... 9 (159) (19)
------ ------
LOSS ON ORDINARY ACTIVITIES AFTER TAXATION.................. (227) (328)
Minority interests -- equity................................ (28) 23
------ ------
LOSS FOR THE FINANCIAL YEAR................................. 19 (255) (305)
====== ======
</TABLE>
All amounts relate to continuing activities.
The notes on pages F-104 to F-120 form part of these financial statements.
All recognised gains and losses are included in the profit and loss account.
F-100
<PAGE> 170
RICHARD ELLIS HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEET
AT 30TH APRIL 1997
<TABLE>
<CAPTION>
NOTE 1997 1996
---- --------------- --------------------
AS RESTATED
-----------
L000 L000 L000 L000
<S> <C> <C> <C> <C> <C>
FIXED ASSETS
Intangible assets................................................ 11 490 --
Tangible fixed assets............................................ 12 1,202 1,458
Investments...................................................... 13 3,112 3,123
------ ------
4,804 4,581
CURRENT ASSETS
Debtors -- due within one year................................... 14 3,323 3,276
-- due after one year................................... 14 87 334
Cash at bank..................................................... 1,058 1,217
------ ------
4,468 4,827
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR................... 15 (3,708) (2,998)
------ ------
NET CURRENT ASSETS............................................... 760 1,829
------ ------
TOTAL ASSETS LESS CURRENT LIABILITIES............................ 5,564 6,410
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR.......... 16 (1,982) (2,348)
------ ------
3,582 4,062
====== ======
CAPITAL AND RESERVES:
Called up share capital.......................................... 18 877 858
Share premium account............................................ 19 2,723 2,647
Profit and loss account.......................................... 19 (131) 150
Capital reserve.................................................. 19 199 --
------ ------
SHAREHOLDERS' FUNDS.............................................. 3,668 3,655
Minority interests -- equity..................................... 17 (86) 407
------ ------
3,582 4,062
====== ======
</TABLE>
The notes on pages F-104 to F-120 form part of these financial statements.
These financial statements were approved by the Board on 23rd October 1997.
F-101
<PAGE> 171
RICHARD ELLIS HOLDINGS LIMITED
BALANCE SHEET
AT 30TH APRIL 1997
<TABLE>
<CAPTION>
NOTE 1997 1996
---- --------------- ---------------
L000 L000 L000 L000
<S> <C> <C> <C> <C> <C>
FIXED ASSETS
Investments......................................... 13 4,342 4,390
CURRENT ASSETS
Debtors -- due within one year...................... 14 165 127
-- due after one year...................... 14 463 463
------ ------
628 590
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR..... 15 (2,821) (1,984)
------ ------
NET CURRENT LIABILITIES............................. (2,193) (1,394)
------ ------
TOTAL ASSETS LESS CURRENT LIABILITIES............... 2,149 2,996
====== ======
CAPITAL AND RESERVES:
Called up share capital............................. 18 877 858
Share premium account............................... 19 2,723 2,647
Profit and loss account............................. 19 (1,451) (509)
------ ------
SHAREHOLDERS' FUNDS................................. 2,149 2,996
====== ======
</TABLE>
All amounts within capital and reserves relate to equity.
The notes on pages F-104 to F-120 form part of these financial statements.
These financial statements were approved by the Board on 23rd October 1997.
<TABLE>
<S> <C>
Chairman Director
</TABLE>
F-102
<PAGE> 172
RICHARD ELLIS HOLDINGS LIMITED
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 30TH APRIL 1997
<TABLE>
<CAPTION>
NOTE 1997 1996
---- ---- ----
L000 L000
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES......................... 21 558 702
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE............. 22 (38) 29
TAXATION.................................................... (10) (5)
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT................ 23 57 118
ACQUISITIONS AND DISPOSALS.................................. 24 (318) --
---- ----
CASH OUTFLOW BEFORE FINANCING............................... 249 844
FINANCING................................................... 25 (407) (266)
---- ----
(DECREASE)/INCREASE IN CASH................................. (158) 578
==== ====
</TABLE>
The notes on pages F-104 to F-120 form part of these financial statements.
F-103
<PAGE> 173
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH APRIL 1997
1 ACCOUNTING POLICIES
Accounting convention
The financial statements have been prepared under the historical cost
convention and are in accordance with applicable accounting standards. The
following principal accounting policies have been applied:
Basis of consolidation
The financial statements consolidate the accounts of Richard Ellis Holdings
Limited and its subsidiary and associated undertakings, drawn up to 30th April
each year. The accounts of certain small subsidiaries and associated
undertakings have been drawn up to 31st March 1997. Adjustments to reflect those
companies' trading results for the period between the dates of their accounts
and 30th April 1997 would not be material to the group.
The group uses the acquisition method of accounting to consolidate the
results of subsidiary undertakings whereby the results of subsidiary
undertakings are included from the date of acquisition.
No profit and loss account is presented for Richard Ellis Holdings Limited,
as permitted by Section 230 of the Companies Act 1985.
Goodwill
The tangible assets of newly acquired subsidiary undertakings are
incorporated into the accounts on the basis of the fair value to the group as at
the effective date of control.
Goodwill, being any excess of the consideration over that fair value, is
amortised through the profit and loss account over the directors' estimate of
its useful economic life which ranges from zero to ten years.
This represents a change in the group's previous accounting policy in
relation to goodwill, which was written off directly to reserves. The decision
to change the accounting policy was caused by the purchase by the group of an
investment in Richmount Enterprise Zone Managers Limited. In the light of this
acquisition and current thinking, the directors felt it more appropriate to
amortise the goodwill arising through the profit and loss account. It is the
opinion of the directors that it is reasonable to attribute a useful economic
life to the goodwill arising on this acquisition of not less than ten years, and
thus this is the useful economic life adopted.
The economic effects of this change in accounting policy are set out in
note 19 to the financial statements. There is no effect to the results for the
year ended 30 April 1996.
Associated undertakings
A company is treated as an associated undertaking when the group holds a
substantial interest in it for the long term and exercises significant influence
over its operating and financial policy decisions.
The group's share of the results of associated undertakings is included in
the consolidated profit and loss account using the equity method of accounting.
The investment in associated undertakings included in the consolidated balance
sheet is based on the group's share of the net assets of the associated
undertakings, together with any premium or discount arising on acquisition, less
amounts written off. Any premium on acquisition is dealt with as if it were
goodwill.
Foreign currency
Profit and loss accounts and assets and liabilities of foreign subsidiary
undertakings are translated into sterling at the rates of exchange ruling on the
balance sheet date.
F-104
<PAGE> 174
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
Turnover
Turnover represents professional fees rendered to the extent that they have
been earned, net of shared fees, and amounts receivable in respect of equipment
hire and promotional services, all exclusive of value added tax. An accrual is
made for professional fees earned but not billed at the year end.
Valuation of investments
Investments held as fixed assets are stated at cost less any provision for
a permanent diminution in value.
Depreciation
Depreciation is calculated to write off the cost less estimated residual
values of all tangible fixed assets over their expected useful lives as follows:
<TABLE>
<S> <C>
New motor vehicles (from 1st October -- straight line at 25% per annum
1994)
Motor vehicles -- reducing balance at 25% per
annum
Office equipment -- straight line at 20% per annum
Office fixtures and fittings -- straight line at 33% per annum
Office furniture -- straight line at 12.5% per annum
</TABLE>
Deferred taxation
Provision is made for timing differences between the treatment of certain
items for taxation and accounting purposes to the extent that it is probable
that a liability or asset will crystallise.
Leased assets
Where assets are financed by leasing arrangements that give rights
approximating to ownership (finance leases), the assets are treated as if they
had been purchased outright. The amount capitalised is the minimum lease
payments payable over the full term of a lease. The corresponding leasing
commitments are shown as payable to the lessor. Depreciation on the relevant
assets is charged to the profit and loss account.
Lease payments are split between capital and interest using the actuarial
method. The interest is charged to the profit and loss account. The capital part
reduces the amounts payable to the lessor.
All other leases are treated as operating leases. Their annual rentals are
charged to the profit and loss account on a straight line basis over the term of
the lease.
Pension costs
Pension costs are charged against profits in the year in which they become
payable.
2 TURNOVER
Turnover comprises:
<TABLE>
<CAPTION>
1997 1996
----- -----
L000 L000
<S> <C> <C>
Professional fees........................................... 6,842 7,390
Asset hire and promotional charges.......................... 1,741 1,663
----- -----
8,583 9,053
===== =====
</TABLE>
F-105
<PAGE> 175
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
Turnover includes L50,000 which was generated in Poland. All other turnover
was generated in the United Kingdom. Related party turnover is disclosed in note
32.
3 ADMINISTRATIVE EXPENSES
Administrative expenses include:
<TABLE>
<CAPTION>
1997 1996
---- ----
L000 L000
<S> <C> <C>
Auditors' remuneration -- audit -- parent company
auditors.................... 55 53
-- other auditors......... 11 --
-- non audit services..... 29 26
Depreciation................................................ 428 563
Amortisation................................................ 72 --
Profit on disposal of fixed assets.......................... (36) (89)
Payments in respect of operating leases..................... 703 637
Exceptional items:
Restructuring costs....................................... 294 169
Provision against investment.............................. -- 160
</TABLE>
The exceptional items in the year ended 30th April 1997 were the cost
incurred in the major restructuring, the details of which are disclosed in note
31 and the costs involved in the restructuring of Richard Ellis Regional
Limited.
The exceptional item in the previous year related to a provision made
against the group's investment in Chasley (Lifestyle) Limited (formerly IHS
Sport Villages Plc).
Depreciation includes L157k (1996: L229k) charged on assets held under
finance leases and hire purchase contracts.
4 DIRECTORS' EMOLUMENTS
Directors' emoluments consist of:
<TABLE>
<CAPTION>
1997 1996
---- ----
L000 L000
<S> <C> <C>
Directors' remuneration..................................... 42 42
Amounts paid to Richard Ellis Partnership................... 278 324
Contributions to a defined contribution pension scheme...... 9 --
--- ---
329 366
=== ===
</TABLE>
There are six directors in a defined benefit pension scheme (1996: Six).
The emoluments of the highest paid director were L7k (1996: L7k). The
accrued pension of the highest paid director at the year end was L19k.
F-106
<PAGE> 176
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
5 STAFF COSTS
<TABLE>
<CAPTION>
1997 1996
----- -----
L000 L000
<S> <C> <C>
Staff costs consist of:
Wages and salaries........................................ 3,281 3,745
Social security costs..................................... 317 353
Pension costs............................................. 121 142
----- -----
3,719 4,240
===== =====
</TABLE>
The average number of employees during the year was as follows:
<TABLE>
<CAPTION>
NUMBER NUMBER
------ ------
<S> <C> <C>
Full time................................................... 136 150
Part time................................................... 6 5
--- ---
142 155
=== ===
</TABLE>
6 INVESTMENT INCOME
<TABLE>
<CAPTION>
1997 1996
---- ----
L000 L000
<S> <C> <C>
Income from investments..................................... 4 66
Profit share receivable from Richard Ellis.................. 130 130
--- ---
134 196
=== ===
</TABLE>
7 INTEREST PAYABLE
<TABLE>
<CAPTION>
1997 1996
---- ----
L000 L000
<S> <C> <C>
Bank interest............................................... 70 73
Finance leases and hire purchase contracts.................. 97 87
--- ---
167 160
=== ===
</TABLE>
8 SHARE OF PROFIT/(LOSS) OF ASSOCIATED UNDERTAKINGS
<TABLE>
<CAPTION>
1997 1996
---- ----
L000 L000
<S> <C> <C>
Richmount Enterprise Zone Managers Limited.................. 26 (3)
Beckwith Property Fund Management Limited................... -- (129)
General Property Company (Goldsworth Park) Limited
-- share of profit for the year........................... 22 13
-- share of revaluation reserve........................... -- (72)
LAW 572 Limited............................................. (5) (1)
-- ----
43 (192)
== ====
</TABLE>
F-107
<PAGE> 177
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
9 TAXATION ON LOSS ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
1997 1996
---- ----
L000 L000
<S> <C> <C>
UK corporation tax.......................................... 176 50
Over provision in respect of prior years.................... (17) (35)
--- ---
159 15
Share of associated undertakings' tax charge................ -- 4
--- ---
159 19
=== ===
</TABLE>
10 DEFERRED TAXATION
The group has a potential tax liability of approximately L693k which would
crystallise on the liquidation of Richard Ellis Corporate Capital Limited. This
deferred taxation has not been provided as the directors have no intention to
liquidate Richard Ellis Corporate Capital Limited in the foreseeable future.
11 INTANGIBLE ASSETS
Group
<TABLE>
<CAPTION>
GOODWILL ON
CONSOLIDATION
-------------
L000
<S> <C>
Cost:
Addition in the year...................................... 562
---
At 30th April 1997........................................ 562
===
Amortisation:
Charged in the year....................................... 72
---
At 30th April 1997........................................ 72
===
Net book value:
At 30th April 1997........................................ 490
===
At 30th April 1996........................................ --
===
</TABLE>
F-108
<PAGE> 178
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
12 TANGIBLE FIXED ASSETS
Group
<TABLE>
<CAPTION>
FURNITURE,
EQUIPMENT,
FIXTURES &
MOTOR FITTINGS TOTAL
----- ---------- -----
L000 L000 L000
<S> <C> <C> <C>
Cost:
At 1st May 1996.......................................... 1,970 5,126 7,096
Additions in the year.................................... 200 59 259
Disposals in the year.................................... (395) (2) (397)
----- ----- -----
At 30th April 1997....................................... 1,775 5,183 6,958
===== ===== =====
Depreciation:
At 1st May 1996.......................................... 875 4,763 5,638
Charged in the year...................................... 261 167 428
Disposals in the year.................................... (309) (1) (310)
----- ----- -----
At 30th April 1997....................................... 827 4,929 5,756
===== ===== =====
Net book value:
At 30th April 1997....................................... 948 254 1,202
===== ===== =====
At 30th April 1996....................................... 1,095 363 1,458
===== ===== =====
</TABLE>
The net book value of tangible fixed assets includes an amount of L886k
(1996: L1,006k) in respect of assets held under finance leases and hire purchase
contracts.
Company
Richard Ellis Holdings Limited has no tangible fixed assets other than
investments (note 13).
Capital commitments
Commitments for tangible fixed assets at 30th April 1997 were:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
L000 L000
Contracted.................................................. 453 --
==== ====
</TABLE>
At 30th April 1997 the group was committed to invest an additional L875k in
its associate Beckwith Property Management Fund Limited. The cash is to be
invested in property investment funds (1996: L875k).
F-109
<PAGE> 179
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
13 FIXED ASSET INVESTMENTS
Group
<TABLE>
<CAPTION>
RICHARD UNQUOTED CONVERTIBLE ASSOCIATED
ELLIS INVESTMENTS LOAN STOCK UNDERTAKINGS TOTAL
------- ----------- ----------- ------------ -----
<S> <C> <C> <C> <C> <C>
L000 L000 L000 L000 L000
At 1st May 1996.............................. 2,600 45 463 15 3,123
Disposals in the year........................ -- -- -- (5) (5)
Profit for the year.......................... -- -- -- 48 48
Reclassifications............................ -- (16) -- 48 32
Reclassification as group undertaking........ -- -- -- (86) (86)
----- --- --- --- -----
At 30th April 1997........................... 2,600 29 463 20 3,112
===== === === === =====
</TABLE>
The investment in Richard Ellis is partnership capital subscribed by the
group interest-free, carrying an entitlement to a share of profits, as
determined by the partners of Richard Ellis. The investment in Richard Ellis is
non-voting and no control is exercised.
On 4th November 1996, the group acquired the remaining 70% of the issued
ordinary share capital of Richmount Enterprise Zone Managers Limited, (REZM), a
group engaged in the management of enterprise zone trusts and incorporated in
England. The company now holds 100% of the issued ordinary share capital of
REZM. REZM Limited holds 100% of the issued ordinary share capital of Richmount
Management Limited which is also engaged in the management of enterprise zone
trusts and is incorporated in England.
Company
<TABLE>
<CAPTION>
1997 1996
----- -----
L000 L000
<S> <C> <C>
Beckwith Property Fund Management Limited................... -- --
Business Parks Consultancy Limited.......................... -- --
Business Parks Consultancy SA............................... -- --
Capital and Country Properties Limited...................... -- --
Property Mezzanine Partners Limited......................... -- 16
R.E.F.S. Limited............................................ -- --
REFS Holdings Limited....................................... 1,975 1,843
Rehold Limited.............................................. -- --
Richard Ellis Corporate Finance Limited..................... 12 12
Richard Ellis Facilities Management Limited................. -- --
Richard Ellis Financial Holdings Limited.................... 1,515 1,479
Richard Ellis Fund Management Limited....................... -- --
Richard Ellis Gunne Limited................................. -- --
Richard Ellis (incorporating Hepper Robinson) Limited....... 534 740
Richard Ellis International Limited......................... -- --
Richard Ellis Investment Services Limited................... 5 --
Richard Ellis (Ireland) Limited............................. -- --
Richard Ellis Scotland Limited.............................. 1 --
Richard Ellis Securities Limited............................ -- --
Richard Ellis Services Limited.............................. 300 300
Waresure Limited............................................ -- --
----- -----
4,342 4,390
===== =====
</TABLE>
F-110
<PAGE> 180
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
The following were subsidiary and associated undertakings at the end of the
year and have all been included in the consolidated accounts:
<TABLE>
<CAPTION>
PROPORTION OF
COUNTRY OF VOTING RIGHTS
INCORPORATION AND SHARE
OR REGISTRATION CAPITAL HELD NATURE OF BUSINESS
--------------- ------------- ------------------
<S> <C> <C> <C>
30 Marsh Wall Limited............................. England 100% Enterprise zone trust managers
Beckwith Property Fund Management Limited*........ England 25% Property fund management
Business Parks Consultancy Limited................ England 100% Holding company
Capital and Country Properties General Property
Company......................................... England 100% Dormant
(Goldsworth Park) Limited*........................ England 25% Property investment
Laser Richmount Limited........................... England 100% Provision of operational and
promotional services
R.E.F.S. Limited.................................. England 100% Dormant
R.E.F Services Limited............................ England 100% Property related investment
REFS Holdings Limited............................. England 100% Finance and investment services
Rehold Limited.................................... England 100% Dormant
Richard Ellis Corporate Capital Limited........... England 100% Finance and investment services
Richard Ellis Corporate Finance Limited........... England 100% SFA regulated finance and
investment services
Richard Ellis Facilities Management Limited....... England 100% Facilities management
Richard Ellis Financial Holdings Limited.......... England 100% Finance and investment services
Richard Ellis Financial Limited................... England 100% Property related investment
advisors
Richard Ellis Fund Management Limited............. England 100% Holding company
Richard Ellis Gunne Limited....................... England 51% Auctioneers
Richard Ellis (incorporating Hepper Robinson)
Limited......................................... England 100% Commercial property consultants
Richard Ellis International Limited............... England 100% Dormant
Richard Ellis Investment Services Limited......... England 100% Dormant
Richard Ellis (Ireland) Limited................... England 100% Dormant
Richard Ellis Midlands Limited.................... England 100% Property consultants
Richard Ellis Regional Limited.................... England 100% Property consultants
Richard Ellis Services Limited.................... England 100% Provision of assets for hire and
promotional services
Richard Ellis Structured Finance Limited.......... England 100% Property related investment
advisors
Richmount Enterprise Zone Managers Limited*....... England 100% Enterprise zone trust managers
Richmount Management Limited*..................... England 100% Enterprise zone trust managers
Richmount Marketing Limited*...................... England 100% Enterprise zone trust managers
Richmount Underwriting Limited*................... England 100% Enterprise zone trust managers
Waresure Limited.................................. England 100% Corporate partner in Richard Ellis
</TABLE>
- ---------------
* Subsidiaries with a 31st March year end.
F-111
<PAGE> 181
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
14 DEBTORS
Amounts due within one year:
<TABLE>
<CAPTION>
GROUP COMPANY
------------- -----------
1997 1996 1997 1996
----- ----- ---- ----
L000 L000 L000 L000
<S> <C> <C> <C> <C>
Trade debtors............................................ 2,810 2,372 -- --
Prepayments and accrued income........................... 388 410 -- --
Corporation tax recoverable.............................. -- 23 -- --
Other debtors............................................ 125 58 42 2
Amounts due from group undertakings...................... -- -- 123 125
Amounts due from associated undertakings................. -- 413 -- --
----- ----- --- ---
3,323 3,276 165 127
===== ===== === ===
</TABLE>
Amounts due after more than one year:
<TABLE>
<S> <C> <C> <C> <C>
Trade debtors............................................... -- 247 -- --
ACT recoverable............................................. 87 87 -- --
Amounts due from group undertakings......................... -- -- 463 463
--- --- --- ---
87 334 463 463
=== === === ===
</TABLE>
15 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
GROUP COMPANY
------------- -------------
1997 1996 1997 1996
----- ----- ----- -----
L000 L000 L000 L000
<S> <C> <C> <C> <C>
Bank overdraft......................................... -- -- 156 66
Trade creditors........................................ 1,517 907 788 409
Other taxes and social security........................ 292 405 -- --
Other creditors........................................ 474 433 61 --
Obligations under finance leases and hire purchase
contracts............................................ 249 261 -- --
Corporation tax........................................ 174 50 -- --
Accruals and deferred income........................... 1,002 942 300 56
Amounts owed to group undertakings..................... -- -- 1,516 1,453
----- ----- ----- -----
3,708 2,998 2,821 1,984
===== ===== ===== =====
</TABLE>
16 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
GROUP COMPANY
------------- -----------
1997 1996 1997 1996
----- ----- ---- ----
L000 L000 L000 L000
<S> <C> <C> <C> <C>
Loan from Hypobank....................................... 1,350 1,350 -- --
Obligations under finance leases and hire purchase
contracts.............................................. 519 658 -- --
Accruals and deferred income............................. 113 340 -- --
----- ----- -- --
1,982 2,348 -- --
===== ===== == ==
</TABLE>
The loan from Hypobank carries a fixed rate of 5% until July 1999 and then
converts to a variable rate. It is repayable in July 2000.
F-112
<PAGE> 182
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
The obligations under finance leases and hire purchase contracts are
secured on the relevant assets and each carries a normal commercial rate of
interest.
They are due as follows:
<TABLE>
<CAPTION>
GROUP COMPANY
----------- -----------
1997 1996 1997 1996
---- ---- ---- ----
L000 L000 L000 L000
<S> <C> <C> <C> <C>
Within 1 -- 2 years......................................... 166 239 -- --
Within 2 -- 5 years......................................... 353 419 -- --
--- --- -- --
519... 658 -- --
=== === == ==
</TABLE>
17 MINORITY INTERESTS
<TABLE>
<CAPTION>
1997 1996
---- ----
L000 L000
<S> <C> <C>
Richard Ellis Gunne Limited................................. (86) (86)
Richard Ellis Regional Limited.............................. -- 155
REFS Holdings Limited....................................... -- 315
Richard Ellis Financial Holdings Limited.................... -- 23
--- ---
(86) 407
=== ===
</TABLE>
The minority interests in Richard Ellis Regional Limited, REFS Holdings
Limited and Richard Ellis Financial Holdings Limited, were purchased by the
group during the year. For details of these transactions see note 20.
18 SHARE CAPITAL
Authorised
<TABLE>
<CAPTION>
1997 1996
----- -----
L000 L000
<S> <C> <C>
"A" ordinary shares of 10p each............................. 3,283 500
"B" ordinary shares of 10p each............................. -- 600
----- -----
3,283 1,100
===== =====
</TABLE>
On 30th April 1997 the authorised share capital was increased to L3,283k
and the "B" ordinary shares were converted into "A" ordinary shares.
Allotted, called up and fully paid
<TABLE>
<CAPTION>
NO OF "B" TOTAL
NO OF "A" ORDINARY NON NO OF
ORDINARY SHARES VOTING SHARES SHARES OF
OF 10P EACH OF 10P EACH 10P EACH L000
--------------- ------------- --------- ----
<S> <C> <C> <C> <C>
30th April 1997........................... 8,769,749 -- 8,769,749 877
========= ========= ========= ===
30th April 1996........................... 3,596,858 4,986,197 8,583,055 858
========= ========= ========= ===
</TABLE>
On 30th April 1997 the "B" ordinary non voting shares of 10p each were
converted into "A" ordinary shares of 10p each.
F-113
<PAGE> 183
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
On 30th April 1997 186,694 ordinary shares of 10p each were allotted,
issued, called up and fully paid. The shares issued were as consideration for
minority shareholdings in Richard Ellis (incorporating Hepper Robinson) Limited.
The shares were issued for a total consideration of L93k at a premium of 40p per
share.
19 RESERVES
Group
<TABLE>
<CAPTION>
SHARE PROFIT
PREMIUM AND LOSS GOODWILL CAPITAL
ACCOUNT ACCOUNT RESERVE RESERVE TOTAL
------- -------- -------- ------- -----
L000 L000 L000 L000 L000
<S> <C> <C> <C> <C> <C>
At 1 May 1996, as previously stated............... 2,647 734 (584) -- 2,797
Prior year adjustment -- see below................ -- (584) 584 -- --
----- ---- ---- --- -----
At 1 May 1996, as restated........................ 2,647 150 -- -- 2,797
Premium on issue of shares........................ 76 -- -- -- 76
Retained loss for the year........................ -- (255) -- -- (255)
Capital reserve on acquisition -- see note 20..... -- -- -- 199 199
Share of former associate's profit taken to group
profit and loss account prior to the associate
becoming a subsidiary........................... -- (26) -- -- (26)
----- ---- ---- --- -----
At 30th April 1997................................ 2,723 (131) -- 199 2,791
===== ==== ==== === =====
</TABLE>
Included within the group reserves are reserves of (L26k) which relate to
shares of associated undertakings retained profits.
Prior year adjustment
As disclosed in note 1 there has been a change in the group's accounting
policy regarding goodwill. The effect on net assets and loss for the year in
effect on the year ended 30th April 1996 is nil. The effect on net assets in the
year ended 30th April 1997, is an increase of L491k in the net assets of the
group, and an increase of L72k in the loss for the year. The change in
accounting policy will give rise to a transfer in reserves between the goodwill
reserve previously held at L584k and the profit and loss account reserve brought
forward.
The cumulative amount of goodwill resulting from acquisitions which has
been eliminated against group reserves is L656k (1996: L584k)
Company
<TABLE>
<CAPTION>
SHARE PROFIT
PREMIUM AND LOSS
ACCOUNT ACCOUNT TOTAL
------- -------- -----
L000 L000 L000
<S> <C> <C> <C>
At 1st May 1996............................................. 2,647 (509) 2,138
Premium on issue of shares.................................. 76 -- 76
Retained loss for the year.................................. -- (942) (942)
----- ------ -----
At 30th April 1997.......................................... 2,723 (1,451) 1,272
===== ====== =====
</TABLE>
F-114
<PAGE> 184
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
20 ACQUISITIONS
<TABLE>
<CAPTION>
RICHARD RICHMOUNT RICHARD
ELLIS ENTERPRISE RICHARD ELLIS
FINANCIAL ZONE REFS ELLIS FACILITIES
HOLDINGS MANAGERS HOLDINGS REGIONAL MANAGEM'T DORMANT
LIMITED LIMITED LIMITED LIMITED LIMITED COMPANIES
--------- ---------- -------- -------- ---------- ---------
L000 L000 L000 L000 L000 L000
<S> <C> <C> <C> <C> <C> <C>
Fixed assets.......................... -- -- -- 52 -- --
Investments........................... 1 -- -- -- -- --
Debtors............................... 31 136 784 195 151 6
Cash.................................. 28 71 37 58 66 --
Creditors............................. (48) (423) (502) (173) (217) --
--- ---- ---- ---- ---- --
Net assets acquired................... 12 (216) 319 132 -- 6
=== ==== ==== ==== ==== ==
Fair value totals..................... 12 (216) 319 132 -- 6
Goodwill.............................. (36) (519) 199 (7) -- --
--- ---- ---- ---- ---- --
Consideration......................... 48 303 120 139 -- 6
=== ==== ==== ==== ==== ==
</TABLE>
The preacquisition results of the subsidiaries acquired during the year
were L87k (1996: L2k).
Analysis of net cash acquired on purchase of subsidiary undertakings:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Cash consideration.................... (48) (242) (120) -- -- --
Cash acquired......................... -- 71 -- -- 66 --
--- ---- ---- ---- ---- --
(48) (171) (120) -- 66 --
=== ==== ==== ==== ==== ==
</TABLE>
For details of the dormant companies acquired see note 13.
In the opinion of the directors, there is no material difference between
the fair values of the assets and liabilities of the subsidiary undertakings
purchased and the fair value totals set out above.
F-115
<PAGE> 185
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
<TABLE>
<CAPTION>
CAPITAL
GOODWILL RESERVE
-------- -------
L000 L000
<S> <C> <C> <C>
ACQUISITION MINORITY INTEREST IN RICHARD ELLIS FINANCIAL
HOLDINGS LIMITED:
Consideration............................................... 48
Net assets acquired......................................... 12
----
(36)
ACQUISITION OF RICHMOUNT ENTERPRISE ZONE MANAGERS LIMITED:
Consideration paid.......................................... 303
Net assets acquired......................................... (216)
----
(519) --
ACQUISITION OF MINORITY INTEREST IN REFS HOLDINGS LIMITED:
Consideration paid.......................................... 120
Net assets acquired......................................... 319
----
-- 199
ACQUISITION OF MINORITY INTEREST IN RICHARD ELLIS REGIONAL
LIMITED:
Consideration paid.......................................... 139
Net assets acquired......................................... 132
----
(7) --
ACQUISITION OF RICHARD ELLIS FACILITIES MANAGEMENT LIMITED
Consideration paid.......................................... --
Net assets acquired......................................... --
----
-- --
ACQUISITION OF DORMANT COMPANIES
Consideration paid.......................................... 6
Net assets acquired......................................... 6
----
--
---- ---
(562) 199
==== ===
</TABLE>
21 RECONCILIATION OF OPERATING LOSS TO CASH FLOW FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
GROUP GROUP
1997 1996
----- -----
L000 L000
<S> <C> <C>
Operating loss.............................................. (139) (249)
Depreciation charges........................................ 428 564
Amortisation................................................ 72 --
Provision against investment................................ 26 160
Profit on sale of tangible fixed assets..................... (36) (89)
Decrease in debtors......................................... 119 1,206
Decrease in creditors....................................... 88 (890)
---- -----
Net cash inflow from operating activities................... 558 702
==== =====
</TABLE>
F-116
<PAGE> 186
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
22 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
<TABLE>
<CAPTION>
GROUP GROUP
1997 1996
----- -----
L000 L000
<S> <C> <C>
Investment income net of tax................................ -- 134
Interest received........................................... 127 60
Interest paid............................................... (96) (78)
Interest element of finance lease payments.................. (69) (87)
---- -----
Returns on investment and servicing of finance.............. (38) 29
==== =====
</TABLE>
23 CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
<TABLE>
<CAPTION>
GROUP GROUP
1997 1996
----- -----
L000 L000
<S> <C> <C>
Purchase of tangible fixed assets........................... (44) (140)
Sale of tangible fixed asset................................ 126 239
Payment to acquire investments.............................. -- (16)
Sale of investment.......................................... (25) 35
---- -----
Net cash outflow for capital expenditure and financial
investment................................................ 57 118
==== =====
</TABLE>
24 ACQUISITIONS AND DISPOSALS
<TABLE>
<CAPTION>
GROUP GROUP
1997 1996
----- -----
L000 L000
<S> <C> <C>
Purchase of subsidiary undertaking.......................... (455) --
Net cash acquired with subsidiary........................... 137 --
---- ----
Net cash outflow for acquisitions and disposals............. (318) --
==== ====
</TABLE>
25 FINANCING
<TABLE>
<CAPTION>
GROUP GROUP
1997 1996
----- -----
L000 L000
<S> <C> <C>
Capital element of finance lease rental payments............ (407) (318)
Proceeds from new borrowings................................ -- 83
Repayment of borrowings..................................... -- (31)
---- ----
Net cash outflow from financing............................. (407) (266)
==== ====
</TABLE>
26 NET DEBT
<TABLE>
<CAPTION>
AT 1ST MAY CASH AT 30TH
1996 FLOW APRIL 1997
---------- ----- ----------
L000 L000 L000
<S> <C> <C> <C>
Cash in hand and at bank............................... 1,217 (158) 1,059
Debt due after one year................................ (1,350) -- (1,350)
Finance leases......................................... (919) 150 (769)
------ ---- ------
(1,052) (8) (1,060)
====== ==== ======
</TABLE>
F-117
<PAGE> 187
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
1997
------
L000
<S> <C>
Decrease in cash in the year................................ (158)
Cash outflow from decrease in lease financing............... 150
------
Movement in net debt in the year............................ (8)
Net debt at 1 May 1997...................................... (1,052)
------
Net debt at 30th April 1997................................. (1,060)
======
</TABLE>
27 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
GROUP COMPANY
------------- -------------
1997 1996 1997 1996
----- ----- ----- -----
L000 L000 L000 L000
<S> <C> <C> <C> <C>
Loss for the financial year............................ (255) (305) (942) (608)
New share capital subscribed........................... 95 -- 95 --
Capital reserve on acquisition......................... 199 -- -- --
Share of former associate's profit taken to group
profit and loss account prior to the associate
becoming a subsidiary................................ (26) -- -- --
----- ----- ----- -----
Net increase/(decrease) in shareholders' funds......... 13 (305) (847) (608)
Shareholders' funds at beginning of year............... 3,655 3,960 2,996 3,604
----- ----- ----- -----
Shareholders' funds at end of year..................... 3,668 3,655 2,149 2,996
===== ===== ===== =====
</TABLE>
28 PENSIONS
Certain employees are members of a pension scheme operated by the Richard
Ellis Partnership. The scheme includes final salary and defined contribution
sections. The assets of the schemes are held separately from those of the
Partnership.
The most recent actuarial valuation was at 30th April 1993. The valuation
was conducted using the projected unit method, and assumed an interest rate of
8%, a salary growth of 6% and dividend growth of 3.5%. The value of the scheme's
assets exceeded the accrued benefits to members. The next actuarial valuation is
at 30th April 1996, and is currently being prepared.
The pension charge represents contributions payable by the company and
amounted to L110k. Costs totalling L7k were payable at the year end and are
included in creditors.
F-118
<PAGE> 188
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
29 LEASING COMMITMENTS
The group had commitments under operating leases to make payments totalling
L539k (1996: L559k) in the year ending 30th April 1997 as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
LAND & LAND &
BUILDINGS OTHER BUILDINGS OTHER
--------- ----- --------- -----
L000 L000 L000 L000
<S> <C> <C> <C> <C>
Leases expiring:
Within one year................................... -- 52 -- 12
Within two to five years.......................... 52 138 23 227
Over five years................................... 297 -- 297 --
--- --- --- ---
349 190 320 239
=== === === ===
</TABLE>
30 CONTINGENT LIABILITIES
The company has given an unlimited guarantee in respect of the bank loans
and overdrafts of certain other group companies. At 30th April 1997 the amount
guaranteed by the company was L851k (1996: L706k).
31 POST BALANCE SHEET EVENT
On 2nd May 1997 the Richard Ellis group in the UK carried out a corporate
restructuring. This involved transferring the trade, assets and liabilities of
the former Richard Ellis Partnership, Richard Ellis Services Limited, Richard
Ellis (incorporating Hepper Robinson) Limited, Richard Ellis Regional Limited
and Richard Ellis Midlands Limited into Richard Ellis Holdings Limited, which
became the main UK trading company for the group, trading as Richard Ellis. The
ultimate parent company is now Richard Ellis Group Limited.
32 RELATED PARTY TRANSACTIONS
All of the directors of Richard Ellis Holdings Limited, except I Harvey and
A J Davenport, were partners in the Richard Ellis Partnership during the year.
During the year the Partnership charged Richard Ellis Holdings Limited and
its subsidiary companies fees totalling L126k and management charges totalling
L1,235k. Subsidiaries of Richard Ellis Holdings Limited charged the Partnership
fees totalling L451k, hire charges totalling L618k and promotional charges
totalling L1,122k.
Of these sums, the amounts unpaid at the balance sheet date totalled L461k
owed by the group, and L514k owed to the group.
Additionally Waresure Limited, a group company, is the corporate partner in
the Partnership, having invested capital of L2,600k. Waresure Limited was
allocated L130k in the year by way of its share of Partnership profits, L116k of
which was unpaid at the year end.
F-119
<PAGE> 189
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
The group paid the Richard Ellis Partnership L278k in respect of directors'
services to group companies.
All transactions were carried out on commercial terms and at arms' length.
33 ULTIMATE PARENT COMPANY
The ultimate parent company is Richard Ellis Group Limited which is the
parent of both the smallest and the largest groups of which the company is a
member.
34 SIGNIFICANT DIFFERENCES BETWEEN U.K. GAAP AND U.S. GAAP
The Company's accounting policies comply with U.K. GAAP which differ in
certain significant respects from U.S. GAAP. The following is a summary of such
differences.
ACCOUNTING FOR GOODWILL
During the year ended 30 April 1997, the Company changed its accounting
policy from writing goodwill off directly to reserves, to amortising it over its
useful economic life through the profit and loss account. In connection with
this change in accounting policy, the 1996 financial statements were restated
onto a consistent basis with the 1997 financial statements; as a result the
goodwill previously taken to reserves was written off through the profit and
loss account in the restated 1996 financial statements as it was considered to
have nil useful economic life.
The restatement and the change in accounting policy did not adjust for
goodwill written off to reserves prior to 1995.
Under U.S. GAAP, goodwill arising on acquisitions is capitalised and
amortised over its economic life through the profit and loss account.
ACCOUNTING FOR DEFERRED INCOME TAXES
U.K. GAAP requires deferred income taxes to be recorded using the liability
method based on those timing differences expected to crystallise in the
foreseeable future. U.S. GAAP also requires the use of the liability method;
however, full provision for all temporary differences is required.
F-120
<PAGE> 190
RICHARD ELLIS
PARTNERSHIP ACCOUNTS
FOR THE YEAR ENDED 30TH APRIL 1997
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Profit and loss account..................................... F-122
Balance sheet............................................... F-123
Notes to the Partnership accounts........................... F-124
Report of the auditors...................................... F-130
</TABLE>
SECRETARY
P Osman, Berkeley Square House, Berkeley Square, London, W1X 6AN.
AUDITORS
BDO Stoy Hayward, 8 Baker Street, London, W1M 1DA.
PRINCIPAL BANKERS
Barclays Bank PLC, 54 Lombard Street, London, EC3V 9EX.
F-121
<PAGE> 191
RICHARD ELLIS
PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 30TH APRIL 1997
<TABLE>
<CAPTION>
NOTE 1997 1996
---- ------- -------
L000 L000
<S> <C> <C> <C>
Turnover.................................................... 2 27,137 25,553
Operating expenses.......................................... 3 (26,399) (24,522)
------- -------
Operating profit............................................ 738 1,031
Interest receivable......................................... 6 290 306
Interest payable............................................ 7 (204) (189)
Shareholders' interest payable.............................. (80) (99)
------- -------
6 18
------- -------
Net profit.................................................. 744 1,049
======= =======
</TABLE>
All amounts relate to continuing activities. The trade was transferred to
Richard Ellis Group
on 1st May 1997.
All recognised gains and losses are included in the profit and loss account.
The notes on pages F-124 to F-129 form part of these Partnership accounts.
F-122
<PAGE> 192
RICHARD ELLIS
BALANCE SHEET
AT 30TH APRIL 1997
<TABLE>
<CAPTION>
NOTE 1997 1996
---- ------ ------
L000 L000
<S> <C> <C> <C>
Fixed assets................................................ 8 458 446
Investments................................................. 9 -- 6
------ ------
458 452
Current assets
Current asset investment.................................. -- 5
Work in progress.......................................... 695 538
Debtors and prepayments................................... 10 10,040 9,883
Cash at bank and in hand.................................. 11 886 2,468
------ ------
11,621 12,894
Creditors falling due within one year....................... 12 (6,420) (5,739)
------ ------
Net current assets.......................................... 5,201 7,155
------ ------
Total assets less current liabilities....................... 5,659 7,607
Creditors falling due after more than one year.............. 13 (1,518) (1,649)
------ ------
4,141 5,958
====== ======
Represented by:
Shareholders' equity........................................ 14
Capital accounts.......................................... 3,950 3,828
Sinking fund capital accounts............................. -- 219
Loan accounts............................................. 7 1,070
Current accounts.......................................... 184 841
Current taxation.......................................... -- --
------ ------
4,141 5,958
====== ======
</TABLE>
The notes on pages F-124 to F-129 form part of these Partnership accounts.
F-123
<PAGE> 193
RICHARD ELLIS
NOTES TO THE PARTNERSHIP ACCOUNTS
FOR THE YEAR ENDED 30TH APRIL 1997
1 ACCOUNTING POLICIES
These Partnership accounts have been prepared under the historical cost
convention and are in accordance with applicable accounting standards. The
following principal accounting policies have been applied:
Turnover
This represents fees earned from all activities of the firm, exclusive of
value added tax, and net of specific provisions for bad debts and shared fees.
An accrual is made for management commission earned but not billed at the year
end, and for movements in work in progress in professional departments. Work in
progress is valued at the lower of cost and net realisable value; cost
represents the cost of relevant staff plus attributable professional indemnity
cover. In previous years cost has represented the salaries of the relevant
professional staff.
Provision for bad debts is made against specific fee accounts when, in the
opinion of the Partners, there is a substantial risk of loss due to non-payment.
Shared fees are matched with the relevant income.
Depreciation
Depreciation is provided in order to write off the cost less estimated
residual values of all tangible fixed assets over their expected useful lives as
follows:
<TABLE>
<S> <C>
-- reducing balance at 25% per
Motor vehicles annum
Computer software -- straight line at 25% per annum
</TABLE>
Leased assets
Where assets are financed by leasing agreements that give rights
approximating to ownership (finance leases), the assets are treated as if they
had been purchased outright. The amount capitalised is the present value of the
minimum lease payments payable during the lease term. The corresponding leasing
commitments are shown as amounts payable to the lessor. Depreciation on the
relevant assets is charged to the profit and loss account.
Lease payments are split between capital and interest using the straight
line method. The interest is charged to the profit and loss account. The capital
part reduces the amounts payable to the lessor.
All other leases are treated as operating leases. Their annual rentals are
charged to the profit and loss account on a straight line basis over the lease
term.
Valuation of investments
Investments held as fixed assets are stated at cost less any provision for
a permanent diminution in value.
Cashflow statement
In the opinion of the Partners, a cashflow statement as required by FRS1
would be misleading because the cashflows relating to Partners' financing of the
firm and their drawings do not readily fit into the required format. An
alternative cashflow statement was not considered by the Partners to add value
to these Partnership accounts, nor to be appropriate or cost effective in
assisting them, and other users, in their understanding of these final
Partnership accounts.
F-124
<PAGE> 194
RICHARD ELLIS
NOTES TO THE PARTNERSHIP ACCOUNTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
2 TURNOVER
<TABLE>
<CAPTION>
1997 1996
------ ------
L000 L000
<S> <C> <C>
Professional fees........................................... 24,572 22,833
Management commission....................................... 2,563 2,939
Bad debt write back/(charge)................................ 2 (219)
------ ------
27,137 25,553
====== ======
</TABLE>
3 OPERATING EXPENSES INCLUDE:
<TABLE>
<CAPTION>
1997 1996
---- ----
L000 L000
<S> <C> <C>
Hire charges................................................ 788 900
Fixed asset depreciation.................................... 73 157
Auditors' remuneration...................................... 30 30
Exceptional income upon loss of profits claim relating to
bomb disruption in a previous period...................... -- (632)
</TABLE>
Depreciation includes L90,438 (1996: L91,370) charged on assets held under
finance leases and hire purchase contracts.
4 EQUITY PARTNERS' NOTIONAL SALARIES
<TABLE>
<CAPTION>
1997 1996
----- -----
L000 L000
<S> <C> <C>
Equity Partners' notional salaries.......................... 2,656 2,826
===== =====
</TABLE>
5 STAFF AND RELATED COSTS
<TABLE>
<CAPTION>
1997 1996
------ ------
L000 L000
<S> <C> <C>
Salaries (excluding Equity Partners)........................ 10,432 10,085
Salaried Partners' and Associates' bonuses.................. 271 397
Staff bonuses............................................... 87 126
------ ------
10,790 10,608
Social security costs....................................... 1,027 1,041
------ ------
11,817 11,649
====== ======
</TABLE>
F-125
<PAGE> 195
RICHARD ELLIS
NOTES TO THE PARTNERSHIP ACCOUNTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
Number of persons in the firm at 30th April
<TABLE>
<CAPTION>
1997 1996
------ ------
NUMBER NUMBER
<S> <C> <C>
Operating units
Partners and other professional staff.................. 205 210
Administrative staff................................... 127 119
--- ---
332 329
=== ===
Support units
Partners and other professional staff.................. 63 63
Administrative staff................................... 37 39
--- ---
100 102
--- ---
432 431
--- ---
</TABLE>
6 INTEREST RECEIVABLE ON:
<TABLE>
<CAPTION>
1997 1996
---- ----
L000 L000
<S> <C> <C>
Bank deposits............................................... 290 306
=== ===
</TABLE>
7 INTEREST PAYABLE ON:
<TABLE>
<CAPTION>
1997 1996
---- ----
L000 L000
<S> <C> <C>
Term loan from 3i plc (see note 13)......................... 132 105
Bank overdrafts............................................. 12 58
Hire purchase contracts..................................... 60 26
--- ---
204 189
=== ===
</TABLE>
8 FIXED ASSETS
<TABLE>
<CAPTION>
MOTOR LEASEHOLD COMPUTER
VEHICLES PREMISES SOFTWARE TOTAL
-------- --------- -------- -----
L000 L000 L000 L000
<S> <C> <C> <C> <C>
Cost
B/F............................................ 1,130 228 109 1,467
Additions...................................... 161 0 0 161
Disposals...................................... (321) 0 0 (321)
----- --- --- -----
C/F............................................ 970 228 109 1,307
===== === === =====
Depreciation
B/F............................................ 716 228 77 1,021
Charge in year................................. 45 0 28 73
Disposals...................................... (245) 0 0 (245)
----- --- --- -----
C/F............................................ 516 228 105 849
===== === === =====
Net Book Value
At 30th April 1997............................. 454 0 4 458
----- --- --- -----
At 30th April 1996............................. 414 0 32 446
===== === === =====
</TABLE>
F-126
<PAGE> 196
RICHARD ELLIS
NOTES TO THE PARTNERSHIP ACCOUNTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
The net book value of tangible fixed assets includes an amount of L50,223
(1996: L311,059) in respect of assets held under hire purchase contracts.
9 INVESTMENTS
<TABLE>
<CAPTION>
1997 1996
---- ----
L000 L000
<S> <C> <C>
At cost at 1st May.......................................... 6 6
Disposals in year........................................... (6) --
-- --
At 30th April............................................... -- 6
== ==
</TABLE>
10 DEBTORS AND PREPAYMENTS
<TABLE>
<CAPTION>
1997 1996
------ -----
L000 L000
<S> <C> <C>
Fees receivable (net of bad debt provision)................. 6,767 7,319
Management commission accrued............................... 331 295
Sundry debtors and prepayments.............................. 2,942 2,269
------ -----
10,040 9,883
====== =====
</TABLE>
All amounts shown under debtors and prepayments fall due within one year.
11 CASH AT BANK AND IN HAND
Cash at bank and in hand includes L752,660 (1996: L715,582) in a blocked
account, over which a charge has been granted.
12 CREDITORS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
1997 1996
----- -----
L000 L000
<S> <C> <C>
Bank overdraft.............................................. 1,713 --
Trade creditors and accruals................................ 2,049 1,249
Shared fees payable......................................... 379 514
P A Y E and National Insurance.............................. 364 429
Bonuses payable............................................. 358 522
Current taxation............................................ -- 1,559
Hire purchase creditors..................................... 19 116
Other creditors............................................. 1,538 1,350
----- -----
6,420 5,739
===== =====
</TABLE>
13 CREDITORS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
1997 1996
----- -----
L000 L000
<S> <C> <C>
Term loan from 3i plc....................................... 1,500 1,500
Hire purchase creditors..................................... 18 149
----- -----
1,518 1,649
===== =====
</TABLE>
F-127
<PAGE> 197
RICHARD ELLIS
NOTES TO THE PARTNERSHIP ACCOUNTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
The term loan from 3i plc, which expires in December 2011, bears interest
at 1.875% above the higher of LIBOR or 6%. It is repayable at the Partners'
discretion but must be reduced to L1,000,000 by December 2001 and to L500,000 by
December 2006.
Obligations under hire purchase contracts are due as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
L000 L000
<S> <C> <C>
Within 1 -- 2 years......................................... 9 100
Within 2 -- 5 years......................................... 9 49
-- ---
18 149
== ===
</TABLE>
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SINKING FUND
CAPITAL CAPITAL LOAN CURRENT CURRENT
ACCOUNTS ACCOUNTS ACCOUNTS ACCOUNTS ACCOUNTS
-------- ------------ -------- -------- --------
L000 L000 L000 L000 L000
<S> <C> <C> <C> <C> <C>
At 1st May 1996.............................. 3,828 219 1,070 841 --
Movement in year
Capital introduced......................... 222 -- -- -- --
Salaries and interest...................... -- -- -- 2,736 --
Profit attributable........................ -- -- -- 744 --
Transfers (to)/from creditors.............. (100) (20) (140) (55) 1,572
Capital and loan distributions............. -- (199) (923) -- --
Drawings................................... -- -- -- (2,824) --
Tax suffered............................... -- -- -- (1,151) 1,151
Tax released/paid.......................... -- -- -- (107) (1,663)
Cash set aside............................. -- -- -- -- (1,026)
Further cash to be set aside............... -- -- -- -- (234)
Administration costs accrued............... -- -- -- -- 200
----- ---- ----- ------ ------
At 30th April 1997........................... 3,950 -- 7 184 --
===== ==== ===== ====== ======
</TABLE>
15 COMMITMENTS UNDER OPERATING LEASES
As at 30th April 1997 the Partnership had annual commitments under
non-cancellable operating leases as set out below:
<TABLE>
<CAPTION>
PROPERTY EQUIPMENT
------------- ------------
1997 1996 1997 1996
----- ----- ----- ----
L000 L000 L000 L000
<S> <C> <C> <C> <C>
Operating leases which expire:
within one year............................................. -- -- 117 39
in second to fifth years inclusive.......................... 205 49 616 313
greater than five years..................................... 2,808 3,152 --
----- ----- ----- ---
3,013 3,201 733 352
===== ===== ===== ===
</TABLE>
16 RELATED PARTY TRANSACTIONS
During the year, all of the Richard Ellis Partners were directors of
Richard Ellis Holdings Limited and all except S.V. Clayton and R.P. Lister were
also shareholders in that company.
F-128
<PAGE> 198
RICHARD ELLIS
NOTES TO THE PARTNERSHIP ACCOUNTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1997
During the year the Partnership charged Richard Ellis Holdings Limited and
its subsidiary companies fees totalling L126,474 and management charges
totalling L1,235,256. Subsidiaries of Richard Ellis Holdings Limited also
charged the Partnership fees totalling L451,043, hire charges totalling L618,954
and promotional charges totalling L1,122,214. Of these sums the amounts unpaid
at the year end totalled L461,286 owing to the Partnership and L644,806 owing by
the Partnership.
Additionally, Waresure Limited, a subsidiary of Richard Ellis Holdings
Limited, is the corporate partner in the Partnership, having invested capital of
L2,600,000. Waresure Limited was allocated L130,000 in the year by way of its
share of partnership profits, L116,140 of which was unpaid at the year end.
All transactions were carried out on commercial terms and at arms length.
17 POST BALANCE SHEET EVENT
On 1st May 1997 the trade, assets and liabilities of the Partnership were
transferred to Richard Ellis Group, a newly formed company, and the Partnership
ceased trading.
18 SIGNIFICANT DIFFERENCES BETWEEN U.K. GAAP AND U.S. GAAP
The Partnership's accounting policies comply with applicable U.K. GAAP as
noted in the financial statements, which differ in certain significant respects
from U.S. GAAP. The following is a summary of such differences.
CASH FLOW STATEMENTS
Under U.K. GAAP, as a partnership, Richard Ellis does not present a Cash
Flow Statement as, in the opinion of the Partners, a cash flow statement as
required by Financial Reporting Standard 1 (Revised) would be misleading because
the cash flow relating to the Partners' financing of the firm and drawings do
not readily fit into the required format. An alternative cash flow statement was
not considered by the Partners to add value to these accounts, nor to be
appropriate or cost effective in assisting them, and other users, in their
understanding of the Partnership accounts. Under U.S. GAAP, a Cash Flow
Statement would be required for all years presented.
WORK IN PROGRESS
As discussed in the Partnership's accounting policies, work in progress is
valued at the lower of cost and net realisable value; cost represents the
salaries of the relevant professional staff. It does not, however, include any
cost element in respect of equity partner time. Under U.S. GAAP, work in
progress would be recorded at cost.
F-129
<PAGE> 199
RICHARD ELLIS
REPORT OF THE AUDITORS
TO THE PARTNERS OF RICHARD ELLIS
We have audited the Partnership accounts on pages F-122 to F-129 which have
been prepared under the accounting policies set out on page F-124.
Respective responsibilities of Partners and auditors
You are responsible, as Partners, for the preparation of the Partnership
accounts. It is our responsibility to form an independent opinion, based on our
audit, on those accounts and to report our opinion to you.
Basis of opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. n audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the Partnership accounts. It
also includes an assessment of the significant estimates and judgements made by
the Partners in the preparation of the Partnership accounts, and of whether the
accounting policies are appropriate to the Partnership's circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the Partnership accounts
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the Partnership accounts.
Opinion
In our opinion the financial statements give a true and fair view of the
state of the Partnership's affairs as at 30th April 1997 and of its profit for
the year then ended.
Accounting principles generally accepted in the United Kingdom vary in
certain respects from generally accepted accounting principles in the United
States. These differences are referred to in note 18 to the financial
statements.
BDO STOY HAYWARD
Chartered Accountants
and Registered Auditors
London
23 October 1997 (final paragraph signed as at 21 July 1998)
F-130
<PAGE> 200
RICHARD ELLIS HOLDINGS LIMITED
ANNUAL REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH APRIL 1996
CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Directors
Report of the directors..................................... F-132
Report of the auditors...................................... F-135
Consolidated profit and loss account........................ F-136
Consolidated balance sheet.................................. F-137
Balance sheet............................................... F-138
Consolidated cash flow statement............................ F-139
Notes forming part of the financial statements.............. F-140
</TABLE>
DIRECTORS
<TABLE>
<S> <C>
A J M Huntley (Chairman) A C M Pringle
B N Harris J J Shellard
J A D Croft M J Strong
D A Sizer K J Caesar
B D White A J Waters
M D G Wheldon G E Webster
R J F Wildman J S Worboys
C N G Arding J M T Slade
R D Lucas C M Warner
A Forbes S L Barter
R G Glover H V A Ellingham
C P B Roe I D Ellis
E T D Luker D P Smith
A C Froggatt S V Clayton
S A Hubbard R P Lister
</TABLE>
SECRETARY AND REGISTERED OFFICE
P A V S Osman, Berkeley Square House, London, W1X 6AN.
AUDITORS
BDO Stoy Hayward, 8 Baker Street, London, W1M 1DA.
BANKERS
Barclays Bank PLC, 54 Lombard Street, London EC3V 9EX.
F-131
<PAGE> 201
RICHARD ELLIS HOLDINGS LIMITED
REPORT OF THE DIRECTORS
FOR THE YEAR ENDED 30TH APRIL 1996
The directors present their annual report together with the audited
financial statements for the year ended 30th April 1996.
RESULTS AND DIVIDENDS
The results of the group for the year are set out on page F-136.
The directors do not propose the payment of a dividend.
PRINCIPAL ACTIVITIES, TRADING REVIEW AND FUTURE DEVELOPMENTS
The company's principal activity is that of a holding company. The
subsidiaries' activities are disclosed in note 14 to the financial statements.
The trading environment for the Group's activities remained difficult
throughout the year and the exceptional costs have been taken with the write
down of investments held by the Group. Considerable effort has been devoted to
reducing the Group's administrative expenses resulting in an improved
performance. Further improvements are expected during the course of the next
financial year.
FIXED ASSETS
The movements in fixed assets are set out in notes F-140 and F-151 to the
financial statements.
F-132
<PAGE> 202
DIRECTORS
The directors of the company during the year and their interests in the
ordinary share capital of the company were:
<TABLE>
<CAPTION>
10P ORDINARY SHARES AT 30TH APRIL 1996 TOTAL
--------------------------------------- 10P ORDINARY
NON-VOTING SHARES AT
"A" SHARES "B" SHARES TOTAL 30.4.95
------------ ------------ --------- ------------
<S> <C> <C> <C> <C>
A J M Huntley................................... 159,038 212,494 371,532 371,532
B N Harris...................................... 159,038 201,494 360,532 360,532
J A D Croft..................................... 159,038 199,219 358,257 358,257
D A Sizer....................................... 159,038 212,494 371,532 371,532
B D White....................................... 159,038 199,219 358,257 358,257
M D G Wheldon................................... 159,038 211,494 370,532 370,532
R J F Wildman................................... 159,038 201,494 360,532 360,532
C N G Arding.................................... 159,038 201,494 360,532 360,532
R D Lucas....................................... 159,038 201,494 360,532 360,532
A Forbes........................................ 159,038 215,488 374,526 374,526
R G Glover...................................... 159,038 206,163 365,201 365,201
C P B Roe....................................... 159,038 199,219 358,257 358,257
E T D Luker..................................... 159,038 199,219 358,257 358,257
A C Froggatt.................................... 135,182 39,522 174,704 174,704
S A Hubbard..................................... 135,182 211,250 346,432 346,432
A C M Pringle................................... 135,182 196,250 331,432 331,432
J J Shellard.................................... 135,182 191,250 326,432 326,432
M J Strong...................................... 127,230 191,249 318,479 318,479
K J Caesar...................................... 111,327 233,573 344,900 344,900
A J Waters...................................... 111,327 193,304 304,631 304,631
G E Webster..................................... 111,327 191,573 302,900 302,900
J S Worboys..................................... 111,327 183,304 294,631 294,631
J M T Slade..................................... 95,423 183,285 278,708 278,708
C M Warner...................................... 95,423 183,285 278,708 278,708
G Carr-Jones (resigned 31.7.95)................. 79,519 143,214 222,733 222,733
S L Barter...................................... 2,600 -- 2,600 2,600
H V A Ellingham................................. 47,711 152,345 200,056 200,056
I D Ellis....................................... 47,711 15,904 63,615 63,615
D P Smith....................................... 47,711 15,904 63,615 63,615
A J Davenport (resigned 31.05.96)............... -- -- -- --
S V Clayton..................................... -- -- -- --
R P Lister...................................... -- -- -- --
--------- --------- --------- ---------
3,596,858 4,986,197 8,583,055 8,583,055
========= ========= ========= =========
</TABLE>
F-133
<PAGE> 203
DIRECTORS' RESPONSIBILITIES
Company law requires the directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
Company and Group and of the profit or loss of the Group for that period. In
preparing those financial statements, the directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgements and estimates that are reasonable and prudent;
- state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the financial
statements; and
- prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company and Group will continue in
business.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and Group and to enable them to ensure that the financial statements
comply with the Companies Act 1985. They are also responsible for safeguarding
the assets of the Company and Group and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
AUDITORS
BDO Stoy Hayward have expressed their willingness to continue in office and
a resolution to re-appoint them will be proposed at the annual general meeting.
BY ORDER OF THE BOARD
P A V S Osman
SECRETARY
22nd October 1996
F-134
<PAGE> 204
RICHARD ELLIS HOLDINGS LIMITED
REPORT OF THE AUDITORS
TO THE SHAREHOLDERS OF RICHARD ELLIS HOLDINGS LIMITED
We have audited the financial statements on pages F-136 to F-151 which have
been prepared under the accounting policies set out on pages F-140 to F-141.
Respective responsibilities of directors and auditors
As described on page F-134 the company's directors are responsible for the
preparation of the financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
Basis of opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes an examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements give a true and fair view of the
state of affairs of the company and the group as at 30th April 1996 and of the
result of the group for the year then ended and have been properly prepared in
accordance with the Companies Act 1985.
Accounting principles generally accepted in the United Kingdom vary in
certain respects from generally accepted accounting principles in the United
States. These differences are referred to in note 27 to the financial
statements.
BDO STOY HAYWARD
Chartered Accountants
and Registered Auditors
London
22nd October 1996 (final paragraph signed as at 21st July 1998)
F-135
<PAGE> 205
RICHARD ELLIS HOLDINGS LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 30TH APRIL 1996
<TABLE>
<CAPTION>
NOTE 1996 1995
---- ------ -------
L000 L000
<S> <C> <C> <C>
TURNOVER.................................................... 2 9,053 9,482
Administrative expenses..................................... 3 (9,142) (10,101)
------ -------
LOSS ON ORDINARY ACTIVITIES BEFORE INTEREST AND OTHER
INCOME.................................................... (89) (619)
Exceptional item............................................ 6 (160) --
Investment income........................................... 7 196 207
Interest receivable......................................... 96 105
Interest payable............................................ 8 (160) (142)
Share of loss of associated undertakings.................... 9 (192) (67)
------ -------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION................. (309) (516)
Taxation on loss on ordinary activities..................... 10 (19) (129)
------ -------
LOSS ON ORDINARY ACTIVITIES AFTER TAXATION.................. (328) (645)
Minority interests.......................................... 23 22
------ -------
LOSS FOR THE FINANCIAL YEAR................................. (305) (623)
Dividends paid.............................................. 11 -- (43)
------ -------
TRANSFER FROM RESERVES...................................... 19 (305) (666)
====== =======
</TABLE>
All amounts relate to continuing activities.
All recognised gains and losses are included in the profit and loss account.
The notes on pages F-140 to F-151 form part of these financial statements.
F-136
<PAGE> 206
RICHARD ELLIS HOLDING LIMITED
CONSOLIDATED BALANCE SHEET
AT 30TH APRIL 1996
<TABLE>
<CAPTION>
NOTE 1996 1995
---- --------------- ---------------
L000 L000 L000 L000
<S> <C> <C> <C> <C> <C>
FIXED ASSETS
Tangible fixed assets.......................................... 13 1,458 1,657
Investments.................................................... 14 3,123 3,363
------ ------
4,581 5,020
CURRENT ASSETS
Debtors -- due within one year................................. 15 3,276 3,961
-- due after one year................................. 15 334 582
Cash at bank................................................... 1,217 639
------ ------
4,827 5,182
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR................... 16 (2,998) (3,348)
------ ------
NET CURRENT ASSETS............................................... 1,829 1,834
------ ------
TOTAL ASSETS LESS CURRENT LIABILITIES............................ 6,410 6,854
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR.......... 17 (2,348) (2,464)
------ ------
4,062 4,390
====== ======
CAPITAL AND RESERVES:
Share capital.................................................. 18 858 858
Share premium account.......................................... 19 2,647 2,647
Profit and loss account........................................ 19 734 1,039
Goodwill....................................................... (584) (584)
------ ------
3,655 3,960
Minority interests............................................. 407 430
------ ------
4,062 4,390
====== ======
</TABLE>
The notes on pages F-140 to F-151 form part of these financial statements.
These financial statements were approved by the Board on 22nd October 1996.
F-137
<PAGE> 207
RICHARD ELLIS HOLDINGS LIMITED
BALANCE SHEET
AT 30TH APRIL 1996
<TABLE>
<CAPTION>
NOTE 1996 1995
---- --------------- --------------
L000 L000 L000 L000
<S> <C> <C> <C> <C> <C>
FIXED ASSETS
Investments........................................ 14 4,390 4,499
CURRENT ASSETS
Debtors -- due within one year..................... 15 127 288
-- due after one year..................... 15 463 463
------ ------
590 751
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR....... 16 (1,984) (1,646)
------ ------
NET CURRENT LIABILITIES.............................. (1,394) (895)
------ -----
TOTAL ASSETS LESS CURRENT LIABILITIES................ 2,996 3,604
====== =====
CAPITAL AND RESERVES:
Share capital...................................... 18 858 858
Share premium account.............................. 19 2,647 2,647
Profit and loss account............................ 19 (509) 99
------ -----
2,996 3,604
====== =====
</TABLE>
All amounts within capital and reserves relate to equity.
The notes on pages F-140 to F-151 form part of these financial statements.
These financial statements were approved by the Board on 22nd October 1996.
<TABLE>
<CAPTION>
<S> <C>
A C Froggatt R D Lucas
Director Director
</TABLE>
F-138
<PAGE> 208
RICHARD ELLIS HOLDINGS LIMITED
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 30TH APRIL 1996
<TABLE>
<CAPTION>
NOTE 1996 1995
---- ----------- ---------------
L000 L000 L000 L000
<S> <C> <C> <C> <C> <C>
NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES.... 20 702 (1,186)
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE:
Investment income, net of tax credit................. 134 174
Dividends paid....................................... -- (74)
Interest received.................................... 60 98
Interest paid........................................ (78) (102)
Interest element of finance lease rental payments.... (87) (45)
---- ------
29 51
TAXATION:
UK corporation tax (paid)/recovered.................. (5) 137
Belgian corporation tax paid......................... -- (29)
---- ------
(5) 108
INVESTING ACTIVITIES:
Payments to acquire investments...................... (16) (588)
Payments to acquire fixed assets..................... 21 (140) (211)
Receipts from sale of investments.................... 35 1,250
Receipts from sales of fixed assets.................. 239 205
---- ------
118 656
---- ------
NET CASH INFLOW/(OUTFLOW) BEFORE FINANCING............. 844 (371)
FINANCING
Issue of ordinary share capital...................... -- 30
Repurchase of shares................................. -- (32)
Capital element of finance lease rental payments..... (318) (205)
Proceeds from new borrowings......................... 83 30
Repayment of borrowings.............................. (31) (1,250)
---- ------
(266) (1,427)
---- ------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS....... 22 578 (1,798)
==== ======
</TABLE>
The notes on pages F-140 to F-151 form part of these financial statements.
F-139
<PAGE> 209
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH APRIL 1996
1 ACCOUNTING POLICIES
Accounting convention
The financial statements have been prepared under the historical cost
convention and are in accordance with applicable accounting standards. The
following principal accounting policies have been applied:
Basis of consolidation
The financial statements consolidate the accounts of Richard Ellis Holdings
Limited and its subsidiary and associated undertakings, drawn up to 30th April
each year. The accounts of certain small subsidiaries and associated
undertakings have been drawn up to 31st March 1996 or up to 30th June 1996.
Adjustments to reflect those companies' trading results for the period between
the dates of their accounts and 30th April 1996 would not be material to the
group.
The group uses the acquisition method of accounting to consolidate the
results of subsidiary undertakings whereby the results of subsidiary
undertakings are included from the date of acquisition.
No profit and loss account is presented for Richard Ellis Holdings Limited,
as permitted by Section 230 of the Companies Act 1985.
Goodwill
The tangible assets of newly acquired subsidiary undertakings are
incorporated into the accounts on the basis of the fair value to the group as at
the effective date of control.
Goodwill, being any excess of the consideration over that fair value, is
written off against reserves on consolidation.
Associated undertakings
A company is treated as an associated undertaking when the group holds a
substantial interest in it for the long term and exercises significant influence
over its operating and financial policy decisions.
The group's share of the results of associated undertakings is included in
the consolidated profit and loss account using the equity method of accounting.
The investment in associated undertakings included in the consolidated balance
sheet is based on the group's share of the net assets of the associated
undertakings, together with any premium or discount arising on acquisition, less
amounts written off. Any premium on acquisition is dealt with as if it were
goodwill.
Foreign currency
Profit and loss accounts and assets and liabilities of foreign subsidiary
undertakings are translated into sterling at the rates of exchange ruling on the
balance sheet date.
Turnover
Turnover represents professional fees rendered to the extent that they have
been earned, net of shared fees, and amounts receivable in respect of equipment
hire and promotional services, all exclusive of value added tax. An accrual is
made for professional fees earned but not billed at the year end.
Valuation of investments
Investments held as fixed assets are stated at cost less any provision for
a permanent diminution in value.
F-140
<PAGE> 210
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation
Depreciation is calculated to write off the cost less estimated residual
values of all tangible fixed assets over their expected useful lives as follows:
<TABLE>
<S> <C>
New motor vehicles (from 1st October -- straight line at 25% per annum
1994)
Motor vehicles -- reducing balance at 25% per
annum
Office equipment -- straight line at 20% per annum
Office fixtures and fittings -- straight line at 33% per annum
Office furniture -- straight line at 12.5% per annum
</TABLE>
Deferred taxation
Provision is made for timing differences between the treatment of certain
items for taxation and accounting purposes to the extent that it is probable
that a liability or asset will crystallise.
Leased assets
Where assets are financed by leasing arrangements that give rights
approximating to ownership (finance leases), the assets are treated as if they
had been purchased outright. The amount capitalised is the minimum lease
payments payable over the full term of a lease. The corresponding leasing
commitments are shown as payable to the lessor. Depreciation on the relevant
assets is charged to the profit and loss account.
Lease payments are split between capital and interest using the actuarial
method. The interest is charged to the profit and loss account. The capital part
reduces the amounts payable to the lessor.
All other leases are treated as operating leases. Their annual rentals are
charged to the profit and loss account on a straight line basis over the term of
the lease.
Pension costs
Pension costs are charged against profits in the year in which they become
payable.
2 TURNOVER
Turnover comprises:
<TABLE>
<CAPTION>
1996 1995
----- -----
L000 L000
<S> <C> <C>
Professional fees........................................... 7,390 7,430
Asset hire and promotional charges.......................... 1,663 2,052
----- -----
9,053 9,482
===== =====
</TABLE>
All turnover is generated in the United Kingdom. Related party turnover is
disclosed in note 4.
F-141
<PAGE> 211
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
3 ADMINISTRATIVE EXPENSES
Administrative expenses include:
<TABLE>
<CAPTION>
1996 1995
---- ----
L000 L000
<S> <C> <C>
Auditors' remuneration...................................... 53 54
Depreciation................................................ 563 629
Profit on disposal of fixed assets.......................... (89) (42)
Payments in respect of operating leases..................... 637 401
Restructuring costs......................................... 169 --
Write down of investments................................... -- 17
=== ===
</TABLE>
Depreciation includes L229k (1995: L136k) charged on assets held under
finance leases and hire purchase contracts.
4 DIRECTORS' EMOLUMENTS
Directors' emoluments consist of:
<TABLE>
<CAPTION>
1996 1995
---- ----
L000 L000
<S> <C> <C>
Directors' remuneration..................................... 42 42
Amounts paid to Richard Ellis Partnership................... 324 282
--- ---
366 324
=== ===
</TABLE>
The Chairman received no emoluments (1995: LNil) during the period. The
emoluments of the highest paid director, excluding pension contributions, were
L7k (1995: L7k). The emoluments of other directors, excluding pension
contributions, were in the following ranges:
<TABLE>
<CAPTION>
1996 1995
------ ------
NUMBER NUMBER
<S> <C> <C>
LNil -- 5,000............................................... 25 24
L5,001 -- 10,000............................................ 5 6
</TABLE>
All the directors of the company, with the exception of Mr. A J Davenport,
are partners in Richard Ellis. The group's turnover relating to asset hire and
promotional services arises principally from Richard Ellis. Richard Ellis
recharged operating costs to the group of L1,094k (1995: L1,183k) including
L324k (1995: L282k) in respect of directors' services, and paid a profit share
to the group of L130k (1995: L130k). Richard Ellis also charged fees to the
group, and the group charged fees to Richard Ellis, for commercial estate agency
work. Some of these fees and some of the operating costs remained outstanding at
the year end.
All transactions were carried out on normal commercial terms and at arm's
length.
F-142
<PAGE> 212
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
5 STAFF COSTS
Staff costs consist of:
<TABLE>
<CAPTION>
1996 1995
----- -----
L000 L000
<S> <C> <C>
Wages and salaries.......................................... 3,745 3,952
Social security costs....................................... 353 383
Pension costs............................................... 142 145
----- -----
4,240 4,480
===== =====
</TABLE>
The average number of employees during the year was as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
NUMBER NUMBER
<S> <C> <C>
Full time................................................... 150 164
Part time................................................... 5 7
--- ---
155 171
=== ===
</TABLE>
6 EXCEPTIONAL ITEM
An exceptional provision of L160k (1995 -- Nil) has been made against the
group's investment in IHS Sport Villages PLC (IHSSV). In the opinion of the
directors there may have been a permanent diminution in the value of this
investment and they have accordingly written down the carrying value of the
IHSSV to the group's share of the net assets of IHSSV based on the financial
statements of that company at 31 December 1995.
7 INVESTMENT INCOME
<TABLE>
<CAPTION>
1996 1995
---- ----
L000 L000
<S> <C> <C>
Income from investments..................................... 66 77
Profit share received from Richard Ellis.................... 130 130
---- ---
196 207
==== ===
</TABLE>
8 INTEREST PAYABLE
<TABLE>
<CAPTION>
1996 1995
---- ----
L000 L000
<S> <C> <C>
Bank interest............................................... 73 97
Finance leases and hire purchase contracts.................. 87 45
---- ---
160 142
==== ===
</TABLE>
F-143
<PAGE> 213
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
9 SHARE OF PROFIT/(LOSS) OF ASSOCIATED UNDERTAKINGS
<TABLE>
<CAPTION>
1996 1995
---- ----
L000 L000
<S> <C> <C>
Richmount Enterprise Zone Managers Limited.................. (3) --
Beckwith Property Fund Management Limited................... (129) (96)
General Property Company (Goldsworth Park) Limited
-- share of profit........................................ 13 22
-- share of revaluation reserve........................... (72) 7
LAW 572 Limited............................................. (1) --
---- ---
(192) (67)
==== ===
</TABLE>
The investment in Beckwith Property Fund Management Limited has now been
fully written down and no further liability can be incurred.
10 TAXATION ON (LOSS)/PROFIT ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
L000 L000
UK corporation tax at 33% based on profit for the year...... 50 51
(Over)/under provision in respect of prior years............ (35) 33
Belgian corporation tax at 41% based on profit for the
year...................................................... -- 36
---- ----
15 120
Share of associated undertakings' tax charge................ 4 9
---- ----
19 129
==== ====
</TABLE>
The company is a close company within the meaning of the Income and
Corporation Taxes Act 1988.
11 DIVIDENDS
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
L000 L000
Ordinary -- Nil (1995 -- L0.005 per share).................. -- 43
==== ====
</TABLE>
12 DEFERRED TAXATION
The group has a potential tax liability of approximately L693k which would
crystallise on the liquidation of Richard Ellis Corporate Capital Limited. This
deferred taxation has not been provided as the directors have no intention to
liquidate Richard Ellis Corporate Capital Limited in the foreseeable future.
F-144
<PAGE> 214
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
13 TANGIBLE FIXED ASSETS
Group
<TABLE>
<CAPTION>
FURNITURE,
EQUIPMENT,
MOTOR FIXTURES &
VEHICLES FITTINGS TOTAL
-------- ---------- ------
L000 L000 L000
<S> <C> <C> <C>
Cost:
At 1st May 1995.......................................... 2,299 7,871 10,170
Additions in the year.................................... 374 140 514
Disposals in the year.................................... (703) (2,885) (3,588)
----- ------ ------
At 30th April 1996......................................... 1,970 5,126 7,096
===== ====== ======
Depreciation:
At 1st May 1995.......................................... 1,131 7,382 8,513
Charged in the year...................................... 311 252 563
Disposals in the year.................................... (567) (2,871) (3,438)
----- ------ ------
At 30th April 1996....................................... 875 4,763 5,638
===== ====== ======
Net book value:
At 30th April 1996....................................... 1,095 363 1,458
----- ------ ------
At 30th April 1995....................................... 1,168 489 1,657
===== ====== ======
</TABLE>
The net book value of tangible fixed assets includes an amount of L1,006k
(1995: L968k) in respect of assets held under finance leases and hire purchase
contracts.
Company
Richard Ellis Holdings Limited has no tangible fixed assets other than
investments (note 14).
Capital commitments
At 30th April 1996 there were no capital commitments for tangible fixed
assets contracted or authorised by either the company or the group (1995: Nil).
At 30th April 1996 the Group was authorised but not committed to invest an
additional L875,000 in its associate Beckwith Property Fund Management Limited.
The cash is to be invested in property investment funds (1995: L875k).
14 FIXED ASSET INVESTMENTS
Group
<TABLE>
<CAPTION>
RICHARD
ELLIS UNQUOTED CONVERTIBLE ASSOCIATED
INVESTMENTS LOAN STOCK UNDERTAKINGS TOTAL
----------- -------- ----------- ------------ -----
L000 L000 L000 L000 L000
<S> <C> <C> <C> <C> <C>
At 1st May 1995................... 2,600 189 463 111 3,363
Acquisitions in the year.......... -- 16 -- 100 116
Loss for the year................. -- -- -- (196) (196)
Write down of investment.......... -- (160) -- -- (160)
----- ---- --- ---- -----
At 30th April 1996................ 2,600 45 463 15 3,123
===== ==== === ==== =====
</TABLE>
F-145
<PAGE> 215
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
The investment in Richard Ellis is partnership capital subscribed by the
group interest-free, carrying an entitlement to a share of profits, as
determined by the partners of Richard Ellis. The investment in Richard Ellis is
non-voting and no control is exercised.
A provision of L160k (1995: L17k) has been made against the Group's
investment in IHS Sports Village PLC (IHSSV). In the opinion of the directors
there may have been a permanent diminution in the value of this investment and
they have accordingly written down the carrying value of IHSSV to the Group's
share of the net assets of IHSSV based on the financial statements of that
company at 31st December 1995.
The group owns 30% of the issued ordinary share capital of Richmount
Enterprise Zone Managers Limited, a company engaged in the management of
enterprise zone trusts. It also owns 25% of the issued ordinary share capital of
each of General Property Company (Goldsworth Park) Limited and LAW 572 Limited.
A loan of L100k to Beckwith Property Fund Management Limited (BPFM) was
capitalised in May 1995. A provision of L225k has been made against the entire
investment in BPFM as the directors believe that it is unlikely that monies
invested to date will be recovered. No further liability can be incurred as a
result of the group's 25% share of the issued ordinary share capital of BPFM.
In the year the Group invested L16k in Property Mezzanine Partners LP, a
limited partnership set up to provide mezzanine funding to property companies.
Company
<TABLE>
<CAPTION>
1996 1995
----- -----
L000 L000
<S> <C> <C>
Richard Ellis Services Limited.............................. 300 300
Richard Ellis (incorporating Hepper Robinson) Limited....... 740 740
Richard Ellis Financial Holdings Limited.................... 1,479 1,479
REFS Holdings Limited....................................... 1,843 1,843
Beckwith Property Fund Management Limited................... -- 125
Property Mezzanine Partners Limited......................... 16 --
Richard Ellis Corporate Finance Limited..................... 12 12
----- -----
4,390 4,499
===== =====
</TABLE>
F-146
<PAGE> 216
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
The following were subsidiary and associated undertakings during the year
and have all been included in the consolidated accounts:
<TABLE>
<CAPTION>
COUNTRY OF PROPORTION OF VOTING
INCORPORATION RIGHTS AND SHARE
OR REGISTRATION CAPITAL HELD NATURE OF BUSINESS
--------------- -------------------- ------------------------------
<S> <C> <C> <C>
Richard Ellis Services
Limited..................... England 100% Provision of assets for hire
and promotional services
Business Parks Consultancy
Limited..................... England 100% Holding company
Business Parks Consultancy
SA.......................... Belgium 100% Property consultants
Richard Ellis (incorporating
Hepper Robinson) Limited.... England 100% Commercial property
consultants
REFS Holdings Limited......... England 89% Finance and investment
services
Richard Ellis Corporate
Capital Limited............. England 100% Finance and investment
services
Richard Ellis Investment
Management Limited.......... England 100% Property related investment
advisors
Richard Ellis Corporate
Finance Limited............. England 100% SFA regulated finance and
investment services
Richard Ellis Financial
Limited..................... England 100% Property related investment
advisors
R.E.F Services Limited........ England 100% Property related investment
advisors
Laser Richmount Limited....... England 100% Provision of operational and
promotional services
Richmount Enterprise Zone
Managers Limited............ England 30% Enterprise zone trust managers
Richard Ellis Regional
Limited..................... England 85% Property consultants
Richard Ellis Midlands
Limited..................... England 100% Property consultants
Richard Ellis Limited......... England 100% Corporate partner in Richard
Ellis
Richard Ellis Fund Management
Limited..................... England 100% Holding company
Beckwith Property Fund
Management Limited.......... England 25% Property fund management
Richard Ellis Gunne Limited... England 51% Auctioneers
General Property Company
(Goldsworth Park) Limited... England 25% Property investment
LAW 572 Limited............... England 25% Finance and investment
services
</TABLE>
F-147
<PAGE> 217
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
15 DEBTORS
Amounts due within one year:
<TABLE>
<CAPTION>
GROUP COMPANY
------------- -----------
1996 1995 1996 1995
----- ----- ---- ----
L000 L000 L000 L000
<S> <C> <C> <C> <C>
Trade debtors............................................ 2,372 2,791 -- --
Prepayments and accrued income........................... 410 499 -- --
Corporation tax recoverable.............................. 23 -- -- --
Other debtors............................................ 58 258 2 104
Amounts due from group undertakings...................... -- -- 125 184
Amounts due from associated Undertakings................. 413 413 -- --
----- ----- --- ---
3,276 3,961 127 288
===== ===== === ===
</TABLE>
Amounts due after more than one year:
<TABLE>
<CAPTION>
GROUP COMPANY
----------- -----------
1996 1995 1996 1995
---- ---- ---- ----
L000 L000 L000 L000
<S> <C> <C> <C> <C>
Trade debtors............................................... 247 497 -- --
ACT recoverable............................................. 87 85 -- --
Amounts due from group undertakings......................... -- -- 463 463
--- --- --- ---
334 582 463 463
=== === === ===
</TABLE>
16 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
GROUP COMPANY
------------- -------------
1996 1995 1996 1995
----- ----- ----- -----
L000 L000 L000 L000
<S> <C> <C> <C> <C>
Bank overdraft......................................... -- -- 66 20
Trade creditors........................................ 907 891 409 492
Other taxes and social security........................ 405 435 -- --
Other creditors........................................ 433 493 -- --
Obligations under finance leases and hire purchase
contracts............................................ 261 224 -- --
Corporation tax........................................ 50 70 -- --
Accruals and deferred income........................... 942 1,235 56 95
Amounts owed to group undertakings..................... -- -- 1,453 1,039
----- ----- ----- -----
2,998 3,348 1,984 1,646
===== ===== ===== =====
</TABLE>
17 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
GROUP COMPANY
-------------- ---------------
1996 1995 1996 1995
----- ------ ------ ------
L000 L000 L000 L000
<S> <C> <C> <C> <C>
Loan from Hypobank.................................. 1,350 1,350 -- --
Obligations under finance leases and hire purchase
contracts......................................... 658 638 -- --
Accruals and deferred income........................ 340 476 -- --
----- ------ ------ ------
2,348 2,464 -- --
===== ====== ====== ======
</TABLE>
F-148
<PAGE> 218
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
The loan from Hypobank carries a fixed rate of 5% until July 1999 and then
converts to a variable rate. It is repayable in July 2000.
<TABLE>
<CAPTION>
GROUP COMPANY
----------- ---------------
1996 1995 1996 1995
---- ---- ------ ------
L000 L000 L000 L000
<S> <C> <C> <C> <C>
The obligations under finance leases and hire purchase
contracts are secured on the relevant assets and each
carries a normal commercial rate of interest. They
are due as follows:
Within 1 -- 2 years.................................. 239 208 -- --
Within 2 -- 5 years.................................. 419 430 -- --
--- --- ------ ------
658 638 -- --
=== === ====== ======
</TABLE>
18 SHARE CAPITAL
Authorised
<TABLE>
<CAPTION>
1996 1995
----- -----
L000 L000
<S> <C> <C>
5,000,000 "A" ordinary shares of 10p each................... 500 500
6,000,000 "B" ordinary shares of 10p each................... 600 600
----- -----
1,100 1,100
===== =====
</TABLE>
Allotted, called up and fully paid
<TABLE>
<CAPTION>
NO OF "B" TOTAL
NO OF "A" ORDINARY NON NO OF
ORDINARY SHARES VOTING SHARES SHARES OF
OF 10P EACH OF 10P EACH 10P EACH L000
--------------- ------------- --------- ----
<S> <C> <C> <C> <C>
At 1st May 1995 and 30th April 1996....... 3,596,858 4,986,197 8,583,055 858
========= ========= ========= ===
</TABLE>
19 RESERVES
<TABLE>
<CAPTION>
GROUP COMPANY
------------------ ------------------
SHARE PROFIT SHARE PROFIT
PREMIUM AND LOSS PREMIUM AND LOSS
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
L000 L000 L000 L000
------- -------- ------- --------
<S> <C> <C> <C> <C>
At 1st May 1995.................................. 2,647 1,039 2,647 99
Retained loss for the year....................... -- (305) -- (608)
----- ----- ----- ----
At 30th April 1996............................... 2,647 734 2,647 (509)
===== ===== ===== ====
</TABLE>
20 RECONCILIATION OF OPERATING LOSS TO NET CASH (OUTFLOW)/INFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
GROUP GROUP
1996 1995
----- ------
L000 L000
<S> <C> <C>
Operating loss.............................................. (89) (619)
Depreciation charges........................................ 563 629
Provision against investment................................ -- 1
Profit on sale of tangible fixed assets..................... (89) (42)
Decrease in debtors......................................... 1,207 747
Decrease in creditors....................................... (890) (1,918)
----- ------
Net cash (outflow)/inflow from.............................. 702 (1,186)
===== ======
</TABLE>
F-149
<PAGE> 219
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
21 PAYMENTS TO ACQUIRE TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
GROUP GROUP
1996 1995
----- -----
L000 L000
<S> <C> <C>
Purchase of fixed assets.................................... 514 1,129
Less: asset additions which are financed.................... (374) (918)
---- -----
140 211
==== =====
</TABLE>
22 CHANGES IN CASH AND CASH EQUIVALENTS IN THE PERIOD
<TABLE>
<CAPTION>
GROUP GROUP
1996 1995
----- ------
L000 L000
<S> <C> <C>
At 1st May 1995............................................. 639 2,433
Net cash inflow/(outflow)................................... 578 (1,798)
Exchange gain............................................... -- 4
----- ------
At 30th April 1996.......................................... 1,217 639
===== ======
</TABLE>
23 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
GROUP COMPANY
---------------- ----------------
1996 1995 1996 1995
----- ----- ----- -----
L000 L000 L000 L000
<S> <C> <C> <C> <C>
Profit/(loss) for the financial year.......... (305) (623) (608) 740
New share capital subscribed.................. -- 30 -- 30
Amount paid by subsidiary on repurchase of
shares during the year...................... -- (32) -- --
Dividends paid................................ -- (43) -- (43)
----- ----- ----- -----
Net (decrease)/increase in shareholders'
funds....................................... (305) (668) (608) 727
Shareholders' funds at beginning of year...... 3,960 4,628 3,604 2,877
----- ----- ----- -----
Shareholders' funds at end of year............ 3,655 3,960 2,996 3,604
===== ===== ===== =====
</TABLE>
24 PENSIONS
Certain employees are members of a pension scheme operated by the Richard
Ellis Partnership. The scheme includes final salary and defined contribution
sections. The assets of the schemes are held separately from those of the
Partnership.
The most recent actuarial valuation was at 30th April 1993. The valuation
was conducted using the projected unit method, and assumed an interest rate of
8%, a salary growth of 6% and dividend growth of 3.5%. The value of the scheme's
assets exceeded the accrued benefits to members.
The pension charge represents contributions payable by the company and
amounted to L124k. Costs totalling L18k were payable at the year end and are
included in creditors.
F-150
<PAGE> 220
RICHARD ELLIS HOLDINGS LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
25 LEASING COMMITMENTS
The group had commitments under operating leases to make payments totalling
L559k (1995: L554k) in the year ending 30th April 1996 as follows:
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
LAND & LAND &
BUILDINGS OTHER BUILDINGS OTHER
--------- ----- --------- -----
L000 L000 L000 L000
<S> <C> <C> <C> <C>
Leases expiring:
Within one year................................ -- 12 -- 6
Within two to five years....................... 23 227 19 241
Over five years................................ 297 -- 287 --
--- --- --- ---
320 239 306 247
=== === === ===
</TABLE>
26 CONTINGENT LIABILITIES
The company has given an unlimited guarantee in respect of the bank loans
and overdrafts of certain other group companies. At 30th April 1996 the amount
guaranteed by the company was L706k (1995: L749k).
27 SIGNIFICANT DIFFERENCES BETWEEN U.K. GAAP AND U.S. GAAP
The Company's accounting policies comply with U.K. GAAP which differ in
certain significant respects from U.S. GAAP. The following is a summary of such
differences.
ACCOUNTING FOR GOODWILL
During the year ended 30 April 1997, the Company changed its accounting
policy from writing goodwill off directly to reserves, to amortising it over its
useful economic life through the profit and loss account. In connection with
this change in accounting policy, the 1996 financial statements were restated
onto a consistent basis with the 1997 financial statements; as a result the
goodwill previously taken to reserves was written off through the profit and
loss account in the restated 1996 financial statements as it was considered to
have nil useful economic life.
The restatement and the change in accounting policy did not adjust for
goodwill written off to reserves prior to 1995.
Under U.S. GAAP, goodwill arising on acquisitions is capitalised and
amortised over its economic life through the profit and loss account.
ACCOUNTING FOR DEFERRED INCOME TAXES
U.K. GAAP requires deferred income taxes to be recorded using the liability
method based on those timing differences expected to crystallise in the
foreseeable future. U.S. GAAP also requires the use of the liability method;
however, full provision for all temporary differences is required.
F-151
<PAGE> 221
RICHARD ELLIS
PARTNERSHIP ACCOUNTS
FOR THE YEAR ENDED 30TH APRIL 1996
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Profit and loss account..................................... F-153
Balance sheet............................................... F-154
Notes to the Partnership accounts........................... F-155
Report of the auditors...................................... F-161
</TABLE>
SECRETARY
P Osman, Berkeley Square House, Berkeley Square, London, W1X 6AN.
AUDITORS
BDO Stoy Hayward, 8 Baker Street, London, W1M 1DA.
PRINCIPAL BANKERS
Barclays Bank PLC, 54 Lombard Street, London, EC3V 9EX.
F-152
<PAGE> 222
RICHARD ELLIS
PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 30TH APRIL 1996
<TABLE>
<CAPTION>
NOTE 1996 1995
---- ------- -------
L000 L000
<S> <C> <C> <C>
Turnover.................................................... 2 25,553 26,760
Operating expenses.......................................... 3 (24,522) (26,348)
------- -------
Operating profit............................................ 1,031 412
Interest receivable......................................... 6 306 60
Interest payable............................................ 7 (189) (55)
Shareholders' interest payable.............................. (99) (132)
------- -------
18 (127)
------- -------
Net profit.................................................. 1,049 285
======= =======
</TABLE>
The notes on pages F-155 to F-160 form part of these Partnership accounts.
F-153
<PAGE> 223
RICHARD ELLIS
BALANCE SHEET
AT 30TH APRIL 1996
<TABLE>
<CAPTION>
NOTE 1996 1995
---- ------ ------
L000 L000
<S> <C> <C> <C>
Fixed assets................................................ 8 446 561
Investments................................................. 9 6 11
------ ------
452 572
Current assets
Current Asset Investment.................................. 5 --
Work in progress.......................................... 538 551
Debtors and prepayments................................... 10 9,883 9,078
Cash at bank and in hand.................................. 11 2,468 730
------ ------
12,894 10,359
Creditors falling due within one year....................... 12 (5,739) (5,010)
------ ------
Net current assets.......................................... 7,155 5,349
------ ------
Total assets less current liabilities....................... 7,607 5,921
Creditors falling due after one year........................ 13 (1,649) (710)
------ ------
5,958 5,211
====== ======
Represented by:
Shareholders' equity........................................ 14
Capital accounts.......................................... 3,828 3,831
Sinking fund capital accounts............................. 219 114
Loan accounts............................................. 1,070 1,146
Current accounts.......................................... 841 120
------ ------
5,958 5,211
====== ======
</TABLE>
The notes on pages F-155 to F-160 form part of these Partnership accounts.
F-154
<PAGE> 224
RICHARD ELLIS
NOTES TO THE PARTNERSHIP ACCOUNTS
FOR THE YEAR ENDED 30TH APRIL 1996
1 ACCOUNTING POLICIES
These Partnership accounts have been prepared under the historical cost
convention and are in accordance with applicable accounting standards. The
profit and loss account, the balance sheet and the notes thereto are considered
to provide a sufficient understanding of the finances of the business and the
addition of a cash flow statement has therefore been considered not cost
effective. The following principal accounting policies have been applied:
Turnover
This represents fees earned from all activities of the firm, exclusive of
value added tax, and net of specific provisions for bad debts and shared fees.
An accrual is made for management commission earned but not billed at the year
end, and for movements in work in progress in professional departments. Work in
progress is valued at the lower of cost and net realisable value; cost
represents the salaries of the relevant professional staff.
Provision for bad debts is made against specific fee accounts when, in the
opinion of the Partners, there is a substantial risk of loss due to non-payment.
Shared fees are matched with the relevant income.
Depreciation
Depreciation is provided in order to write off the cost of all tangible
fixed assets over their expected useful lives as follows:
<TABLE>
<CAPTION>
<S> <C>
Motor vehicles -- reducing balance at 25% per annum
Computer software -- straight line at 25% per annum
</TABLE>
Leased assets
Where assets are financed by leasing agreements that give rights
approximating to ownership (finance leases), the assets are treated as if they
had been purchased outright. The amount capitalised is the present value of the
minimum lease payments payable during the lease term. The corresponding leasing
commitments are shown as amounts payable to the lessor. Depreciation on the
relevant assets is charged to the profit and loss account.
Lease payments are split between capital and interest using the straight
line method. The interest is charged to the profit and loss account. The capital
part reduces the amounts payable to the lessor.
All other leases are treated as operating leases. Their annual rentals are
charged to the profit and loss account on a straight line basis over the lease
term.
Valuation of investments
Investments held as fixed assets are stated at cost less any provision for
a permanent diminution in value.
F-155
<PAGE> 225
RICHARD ELLIS
NOTES TO THE PARTNERSHIP ACCOUNTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1996
2 TURNOVER
<TABLE>
<CAPTION>
1996 1995
------ ------
L000 L000
<S> <C> <C>
Professional fees........................................... 22,833 23,776
Management commission....................................... 2,939 3,436
Bad debt charge............................................. (219) (452)
------ ------
25,553 26,760
====== ======
</TABLE>
3 OPERATING EXPENSES INCLUDE:
<TABLE>
<CAPTION>
1996 1995
---- -----
L000 L000
<S> <C> <C>
Hire charges................................................ 900 1,019
Fixed asset depreciation.................................... 157 148
Auditors' remuneration...................................... 30 30
Exceptional income upon loss of profits claim relating to
Bomb disruption in a previous period...................... (632) --
</TABLE>
Depreciation includes L91,370 (1995: L67,368) charged on assets held under
finance leases and hire purchase contracts.
4 EQUITY PARTNERS' NOTIONAL SALARIES
<TABLE>
<CAPTION>
1996 1995
----- -----
L000 L000
<S> <C> <C>
Equity Partners' notional salaries.......................... 2,826 2,946
===== =====
</TABLE>
5 STAFF AND RELATED COSTS
<TABLE>
<CAPTION>
1996 1995
------ ------
L000 L000
<S> <C> <C>
Salaries (excluding Equity Partners)........................ 10,085 11,076
Salaried Partners' and Associates' bonuses.................. 397 129
Staff bonuses............................................... 126 34
------ ------
10,608 11,239
Social security costs....................................... 1,041 1,036
------ ------
11,649 12,275
====== ======
</TABLE>
F-156
<PAGE> 226
RICHARD ELLIS
NOTES TO THE PARTNERSHIP ACCOUNTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1996
Number of persons in the firm at 30th April
<TABLE>
<CAPTION>
1996 1995
------ ------
NUMBER NUMBER
<S> <C> <C>
Operating units
Partners and other professional staff....................... 210 226
Administrative staff........................................ 119 126
--- ---
329 352
=== ===
Support units
Partners and other professional staff....................... 63 66
Administrative staff........................................ 39 48
--- ---
102 114
--- ---
431 466
=== ===
</TABLE>
6 INTEREST RECEIVABLE ON:
<TABLE>
<CAPTION>
1996 1995
---- ----
L000 L000
<S> <C> <C>
Bank deposits............................................... 306 60
=== ==
</TABLE>
7 INTEREST PAYABLE ON:
<TABLE>
<CAPTION>
1996 1995
---- ----
L000 L000
<S> <C> <C>
Term loan from 3i plc (see note 13)......................... 105 38
Bank overdrafts............................................. 58 1
Hire purchase contracts..................................... 26 16
--- --
189 55
=== ==
</TABLE>
8 FIXED ASSETS
<TABLE>
<CAPTION>
MOTOR LEASEHOLD COMPUTER
VEHICLES PREMISES SOFTWARE TOTAL
-------- --------- -------- -----
L000 L000 L000 L000
<S> <C> <C> <C> <C>
Cost
B/F............................................ 1,217 228 109 1,554
Additions...................................... 67 0 0 67
Disposals...................................... (154) 0 0 (154)
----- --- ----- -----
C/F............................................ 1,130 228 109 1,467
===== === ===== =====
Depreciation
B/F............................................ 715 228 50 993
Charge in year................................. 130 0 27 157
Disposals...................................... (129) 0 0 (129)
----- --- ----- -----
C/F............................................ 716 228 77 1,021
===== === ===== =====
Net Book Value
At 30th April 1996............................. 414 0 32 446
----- --- ----- -----
At 30th April 1995............................. 502 0 59 561
===== === ===== =====
</TABLE>
F-157
<PAGE> 227
RICHARD ELLIS
NOTES TO THE PARTNERSHIP ACCOUNTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1996
The net book value of tangible fixed assets includes an amount of L311,059
(1995: L348,684) in respect of assets held under hire purchase contracts.
9 INVESTMENTS
<TABLE>
<CAPTION>
1996 1995
---- ----
L000 L000
<S> <C> <C>
At cost 6 11
== ==
</TABLE>
10 DEBTORS AND PREPAYMENTS
<TABLE>
<CAPTION>
1996 1995
----- -----
L000 L000
<S> <C> <C>
Fees receivable (net of bad debt provision)................. 7,319 5,905
Management commission accrual............................... 295 364
Sundry debtors and prepayments.............................. 2,269 2,809
----- -----
9,883 9,078
===== =====
</TABLE>
All amounts shown under debtors and prepayments fall due within one year.
11 CASH AT BANK AND IN HAND
Cash at bank and in hand includes L715,582 (1995: L669,536) in a blocked
account, over which a charge has been granted.
12 CREDITORS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
1996 1995
----- -----
L000 L000
<S> <C> <C>
Bank overdraft.............................................. -- 347
Trade creditors and accruals................................ 1,249 1,758
Shared fees payable......................................... 514 186
P A Y E and National Insurance.............................. 429 417
Bonuses payable............................................. 522 163
Current taxation............................................ 1,559 568
Hire purchase creditors..................................... 116 107
Other creditors............................................. 1,350 1,464
----- -----
5,739 5,010
===== =====
</TABLE>
13 CREDITORS FALLING DUE AFTER ONE YEAR
<TABLE>
<CAPTION>
1996 1995
----- ----
L000 L000
<S> <C> <C>
Term loan from 3i plc....................................... 1,500 500
Hire purchase creditors..................................... 149 210
----- ---
1,649 710
===== ===
</TABLE>
F-158
<PAGE> 228
RICHARD ELLIS
NOTES TO THE PARTNERSHIP ACCOUNTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1996
The term loan from 3i plc, which expires in December 2011, was increased to
L1,500,000 in July 1995 and bears interest at 1.875% above the higher of LIBOR
or 6%. It is repayable at the Partners' discretion from October 1996 but must be
reduced to L1,000,000 by December 2001 and to L500,000 by December 2006.
Obligations under hire purchase contracts are due as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
L000 L000
<S> <C> <C>
Within 1 -- 2 years......................................... 100 100
Within 2 -- 5 years......................................... 49 110
--- ---
149 210
=== ===
</TABLE>
14 SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SINKING FUND
CAPITAL CAPITAL LOAN CURRENT
ACCOUNTS ACCOUNTS ACCOUNTS ACCOUNTS
-------- ------------ -------- --------
L000 L000 L000 L000
<S> <C> <C> <C> <C>
At 1st May 1995............................... 3,831 114 1,146 120
Movement in year
Capital introduced.......................... 72 112
Salaries and interest....................... 2,925
Profit attributable......................... 1,049
Transfers................................ (75) (7) (70) 7
Loan balances distributed................... (6)
Increase in taxation reserve................ 14
Drawings.................................... (1,987)
Tax suffered................................ (1,287)
----- --- ----- ------
At 30th April 1996............................ 3,828 219 1,070 841
===== === ===== ======
</TABLE>
15 COMMITMENTS UNDER OPERATING LEASES
As at 30th April 1996 the Partnership had annual commitments under
non-cancellable operating leases as set out below:
<TABLE>
<CAPTION>
PROPERTY EQUIPMENT
------------- -----------
1996 1995 1996 1995
----- ----- ---- ----
L000 L000 L000 L000
<S> <C> <C> <C> <C>
Operating leases which expire:
within one year........................................ -- 26 39 --
in second to fifth years inclusive..................... 49 -- 313 368
greater than five years................................ 3,152 3,134 -- --
----- ----- --- ---
3,201 3,160 352 368
===== ===== === ===
</TABLE>
16 SIGNIFICANT DIFFERENCES BETWEEN U.K. GAAP AND U.S. GAAP
The Partnership's accounting policies comply with applicable U.K. GAAP as
noted in the financial statements, which differ in certain significant respects
from U.S. GAAP. The following is a summary of such differences.
F-159
<PAGE> 229
RICHARD ELLIS
NOTES TO THE PARTNERSHIP ACCOUNTS -- (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1996
CASH FLOW STATEMENTS
Under U.K. GAAP, as a partnership, Richard Ellis does not present a Cash
Flow Statement as, in the opinion of the Partners, a cash flow statement as
required by Financial Reporting Standard 1 (Revised) would be misleading because
the cash flow relating to the Partners' financing of the firm and drawings do
not readily fit into the required format. An alternative cash flow statement was
not considered by the Partners to add value to these accounts, nor to be
appropriate or cost effective in assisting them, and other users, in their
understanding of the Partnership accounts. Under U.S. GAAP, a Cash Flow
Statement would be required for all years presented.
WORK IN PROGRESS
As discussed in the Partnership's accounting policies, work in progress is
valued at the lower of cost and net realisable value; cost represents the
salaries of the relevant professional staff. It does not, however, include any
cost element in respect of equity partner time. Under U.S. GAAP, work in
progress would be recorded at cost.
F-160
<PAGE> 230
RICHARD ELLIS
REPORT OF THE AUDITORS
TO THE PARTNERS OF RICHARD ELLIS
We have audited the Partnership accounts on pages F-151 to F-161 which have
been prepared under the accounting policies set out on page F-155.
Respective responsibilities of Partners and auditors
You are responsible, as Partners, for the preparation of the Partnership
accounts. It is our responsibility to form an independent opinion, based on our
audit, on those accounts and to report our opinion to you.
Basis of opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes an examination, on a test basis, of
evidence relevant to the amounts and disclosures in the Partnership accounts. It
also includes an assessment of the significant estimates and judgements made by
the Partners in the preparation of the Partnership accounts, and of whether the
accounting policies are appropriate to the Partnership's circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the Partnership accounts
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the Partnership accounts.
Opinion
In our opinion the financial statements give a true and fair view of the
state of the Partnership's affairs as at 30th April 1996 and of its profit for
the year then ended.
Accounting principles generally accepted in the United Kingdom vary in
certain respects from generally accepted accounting principles in the United
States. These differences are referred to in note 16 to the financial
statements.
BDO STOY HAYWARD
Chartered Accountants
and Registered Auditors
London
22 October 1996 (final paragraph signed as at 21 July 1998)
F-161
<PAGE> 231
RICHARD ELLIS GROUP LIMITED
ANNUAL REPORT AND FINANCIAL STATEMENTS
FOR THE PERIOD ENDED 31ST DECEMBER 1997
CONTENTS
Directors
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of the directors..................................... F-163
Report of the auditors...................................... F-166
Consolidated profit and loss account........................ F-167
Consolidated balance sheet.................................. F-168
Balance sheet............................................... F-169
Consolidated cash flow statement............................ F-170
Notes forming part of the financial statements.............. F-171
</TABLE>
DIRECTORS
A C Froggatt
A J M Huntley
I Harvey
S A Hubbard
M J Strong
G E Webster
H V A Ellingham
B S Thomas
V W Benjamin
ALTERNATE DIRECTORS
E T D Luker
C M Warner
I D Ellis
SECRETARY AND REGISTERED OFFICE
P A V S Osman, Berkeley Square House, Berkeley Square, London W1X 6AN.
AUDITORS
BDO Stoy Hayward, 8 Baker Street, London, W1M 1DA.
BANKERS
Barclays Bank PLC, 54 Lombard Street, London, EC3V 9EX.
F-162
<PAGE> 232
RICHARD ELLIS GROUP LIMITED
REPORT OF THE DIRECTORS
FOR THE PERIOD ENDED 31ST DECEMBER 1997
The directors present their first report together with the audited
financial statements for the period ended 31st December 1997.
PRINCIPAL ACTIVITY AND FUTURE DEVELOPMENTS
The company was incorporated on 7th April 1997 as an unlimited company. On
2nd May 1997 it was re-registered as a limited company.
On 1st May 1997 it became the UK holding company of the Richard Ellis group
when it acquired the entire share capital of Richard Ellis Holdings Limited. On
the 2nd May 1997 it acquired the trade, assets and liabilities of the former
Richard Ellis Partnership, before passing them down to Richard Ellis Holdings
Limited, which became the main UK trading vehicle for the group trading as
Richard Ellis.
During the period the company's principal activity was that of a holding
company. The subsidiaries' activities are disclosed in note 12 to the financial
statements.
On 4th March 1998 the entire share capital of the company, Richard Ellis
Group Limited, was acquired by Insignia Financial Group, Inc. a company
incorporated in the USA.
RESULTS AND DIVIDENDS
The results of the group for the period are set out on page 167. As the
company is newly formed and the group did not exist in its current form at the
time no comparisons as at the 30th April 1997 have been provided for the company
or for the group.
The business performed very strongly in the period showing a trading profit
of L2,635,000. The result shown on the profit and loss account is after charging
exceptional costs of L4,406,000 and exceptional staff bonuses of L1,785,000.
The directors do not recommend the payment of a dividend.
EMPLOYEE INVOLVEMENT
The flow of information to staff has been maintained by our staff newspaper
and by the process of monthly team briefings for all staff. Members of the
management team regularly visit branches and discuss matters of current interest
and concern to the business with members of staff.
EMPLOYMENT OF DISABLED PERSONS
The company is committed to a policy of recruitment and promotion on the
basis of aptitude and ability without discrimination of any kind. Management
actively pursues both the employment of disabled persons whenever a suitable
vacancy arises and the continued employment and retraining of employees who
become disabled whilst employed by the company. Particular attention is given to
the training, career development and promotion of disabled employees with a view
to encouraging them to play an active role in the development of the company.
YEAR 2000 COMPLIANCE
As is well known, many computer and digital storage systems express dates
using only the last two digits of the year and will thus require modification or
replacement to accommodate the year 2000 and beyond in order to avoid
malfunctions and resulting widespread commercial disruption. This is a complex
and pervasive issue. The operation of our business depends not only on our own
computer systems, but also to some degree on those of our suppliers and
customers. This could expose us to further risk in the event that there is a
failure by other parties to remedy their own Year 2000 issues.
F-163
<PAGE> 233
The company is well advanced in the phase of assessing the risks to our
business resulting from the date change to the Year 2000. Once this phase is
completed we can assess the likely impact on our activities and develop
prioritised action plans to deal with the key risks.
EUROPEAN ECONOMIC AND MONETARY UNION
European Economic and Monetary Union will have a far reaching effect on all
businesses operating within the European Union. Whether or not the United
Kingdom decides to participate in the single currency, Richard Ellis and its
clients will be affected and the Group therefore needs to be prepared. The Board
is taking pro-active steps to ensure that the business will not be adversely
affected by European Economic and Monetary Union.
DIRECTORS
The directors of the company during the period and their interests in the
share capital of the company were:
<TABLE>
<CAPTION>
5P ORDINARY SHARES 5P CONVERTIBLE SHARES
31ST DECEMBER 1997 31ST DECEMBER 1997
------------------ ---------------------
<S> <C> <C>
A C Froggatt (Appointed 7th April 1997)................ 502,123 --
A J M Huntley (Appointed 30th April 1997).............. 622,019
I Harvey (Appointed 30th April 1997)................... 30,000
S A Hubbard (Appointed 30th April 1997)................ 606,730 --
M J Strong (Appointed 30th April 1997)................. 589,702 --
G E Webster (Appointed 30th April 1997)................ 580,212 --
H V A Ellingham (Appointed 30th April 1997)............ 398,856 118,710
R G Glover (Appointed 13th May 1997
Resigned 19th August 1997)................ 618,162 --
R J F Wildman (Appointed 13th May 1997
Resigned 19th August 1997
Re-appointed 29th October 1997
Resigned 13th January 1998)........... 615,318
B S Thomas (Appointed 19th August 1997)................ -- --
V W Benjamin (Appointed 19th August 1997).............. -- --
K J Caesar (Appointed 7th April 1997
Resigned 30th April 1997).................. -- --
--------- -------
4,563,122 118,710
========= =======
</TABLE>
K J Caesar held 1 5p ordinary share in Richard Ellis Group Limited on the
date of his appointment and 210,092 5p ordinary shares on the date of his
resignation as a director.
ALTERNATE DIRECTORS
<TABLE>
<S> <C> <C>
E T D Luker (Appointed 2nd May 1997).................... 613,933 --
C M Warner (Appointed 2nd May 1997)..................... 565,476 --
I D Ellis (Appointed 2nd May 1997)...................... 315,744 118,710
--------- -------
1,495,153 118,710
========= =======
</TABLE>
On 30th June 1997 I Harvey was granted options to acquire 15,000 5p
ordinary shares at 25p each, and on 16th January 1998 he was granted further
options to acquire 25,000 5p ordinary shares at 65p. On 2nd March 1998 he agreed
to the cancellation of these options in exchange for a cash payment of L1.32 per
option less the option price, plus an amount dependent upon the future
profitability of the group in each of the
F-164
<PAGE> 234
following five years, of not less than an initial maximum value of 72p per
option in respect of the year ending 31st December 1998.
On 19th February 1998 the following directors were granted new options to
acquire 5p ordinary shares at 65p each in five equal annual tranches between
28th February 1999 and 28th February 2003.
<TABLE>
<CAPTION>
OPTIONS OVER
NUMBER OF
ORDINARY SHARES
OF 5P EACH
---------------
<S> <C>
A C Froggatt.......................................... 294,117
A J M Huntley......................................... 235,294
I Harvey.............................................. 176,470
S A Hubbard........................................... 235,294
M J Strong............................................ 235,294
G E Webster........................................... 235,294
H V A Ellingham....................................... 235,294
E T D Luker........................................... 235,294
C M Warner............................................ 176,470
</TABLE>
On acquisition of the group on 4th March 1998 by Insignia Financial Group,
Inc., these options converted into options in Insignia Financial Group, Inc.
Also on 4th March 1998 all of the directors sold all of their ordinary and
convertible shares to Insignia Financial Group, Inc.
DIRECTORS' RESPONSIBILITIES
Company law requires the directors to prepare financial statements for each
financial period which give a true and fair view of the state of affairs of the
company and of the profit or loss of the company for that period. In preparing
those financial statements, the directors are required to:
- Select suitable accounting policies and then apply them consistently
- make judgements and estimates that are reasonable and prudent
- state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the financial
statements
- prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the company will continue in business.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
company and to enable them to ensure that the financial statements comply with
the Companies Act 1985. They are also responsible for safeguarding the assets of
the company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
By order of the Board
P A V S Osman
Secretary
15th June 1998
F-165
<PAGE> 235
RICHARD ELLIS GROUP LIMITED
REPORT OF THE AUDITORS
TO THE SHAREHOLDERS OF RICHARD ELLIS GROUP LIMITED
We have audited the financial statements on pages F-167 to F-186 which have
been prepared under the accounting policies set out on page F-171 and F-172.
Respective responsibilities of directors and auditors
As described on page 165, the company's directors are responsible for the
preparation of the financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
Basis of opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements give a true and fair view of the
state of affairs of the company and the group as at 31st December 1997 and of
the result of the group for the period then ended and have been properly
prepared in accordance with the Companies Act 1985.
Accounting principles generally accepted in the United Kingdom vary in
certain respects from generally accepted accounting principles in the United
States. Those differences are referred to in note 35 to the financial
statements.
BDO STOY HAYWARD
Chartered Accountants
and Registered Auditors
London
15th June 1998 (final paragraph signed as at 21 July 1998)
F-166
<PAGE> 236
RICHARD ELLIS GROUP LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE PERIOD ENDED 31ST DECEMBER 1997
<TABLE>
<CAPTION>
8 MONTHS ENDED
NOTE 31ST DECEMBER 1997
---- ------------------
L000
<S> <C> <C>
TURNOVER.................................................... 2 27,550
Administrative expenses -- normal........................... 3 (24,915)
-- exceptional.................... 3 (6,191)
-------
LOSS ON ORDINARY ACTIVITIES BEFORE INTEREST AND OTHER
INCOME.................................................... (3,556)
Interest receivable......................................... 224
Interest payable............................................ 6 (242)
-------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION................. (3,574)
Share of profit of associated undertakings.................. 7 7
Taxation.................................................... 8 69
-------
LOSS ON ORDINARY ACTIVITIES AFTER TAXATION.................. (3,498)
Minority interests -- equity................................ 36
-------
LOSS FOR THE FINANCIAL PERIOD............................... 20 (3,462)
=======
</TABLE>
All amounts relate to continuing activities of the merged businesses and
acquisitions.
All recognised gains and losses are included in the profit and loss account.
The notes on pages F-171 to F-186 form part of these financial statements.
F-167
<PAGE> 237
RICHARD ELLIS GROUP LIMITED
CONSOLIDATED BALANCE SHEET
AS AT 31ST DECEMBER 1997
<TABLE>
<CAPTION>
NOTE 31ST DECEMBER 1997
---- ------------------
L000 L000
<S> <C> <C> <C>
FIXED ASSETS
Intangible assets......................................... 10 455
Tangible fixed assets..................................... 11 994
Investments............................................... 12 28
Investment in own shares.................................. 12 368
-------
1,845
CURRENT ASSETS
Work in progress.......................................... 1,654
Debtors................................................... 13 12,057
Cash at bank and in hand.................................... 797
-------
14,508
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR.............. 14 (12,500)
-------
NET CURRENT ASSETS.......................................... 2,008
------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... 3,853
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR..... 15 (1,879)
------
1,974
======
CAPITAL AND RESERVES:
Called up share capital................................... 17 837
Share premium account..................................... 20 1,322
Profit and loss account................................... 20 (3,462)
Merger reserve............................................ 20 3,400
------
SHAREHOLDERS' FUNDS......................................... 27 2,097
Minority interests -- equity................................ 16 (123)
------
1,974
======
</TABLE>
The financial statements were approved by the Board on 15th June 1998.
The notes on pages F-171 to F-186 form part of these financial statements.
F-168
<PAGE> 238
RICHARD ELLIS GROUP LIMITED
BALANCE SHEET
AS AT 31ST DECEMBER 1997
<TABLE>
<CAPTION>
NOTE 31ST DECEMBER 1997
---- -------------------
L000 L000
<S> <C> <C> <C>
FIXED ASSETS
Investments............................................... 12 3,768
Investment in own shares.................................. 12 368
------
4,136
CURRENT ASSETS
Cash at bank and in hand.................................. 15 805
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR.............. 14 (2,750)
------
NET CURRENT LIABILITIES..................................... (1,945)
------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... 2,191
======
CAPITAL AND RESERVES
Called up share capital................................... 17 837
Share premium account..................................... 20 1,322
Profit and loss account................................... 20 32
------
SHAREHOLDERS' FUNDS......................................... 2,191
======
</TABLE>
All amounts within capital and reserves relate to equity.
The notes on pages F-171 to F-186 form part of these financial statements.
The financial statements were approved by the Board on 15th June 1998.
<TABLE>
<S> <C>
A J M Huntley A Froggatt
Chairman Director
</TABLE>
F-169
<PAGE> 239
RICHARD ELLIS GROUP LIMITED
CONSOLIDATED CASH FLOW STATEMENT
FOR THE PERIOD ENDED 31ST DECEMBER 1997
<TABLE>
<CAPTION>
8 MONTHS ENDED
NOTE 31ST DECEMBER 1997
---- ------------------
L000
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES......................... 21 (13)
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE............. 22 (45)
TAXATION.................................................... --
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT................ 23 527
ACQUISITIONS AND DISPOSALS.................................. 24 (827)
-----
CASH OUTFLOW BEFORE FINANCING............................... (358)
FINANCING................................................... 25 97
-----
DECREASE IN CASH............................................ (261)
=====
</TABLE>
The notes on pages F-171 to F-186 form part of these financial statements.
F-170
<PAGE> 240
RICHARD ELLIS GROUP LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE PERIOD ENDED 31ST DECEMBER 1997
1 ACCOUNTING POLICIES
Accounting Convention
The financial statements have been prepared under the historical cost
convention and are in accordance with applicable accounting standards. The
following principal accounting policies have been applied:
Basis of consolidation
The financial statements consolidate the accounts of Richard Ellis Group
Limited and its subsidiary undertakings, drawn up for an eight month period to
the 31st December 1997. The accounts of certain small subsidiary undertakings
have been drawn up for a nine month period, to the 31st December 1997.
The group uses the acquisition method of accounting to consolidate the
results of subsidiary undertakings whereby the results of subsidiary
undertakings are included from the date of acquisition.
No profit and loss account is presented for Richard Ellis Group Limited, as
permitted by Section 230 of the Companies Act 1985.
Merger accounting
Where merger accounting is used, the investment is recorded in the
company's balance sheet at the nominal value of the shares issued together with
the fair value of any additional consideration paid.
In the group financial statements, merged subsidiary undertakings are
treated as if they had always been a member of the group. The results of such a
subsidiary are included for the whole period in the year it joins the group. Any
difference between the nominal value of the shares acquired by the company and
those issued by the company to acquire them is taken to reserves.
Goodwill
The tangible assets of newly acquired subsidiary undertakings are
incorporated into the accounts on the basis of the fair value to the group as at
the effective date of control.
Goodwill, being any excess of the consideration over that fair value, is
amortised through the profit and loss account over the directors' estimate of
its useful economic life which ranges from zero to ten years.
Associated undertakings
A company is treated as an associated undertaking when the group holds a
substantial interest in it for the long term and exercises significant influence
over its operating and financial policy decisions.
The group's share of the results of associated undertakings is included in
the consolidated profit and loss account using the equity method of accounting.
The investment in associated undertakings included in the consolidated balance
sheet is based on the group's share of the net assets of the associated
undertakings, together with any premium or discount arising on acquisition, less
amounts written off. Any premium on acquisition is dealt with as if it were
goodwill.
Turnover
Turnover represents professional fees rendered to the extent that they have
been earned, net of shared fees exclusive of value added tax. Professional fees
earned but not billed are accrued at the period end.
F-171
<PAGE> 241
RICHARD ELLIS GROUP LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD ENDED 31ST DECEMBER 1997
Valuation of investments
Investments held as fixed assets are stated at cost less any provision for
a permanent diminution in value.
Depreciation
Depreciation is calculated to write off the cost, less any residual values,
of all tangible fixed assets over their expected useful lives as follows:
<TABLE>
<S> <C>
Motor vehicles -- straight line at 25% per annum
Office equipment -- straight line at 20% per annum
Office fixtures and fittings -- straight line at 33% per annum
Office furniture -- straight line at 12.5% per annum
</TABLE>
Work in progress
Work in progress is valued at the lower of cost and net realisable value.
Cost comprises staff salary costs and direct expenses together with an
appropriate proportion of overheads. Net realisable value is based on estimated
selling price less further costs expected to be incurred to completion.
Deferred taxation
Provision is made for timing differences between the treatment of certain
items for taxation and accounting purposes to the extent that it is probable
that a liability or asset will crystallise.
Hire purchase assets
Where assets are financed by leasing arrangements that give rights
approximating to ownership (finance leases), the assets are treated as if they
have already been purchased outright. The amount capitalised is the minimum
lease payments payable over the full term of the lease. The corresponding lease
commitments are shown as payable to the lessor. Depreciation on the relevant
assets is charged to the profit and loss account.
Lease payments are split between capital and interest using the actuarial
method. The interest is charged to the profit and loss account. The capital part
reduces the amounts payable to the lessor.
All other leases are treated as operating leases. The annual rentals are
charged to the profit and loss account on a straight line basis over the term of
the lease.
Pension costs
Contributions to the group's defined benefit pension scheme are charged to
the profit and loss account so as to spread the cost of pensions over employees'
expected working lives with the group.
Contributions to the group's defined contribution pension scheme are
charged to the profit and loss account in the year in which they become payable.
Employee benefit trust
The company is deemed to have control of the assets, liabilities, income
and costs of the Richard Ellis Employee Share Trust (EBT). It has therefore been
included in the financial statements of the group and the company in accordance
with UITF 13.
The ordinary shares of the company held by the EBT are included in fixed
asset investments.
F-172
<PAGE> 242
RICHARD ELLIS GROUP LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD ENDED 31ST DECEMBER 1997
2 TURNOVER
Turnover is wholly attributable to fee income and commissions from
commercial estate agency and surveying activities. The analysis of turnover by
geographical area of destination is as follows:
<TABLE>
<CAPTION>
8 MONTHS ENDED
31ST DECEMBER 1997
------------------
L000
<S> <C>
UK.......................................................... 24,243
Europe -- EC................................................ 2,812
-- Non EC........................................... 383
Asia........................................................ 70
Africa...................................................... 9
America..................................................... 33
------
27,550
======
</TABLE>
3 ADMINISTRATIVE EXPENSES
Administrative expenses include:
<TABLE>
<CAPTION>
8 MONTHS ENDED
31ST DECEMBER 1997
------------------
L000
<S> <C> <C> <C>
Auditor's remuneration -- audit -- parent company auditors................ 63
-- other auditors.................................. 19
-- non audit
services -- parent company auditors... 252
Depreciation of tangible fixed assets...................................... 245
Amortisation............................................................... 35
Profit on disposal of fixed assets......................................... (28)
Payments in respect of operating leases -- land and buildings.............. 2,167
-- other......................... 738
Exceptional items.......................................................... 6,191
=====
</TABLE>
The exceptional items in the period ended 31st December 1997 are the costs
incurred of L4,406,000 to enable the post balance sheet acquisition of the group
by Insignia Financial Group, Inc., details of which are disclosed in note 31,
and staff bonuses of L1,785,000.
Depreciation includes L142,000 charged on assets held under finance leases
and hire purchase contracts.
4 DIRECTORS' EMOLUMENTS
Directors' emoluments consist of:
<TABLE>
<CAPTION>
8 MONTHS ENDED
31ST DECEMBER 1997
------------------
L000
<S> <C>
Directors' remuneration..................................... 1,156
Contributions to a defined contribution pension scheme...... 4
-----
1,160
=====
</TABLE>
There are 2 directors in both a defined contribution scheme and a defined
benefits scheme.
F-173
<PAGE> 243
RICHARD ELLIS GROUP LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD ENDED 31ST DECEMBER 1997
The emoluments of the highest paid director were L98,000. The highest paid
director was not a member of the pension scheme in the period.
5 STAFF COSTS
Staff costs (including directors) consist of:
<TABLE>
<CAPTION>
8 MONTHS ENDED
31ST DECEMBER 1997
------------------
L000
<S> <C>
Wages and salaries.......................................... 17,585
Social security costs....................................... 1,776
Pension costs............................................... 619
Severance pay............................................... 15
------
19,995
======
</TABLE>
The average number of employees during the period was as follows:
<TABLE>
<CAPTION>
8 MONTHS ENDED
31ST DECEMBER 1997
------------------
NUMBER
<S> <C>
Professional staff.......................................... 399
Administrative staff........................................ 230
---
629
===
</TABLE>
6 INTEREST PAYABLE
<TABLE>
<CAPTION>
8 MONTHS ENDED
31ST DECEMBER 1997
------------------
L000
<S> <C>
Bank interest............................................... 64
Loan interest............................................... 106
Finance leases and hire purchase contracts.................. 72
---
242
===
</TABLE>
7 SHARE OF PROFIT OF ASSOCIATED UNDERTAKINGS
<TABLE>
<S> <C>
General Property Company (Goldsworth Park) Limited.......... 7
===
</TABLE>
8 TAXATION
<TABLE>
<S> <C>
UK corporation tax.......................................... 69
===
</TABLE>
9 DEFERRED TAXATION
The group has a potential tax liability of approximately L638,000 which
would crystallise on the liquidation of Richard Ellis Corporate Capital Limited.
This deferred taxation has not been provided as the directors have no intention
to liquidate Richard Ellis Corporate Capital Limited in the foreseeable future.
F-174
<PAGE> 244
RICHARD ELLIS GROUP LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD ENDED 31ST DECEMBER 1997
10 INTANGIBLE ASSETS
Group
<TABLE>
<CAPTION>
GOODWILL ON
CONSOLIDATION
-------------
L000
<S> <C>
Cost:
Intangible assets of group companies transferred in as
part of merger......................................... 562
---
At 31st December 1997..................................... 562
===
Amortisation:
Amortisation of intangible assets of group companies
transferred in as part of merger....................... 72
Charged in the period..................................... 35
---
At 31st December 1997..................................... 107
===
Net book value:
At 31st December 1997..................................... 455
===
</TABLE>
The goodwill arose on the acquisition of Laser Richmount Limited.
Company
Richard Ellis Group Limited has no intangible assets.
11 TANGIBLE FIXED ASSETS
Group
<TABLE>
<CAPTION>
FURNITURE,
EQUIPMENT,
MOTOR FIXTURES &
VEHICLES FITTINGS TOTAL
-------- ---------- ------
L000 L000 L000
<S> <C> <C> <C>
Cost:
Fixed assets of group companies transferred in as part
of merger........................................... 2,750 1,050 3,800
Additions in the period................................ 67 82 149
Disposals in the period................................ (1,278) (2) (1,280)
------ ----- ------
At 31st December 1997.................................. 1,539 1,130 2,669
====== ===== ======
Depreciation:
Depreciation of fixed assets of group companies
transferred in as part of merger.................... 1,345 789 2,134
Charged in the period.................................. 150 95 245
Disposals in the period................................ (704) -- (704)
------ ----- ------
At 31st December 1997.................................. 791 884 1,675
====== ===== ======
Net book value:
At 31st December 1997.................................. 748 246 994
====== ===== ======
</TABLE>
F-175
<PAGE> 245
RICHARD ELLIS GROUP LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD ENDED 31ST DECEMBER 1997
The net book value of tangible fixed assets includes an amount of L702,000
in respect of assets held under finance leases and hire purchase contracts. The
depreciation charge for the period relating to these assets was L142,000.
Company
Richard Ellis Group Limited has no tangible assets other than investments
(note 12).
Capital Commitments
Commitments for tangible fixed assets at 31st December 1997 were:
<TABLE>
<CAPTION>
31ST DECEMBER 1997
------------------
L000
<S> <C>
Contracted.................................................. 22
Authorised but not contracted for........................... 979
</TABLE>
12 FIXED ASSET INVESTMENTS
Group
<TABLE>
<CAPTION>
L000 L000 L000 L000 L000
------ ---- ---- ---- ------
<S> <C> <C> <C> <C> <C>
Fixed asset investments of group companies
transferred in as part of merger.............. 2,628 463 21 -- 3,112
Additions in period............................. -- -- -- 368 368
Disposals in period............................. -- (463) (21) -- (484)
Elimination (see below)......................... (2,600) -- -- -- (2,600)
------ ---- --- --- ------
At 31st December 1997........................... 28 -- -- 368 396
====== ==== === === ======
</TABLE>
During the period the company established an employee benefit trust, the
Richard Ellis Employee Share Trust, which purchased 565,476 5p ordinary shares
in the company. After the year end on the 16th January 1998 it sold 176,665 to
new shareholders. On the 20th January the trust purchased a further 8,000 5p
ordinary shares. On the 20th February 1998 the company purchased back the
remaining 399,811 shares from the employee benefits trust and cancelled the
shares. All of the above transactions were conducted at 65p per share.
The investment in own shares amounting to L368,000 relates to shares held
by the Richard Ellis Employee Share Trust.
On 29th September 1997, the group's investment in General Property Company
(Goldsworth Park) Limited, was sold. The sale proceeds were L443,000. The group
realised profits of L29,000.
F-176
<PAGE> 246
RICHARD ELLIS GROUP LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD ENDED 31ST DECEMBER 1997
12 FIXED ASSET INVESTMENTS (CONTINUED)
Following the acquisition of the Richard Ellis Partnership on 2nd May 1997,
the group's investment in the Richard Ellis Partnership has been eliminated.
Company
<TABLE>
<CAPTION>
31ST DECEMBER 1997
------------------
L000
<S> <C>
Business Parks Consultancy Limited.......................... --
REFS Holdings Limited....................................... 1,974
Richard Ellis Corporate Finance Limited..................... 12
Richard Ellis Financial Holdings Limited.................... 1,515
Richard Ellis Fund Management Limited....................... --
Richard Ellis Gunne Limited................................. --
Richard Ellis Gunne (Northern Ireland) Limited.............. --
Richard Ellis Holdings Limited.............................. 267
Waresure Limited............................................ --
-----
3,768
=====
</TABLE>
Following the merger with Richard Ellis Holdings Limited the above
companies, excluding Richard Ellis Gunne (Northern Ireland) Limited and Richard
Ellis Holdings Limited, were transferred at cost from Richard Ellis Holdings
Limited to be held directly by Richard Ellis Group Limited.
<TABLE>
<CAPTION>
31ST DECEMBER 1997
------------------
L000
<S> <C>
Investment in own shares -- additions in period and at 31st
December 1997............................................. 368
===
</TABLE>
The following were subsidiary undertakings at the end of the period and
have all been included in the consolidated accounts.
<TABLE>
<CAPTION>
PROPORTION
OF
COUNTRY OF VOTING RIGHTS
INCORPORATION AND SHARE
OR REGISTRATION CAPITAL HELD NATURE OF BUSINESS
--------------- ------------- -------------------------------
<S> <C> <C> <C>
30 Marsh Wall Limited......................... England 100% Enterprise zone trust managers
Business Parks Consultancy Limited............ England 100% Property consultants
CB Commercial Limited......................... England 100% Dormant
Capital and Country Properties Limited........ England 100% Dormant
Laser Richmount Limited....................... England 100% Provision of operational and
promotional services
R.E.F.S. Limited.............................. England 100% Dormant
R.E.F. Services Limited....................... England 100% Property related investment
REFS Holdings Limited......................... England 100% Finance and investment services
REHOLD Limited................................ England 100% Dormant
Richard Ellis Corporate Capital Limited....... England 100% Finance and investment services
</TABLE>
F-177
<PAGE> 247
RICHARD ELLIS GROUP LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD ENDED 31ST DECEMBER 1997
<TABLE>
<CAPTION>
PROPORTION
OF
COUNTRY OF VOTING RIGHTS
INCORPORATION AND SHARE
OR REGISTRATION CAPITAL HELD NATURE OF BUSINESS
--------------- ------------- -------------------------------
<S> <C> <C> <C>
Richard Ellis Corporate Finance Limited....... England 100% SFA regulated finance and
investment services
Richard Ellis Facilities Management Limited... England 100% Facilities management
Richard Ellis Financial Holdings Limited...... England 100% Finance and investment services
Richard Ellis Fund Management Limited......... England 100% Holding company
Richard Ellis Gunne Limited................... England 51% Auctioneers
Richard Ellis Gunne (Northern Ireland)
Limited..................................... England 51% Commercial property consultants
Richard Ellis Holdings Limited................ England 100% Commercial property consultants
Richard Ellis (Incorporating Hepper Robinson)
Limited..................................... England 100% Commercial property consultants
Richard Ellis International Limited........... England 100% Dormant
Richard Ellis Investment Services Limited..... England 100% Dormant
Richard Ellis (Ireland) Limited............... England 100% Dormant
Richard Ellis Midlands Limited................ England 100% Property consultants
Richard Ellis Regional Limited................ England 100% Property consultants
Richard Ellis Scotland Limited................ Scotland 100% Dormant
Richard Ellis Services Limited................ England 100% Provision of assets for hire
and promotional services
Richard Ellis Structured Finance Limited...... England 100% Property related investment
advisors
Richmount Enterprise Zone Managers Limited.... England 100% Enterprise zone trust managers
Richmount Management Limited.................. England 100% Enterprise zone trust managers
Richmount Marketing Limited................... England 100% Enterprise zone trust managers
Richmount Underwriting Limited................ England 100% Enterprise zone trust managers
Waresure Limited.............................. England 100% Finance
</TABLE>
F-178
<PAGE> 248
RICHARD ELLIS GROUP LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD ENDED 31ST DECEMBER 1997
13 DEBTORS
Amounts due within one year:
<TABLE>
<CAPTION>
GROUP COMPANY
31ST DECEMBER 1997 31ST DECEMBER 1997
------------------ ------------------
L000 L000
<S> <C> <C>
Trade debtors...................................... 9,373 --
Prepayments and accrued income..................... 2,265 --
Other debtors...................................... 332 --
------ ---
11,970 --
====== ===
Amount due after more than one year:
ACT recoverable.................................... 87 --
====== ===
</TABLE>
14 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
GROUP COMPANY
31ST DECEMBER 1997 31ST DECEMBER 1997
------------------ ------------------
L000 L000
<S> <C> <C>
Trade creditors.................................... 1,532 --
Other taxes and social security.................... 1,892 --
Other creditors.................................... 58 --
Obligations under finance leases and hire purchase
contracts........................................ 185 --
Corporation tax.................................... 104 --
Accruals and deferred income....................... 8,729 --
Amounts owed to group undertakings................. -- 2,750
------ -----
12,500 2,750
====== =====
</TABLE>
15 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
GROUP COMPANY
31ST DECEMBER 1997 31ST DECEMBER 1997
------------------ ------------------
L000 L000
<S> <C> <C>
Loan from Hypobank................................. 1,350 --
Obligations under finance leases and hire purchase
contracts........................................ 418 --
Accruals and deferred income....................... 111 --
----- ---
1,879 --
===== ===
</TABLE>
The loan from Hypobank carries a fixed rate of 5% until July 1999 and then
converts to a variable rate. It is repayable in July 2000 and is secured by a
charge on a blocked bank account containing L804,000.
The obligations under finance leases and hire purchase contracts are
secured on the relevant assets and each carries a normal commercial rate of
interest.
F-179
<PAGE> 249
RICHARD ELLIS GROUP LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD ENDED 31ST DECEMBER 1997
They are as follows:
<TABLE>
<CAPTION>
GROUP COMPANY
31ST DECEMBER 1997 31ST DECEMBER 1997
------------------ ------------------
L000 L000
<S> <C> <C>
Within 1-2 years................................... 156 --
Within 2-5 years................................... 262 --
--- ----
418 --
=== ====
</TABLE>
16 MINORITY INTERESTS
<TABLE>
<CAPTION>
31ST DECEMBER 1997
------------------
L000
<S> <C>
Richard Ellis Gunne Limited................................. (87)
Richard Ellis Gunne (Northern Ireland) Limited.............. (36)
----
(123)
====
</TABLE>
17 SHARE CAPITAL
Authorised
<TABLE>
<CAPTION>
31ST DECEMBER 1997
------------------
L000
<S> <C>
31,140,000 ordinary shares of 5p each....................... 1,557
860,000 convertible shares of 5p each....................... 43
-----
1,600
=====
</TABLE>
Issued, called up and fully paid:
<TABLE>
<CAPTION>
NUMBER NUMBER
OF ORDINARY OF CONVERTIBLE TOTAL NUMBER
SHARES OF SHARES OF OF SHARES OF
5P EACH 5P EACH 5P EACH L000
----------- -------------- ------------ ----
<S> <C> <C> <C> <C>
Shares issued in consideration for Richard
Ellis Partnership....................... 9,833,253 850,755 10,684,008 534
Shares issued in consideration for shares
in Richard Ellis Holdings Limited....... 5,342,002 -- 5,342,002 267
Other shares issued....................... 720,000 -- 720,000 36
---------- ------- ---------- ---
31st December 1997........................ 15,895,255 850,755 16,746,010 837
========== ======= ========== ===
</TABLE>
Insignia Financial Group, Inc., have committed to subscribe for a further
3,452,373 5p ordinary shares at a subscription price of L1.50 per share.
F-180
<PAGE> 250
RICHARD ELLIS GROUP LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD ENDED 31ST DECEMBER 1997
18 MERGERS
<TABLE>
<CAPTION>
RICHARD ELLIS
HOLDINGS LIMITED
& SUBSIDIARIES
----------------
L000
<S> <C>
Fixed assets................................................ 1,208
Intangible fixed assets..................................... 490
Investments................................................. 3,112
Debtors..................................................... 3,402
Cash........................................................ 1,058
Creditors................................................... (5,690)
Minority interest........................................... 87
------
Net assets.................................................. 3,667
======
Fair value totals........................................... 3,667
Merger Reserve.............................................. (3,400)
------
Nominal value of shares issued.............................. 267
======
</TABLE>
Analysis of net cash acquired on purchase of subsidiary undertakings:
<TABLE>
<S> <C>
Cash consideration.......................................... --
Cash acquired............................................... 1,058
------
1,058
======
</TABLE>
In the opinion of the directors, there is no material difference between
the fair values of the assets and liabilities of the subsidiary undertakings
purchased and the fair value totals set out above.
On 1st May 1997, the company combined with Richard Ellis Holdings Limited.
This has been accounted for as a merger. All losses were derived in the period
subsequent to merger. The loss for the year ended 30th April 1997 was L255,000.
19 ACQUISITIONS
<TABLE>
<CAPTION>
RICHARD ELLIS
PARTNERSHIP REVALUATION 2ND MAY 1997
------------- ----------- ------------
L000 L000 L000
<S> <C> <C> <C>
Fixed assets................................... 458 -- 458
Work in progress............................... 695 182 877
Debtors........................................ 10,040 -- 10,040
Cash........................................... (827) -- (827)
Creditors...................................... (9,016) -- (9,016)
------ --- ------
Net assets acquired............................ 1,350 182 1,532
====== === ======
Fair value totals.............................. 1,532
Goodwill....................................... 3,810
------
Consideration.................................. 5,342
======
</TABLE>
The revaluation of work in progress was necessary to achieve consistency of
accounting policies with the group.
F-181
<PAGE> 251
RICHARD ELLIS GROUP LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD ENDED 31ST DECEMBER 1997
Consideration was in the form of 9,833,253 5p ordinary shares and 850,755
5p convertible shares in Richard Ellis Group Limited. Both classes of shares
were issued at 50p.
Analysis of net cash acquired on purchase of assets:
<TABLE>
<S> <C>
Cash consideration.......................................... --
Cash acquired............................................... (827)
----
(827)
====
</TABLE>
In the opinion of the directors, there is no material difference between
the fair values of the assets and liabilities purchased and the fair value
totals set out above.
20 RESERVES
<TABLE>
<CAPTION>
SHARE PROFIT
PREMIUM AND LOSS MERGER
ACCOUNT ACCOUNT RESERVE GOODWILL TOTAL
------- -------- ------- -------- ------
L000 L000 L000 L000 L000
<S> <C> <C> <C> <C> <C>
Reserve on merger................................ -- -- 3,400 -- 3,400
Goodwill on acquisition.......................... -- -- -- (3,810) (3,810)
Premium on issue of shares....................... 5,132 -- -- -- 5,132
Elimination of goodwill against share premium.... (3,810) -- -- 3,810 --
Retained loss for the period..................... -- (3,462) -- -- (3,462)
------ ------ ------ ------ ------
At 31st December 1997............................ 1,322 (3,462) 3,400 -- 1,260
====== ====== ====== ====== ======
</TABLE>
Company
<TABLE>
<S> <C> <C> <C>
Premium on issue of shares.................................. 5,132 -- 5,132
Elimination of goodwill against share premium............... (3,810) -- (3,810)
Retained profit for the period.............................. -- 32 32
------ --- ------
At 31st December 1997....................................... 1,322 32 1,354
====== === ======
</TABLE>
The company has taken advantage of the exemption allowed under section 230
of the Companies Act 1985 and has not presented its own profit and loss account
in these financial statements. The group result for the period includes a profit
by the company for the period of L32,000 which is dealt with in the group
financial statements.
The elimination of goodwill on acquisition against share premium occurred
when the company was unlimited, on 2nd May 1997.
The cumulative amount of goodwill that has been written off against group
reserves is L691,000.
F-182
<PAGE> 252
RICHARD ELLIS GROUP LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD ENDED 31ST DECEMBER 1997
21 RECONCILIATION OF OPERATING LOSS TO CASH FLOW FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
GROUP
31ST DECEMBER 1997
------------------
L000
<S> <C>
Operating loss.............................................. (3,556)
Depreciation charges........................................ 245
Amortisation of goodwill.................................... 35
Profit on sale of tangible assets........................... (28)
Decrease in debtors......................................... 578
Increase in creditors....................................... 2,713
------
Net cash outflow from operating activities.................. (13)
======
</TABLE>
22 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
<TABLE>
<CAPTION>
GROUP
31ST DECEMBER 1997
------------------
L000
<S> <C>
Interest received........................................... 120
Interest paid............................................... (92)
Interest element of finance lease payments.................. (73)
------
Net cash outflow from returns on investments and servicing
of finance................................................ (45)
======
</TABLE>
23 CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
<TABLE>
<CAPTION>
GROUP
31ST DECEMBER 1997
------------------
L000
<S> <C>
Purchase of tangible fixed assets........................... (151)
Sale of tangible fixed assets............................... 604
Payment to acquire investment............................... (369)
Sale of investment.......................................... 443
------
Net cash inflow from capital expenditure and financial
investment................................................ 527
======
</TABLE>
24 ACQUISITIONS AND DISPOSALS
<TABLE>
<CAPTION>
GROUP
31ST DECEMBER 1997
------------------
L000
<S> <C>
Net cash acquired with subsidiary........................... (827)
----
Net cash outflow from acquisitions and disposals............ (827)
====
</TABLE>
F-183
<PAGE> 253
RICHARD ELLIS GROUP LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD ENDED 31ST DECEMBER 1997
25 FINANCING
<TABLE>
<CAPTION>
GROUP
31ST DECEMBER 1997
------------------
L000
<S> <C>
Capital element of finance lease rental payments............ (263)
Share capital issued........................................ 36
Share premium............................................... 324
----
Net cash inflow from financing.............................. 97
====
</TABLE>
26 NET DEBT
Reconciliation of net cash flow to movement in net debt
<TABLE>
<CAPTION>
GROUP
31ST DECEMBER 1997
---------------------
L000
<S> <C>
Decrease in cash in the period.............................. (261)
Cash outflow from decrease in finance leasing............... 263
------
Change in net debt resulting from cash flows................ 2
Finance leases acquired with subsidiary..................... (35)
------
New finance leases in the period............................ (62)
------
Movement in net debt........................................ (95)
Net debt at 1 May 1997...................................... (1,061)
------
Net debt at 31 December 1997................................ (1,156)
======
</TABLE>
Analysis of net debt
<TABLE>
<CAPTION>
NET DEBT OF GROUP
COMPANIES TRANSFERRED ACQUISITION OTHER NON GROUP COMPANIES
IN AS PART OF MERGER CASHFLOW (EXCL CASH) CASH CHANGES 31ST DECEMBER 1997
--------------------- -------- ------------ ------------ ------------------
L000 L000 L000 L000 L000
<S> <C> <C> <C> <C> <C>
Cash in hand and at
bank.................... 1,058 (261) -- -- 797
Debt due after one year... (1,350) -- -- -- (1,350)
Finance leases............ (769) 263 (35) (62) (603)
------ ---- --- --- ------
(1,061) 2 (35) (62) (1,156)
====== ==== === === ======
</TABLE>
27 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
GROUP COMPANY
31ST DECEMBER 1997 31ST DECEMBER 1997
------------------ ------------------
L000 L000
<S> <C> <C>
(Loss)/profit for the period....................... (3,462) 32
New share capital subscribed....................... 837 837
New share premium on capital subscribed............ 1,322 1,322
Merger reserve on acquisition...................... 3,400 --
------ -----
Shareholders' funds at 31st December 1997.......... 2,097 2,191
====== =====
</TABLE>
F-184
<PAGE> 254
RICHARD ELLIS GROUP LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD ENDED 31ST DECEMBER 1997
28 PENSIONS
Certain employees are members of a pension scheme operated by the group.
The scheme includes final salary and defined contributions sections. The assets
of the scheme are held separately from those of the group and are administered
by trustees.
The scheme is the subject of an independent actuarial valuation every three
years. The most recent actuarial valuation was as at 1st May 1996 using the
projected unit method. At that date the market value of the assets was L16.07m
of which L3.27m related to defined contribution assets. Ignoring defined
contribution assets and liabilities, the actuarial value of the assets was
sufficient to cover 107% of the value of the benefits that had accrued to
members, after allowing for increases in earnings. The principle assumptions
used were an interest rate of 7.75% pa, salary growth of 6% pa, price inflation
of 3.5% pa and dividend growth of 3.9% pa. The anticipated surplus in the Fund
at 1st May 1997 based on the assumptions in the 1996 valuation was nil. Company
contributions during the period equalled the pension cost, of L54,000 per month,
amounting to L432,000 for the eight months to 31st December 1997.
29 LEASING COMMITMENTS
The group had commitments under operating leases to make payments totalling
L3,813,000 in the period ending 31st December 1997 as follows:
<TABLE>
<CAPTION>
31ST DECEMBER 1997
------------------
LAND &
BUILDINGS OTHER
--------- -----
L000 L000
<S> <C> <C>
Lease expiring:
Within one year........................................... 23 78
Within two to five years.................................. 284 65
Over five years........................................... 3,002 545
----- ---
3,309 688
===== ===
</TABLE>
Included within other are annuity payments to former partners of the
Richard Ellis Partnership.
30 CONTINGENT LIABILITIES
The company has given an unlimited guarantee in respect of the bank loans
and overdrafts of certain other group companies. At 31st December the amount
guaranteed by the company was L952,000.
The company has received a claim for L763,000 on behalf of a former
employee in connection with the price paid to him on his resignation by the
Richard Ellis Share Trust for his shares in the group and another claim for rent
on one of its properties relating to a void period. If either claim is pursued,
the Board intends to defend it vigorously.
31 POST BALANCE SHEET EVENT
On 4th March 1998, the entire share capital of the company was acquired by
Insignia Financial Group, Inc., a company incorporated in the USA.
32 RELATED PARTY TRANSACTIONS
On 2nd May 1997 the group acquired the trade, assets and liabilities of the
former Richard Ellis Partnership.
F-185
<PAGE> 255
RICHARD ELLIS GROUP LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD ENDED 31ST DECEMBER 1997
All of the directors excluding I Harvey, B S Thomas and V W Benjamin were
partners in the Richard Ellis Partnership prior to the acquisition and each
received 395,704 shares in the group as consideration for the partnership's
trade, assets and liabilities. The shares issued to H V A Ellingham and I D
Ellis included 118,710 convertible shares.
A J M Huntley, J A D Croft, C N G Arding, D A Sizer, R D Lucas, M D G
Wheldon and R J F Wildman were shareholders in both Richard Ellis Group Limited
and REI Limited. In aggregate they controlled 27.21% of the voting rights in
Richard Ellis Group Limited and 26.87% of the voting rights in REI Limited at
31st December 1997.
During the period the group was billed L308,000 by REI Limited, of which
L291,000 was outstanding at the year end. The group charged L364,000 to REI
Limited during the period. The outstanding debtor at the year end was L405,000.
All transactions were carried out on normal commercial terms.
33 PARENT COMPANY
Following the acquisition of Richard Ellis Group Limited, which took place
on 4th March 1998, Insignia Financial Group Inc. (a company incorporated in the
USA) is now the ultimate parent company. The parent of the largest and smallest
group of which the company is a member and for which financial statements are
prepared is Richard Ellis Group Limited.
34 RICHARD ELLIS GROUP LIMITED
Richard Ellis Group Limited was formed on the 7th April 1997, for the
express purpose of acquiring the net assets of Richard Ellis Holdings Limited
and subsidiaries and the net assets of Richard Ellis Partnership. These
transactions completed after the 30th April 1997. As the company is newly formed
and the group did not exist in its current form at the time no comparisons as at
the 30th April 1997 have been provided for the company or for the group.
35 SIGNIFICANT DIFFERENCES BETWEEN U.K. GAAP AND U.S. GAAP
The Company's accounting policies comply with U.K. GAAP which differ in
certain significant respects from U.S. GAAP. The following is a summary of such
differences.
ACCOUNTING FOR DEFERRED INCOME TAXES
U.K. GAAP requires deferred income taxes to be recorded using the liability
method based on those timing differences expected to crystallise in the
foreseeable future. U.S. GAAP also requires the use of the liability method;
however, full provision for all temporary differences is required.
F-186
<PAGE> 256
RICHARD ELLIS GROUP LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE PERIOD ENDED 31ST DECEMBER 1997 (UNAUDITED COMPARATIVES)
<TABLE>
<CAPTION>
8 MONTHS ENDED 8 MONTHS ENDED
NOTE 31ST DECEMBER 1997 31ST DECEMBER 1996
---- ------------------ ------------------
<S> <C> <C> <C>
TURNOVER............................................. 2 27,550 20,207
Administrative expenses
-- normal......................................... 3 (24,915) (20,954)
-- exceptional.................................... 3 (6,191) --
------- -------
LOSS ON ORDINARY ACTIVITIES BEFORE INTEREST AND OTHER
INCOME............................................. (3,556) (747)
Interest receivable.................................. 224 86
Interest payable..................................... 6 (242) (338)
------- -------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION.......... (3,574) (999)
Share of profit of associated undertakings........... 7 7 29
Taxation............................................. 8 69 --
------- -------
LOSS ON ORDINARY ACTIVITIES AFTER TAXATION........... (3,498) (970)
Minority interests -- equity......................... 36 (19)
------- -------
LOSS FOR THE FINANCIAL PERIOD........................ 20 (3,462) (989)
======= =======
</TABLE>
All amounts relate to continuing activities of the merged businesses and
acquisitions.
All recognised gains and losses are included in the profit and loss account.
F-187
<PAGE> 257
RICHARD ELLIS GROUP LIMITED
CONSOLIDATED BALANCE SHEET
AS AT 31ST DECEMBER 1997 (UNAUDITED COMPARATIVES)
<TABLE>
<CAPTION>
NOTE 31ST DECEMBER 1997 31ST DECEMBER 1996
---- ------------------ ------------------
L000 L000 L000 L000
<S> <C> <C> <C> <C> <C>
FIXED ASSETS
Intangible assets............................... 10 455 493
Tangible fixed assets........................... 11 994 1,818
Investments..................................... 12 28 512
Investment in own shares........................ 12 368 --
-------- -------
1,845 2,823
CURRENT ASSETS
Work in progress................................ 1,654 538
Debtors......................................... 13 12,057 9,256
Cash at bank and in hand.......................... 797 2,323
-------- -------
14,508 12,117
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR.... 14 (12,500) (5,920)
-------- -------
NET CURRENT ASSETS................................ 2,008 6,197
------- --------
TOTAL ASSETS LESS CURRENT LIABILITIES............. 3,853 9,020
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE
YEAR............................................ 15 (1,879) 3,500
------- --------
1,974 5,520
======= ========
CAPITAL AND RESERVES:
Called up share capital/Partnership capital..... 17 837 3,200
Share premium account........................... 20 1,322 2,723
Capital reserve on acquisition.................. 199
Profit and loss account......................... 20 (3,462) (508)
Merger reserve.................................. 20 3,400 --
------- --------
SHAREHOLDERS' FUNDS............................... 27 2,097 5,614
Minority interests -- equity...................... 16 (123) (94)
------- --------
1,974 5,520
======= ========
</TABLE>
F-188
<PAGE> 258
RICHARD ELLIS GROUP LIMITED
CONSOLIDATED CASH FLOW STATEMENT
FOR THE PERIOD ENDED 31ST DECEMBER 1997 (UNAUDITED COMPARATIVES)
<TABLE>
<CAPTION>
8 MONTHS ENDED 8 MONTHS ENDED
NOTE 31ST DECEMBER 1997 31ST DECEMBER 1996
---- ------------------ ------------------
L000 L000
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES................ 21 (13) 1,261
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE.... 22 (45) (50)
TAXATION........................................... -- 33
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT....... 23 527 42
ACQUISITIONS AND DISPOSALS......................... 24 (827) (171)
---- -----
CASH OUTFLOW BEFORE FINANCING...................... (358) 1,115
FINANCING.......................................... 25 97 (386)
---- -----
(DECREASE)/INCREASE IN CASH........................ (261) 729
==== =====
</TABLE>
F-189
<PAGE> 259
APPENDIX
A
AGREEMENT AND PLAN OF DISTRIBUTION
BY AND BETWEEN
INSIGNIA FINANCIAL GROUP, INC.
AND
INSIGNIA/ESG HOLDINGS, INC.
DATED AS OF , 1998
<PAGE> 260
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I DEFINITIONS................................................. A-1
1.1 Definitions................................................. A-1
ARTICLE II THE DISTRIBUTION............................................ A-6
2.1 Mechanics of the Distribution............................... A-6
2.2 Timing of the Distribution.................................. A-6
ARTICLE III TAX MATTERS................................................. A-7
3.1 Assumption and Indemnification of Tax Liabilities........... A-7
3.2 Failure of the Merger to Occur.............................. A-7
3.3 Indemnification Procedures.................................. A-7
ARTICLE IV TRANSFER OF ASSETS AND PAYMENT OF LIABILITIES............... A-8
4.1 Transfer of Assets to Holdings.............................. A-8
4.2 Payment of Liabilities...................................... A-8
ARTICLE V OTHER AGREEMENTS............................................ A-8
5.1 Use of "Insignia," "ESG," or "Insignia/ESG" Names........... A-8
5.2 Release of Holdings by the Company's Lenders................ A-9
5.3 Books and Records........................................... A-9
5.4 Access to Information....................................... A-9
5.5 Retention of Records........................................ A-9
5.6 Confidentiality............................................. A-10
5.7 Listing on NYSE............................................. A-10
5.8 Further Assurances.......................................... A-10
5.9 Treatment of Certain Participation Interests................ A-10
5.10 Cooperation................................................. A-11
5.11 Assumption of Certain Contracts by Holdings................. A-11
5.12 Payments With Respect to Consulting Agreements; Restricted
Stock; Stock Options...................................... A-11
5.13 Conflicting Terms........................................... A-12
5.14 Performance of Services..................................... A-12
ARTICLE VI INDEMNIFICATION AND RELEASES................................ A-12
6.1 Mutual Release.............................................. A-12
6.2 Indemnification by the Company.............................. A-12
6.3 Indemnification by Holdings................................. A-12
6.4 Insurance Proceeds; Tax Benefits; Mitigation................ A-13
6.5 Procedure for Indemnification............................... A-13
6.6 Remedies Cumulative......................................... A-15
6.7 Survival of Indemnities..................................... A-15
ARTICLE VII EMPLOYEE MATTERS............................................ A-15
7.1 Employees................................................... A-15
7.2 Employee Benefits........................................... A-15
7.3 Other Liabilities and Obligations........................... A-17
ARTICLE VIII CONDITIONS.................................................. A-17
8.1 Stockholder Approval........................................ A-17
8.2 Opinion of Tax Counsel...................................... A-17
8.3 Certain Transactions........................................ A-17
8.4 Adequate Surplus............................................ A-17
8.5 Release of Obligations...................................... A-17
8.6 Bank Consent................................................ A-17
</TABLE>
App. A-(i)
<PAGE> 261
<TABLE>
<S> <C> <C>
ARTICLE IX MISCELLANEOUS AND GENERAL................................... A-17
9.1 Termination................................................. A-17
9.2 Effect of Termination....................................... A-18
9.3 Modification or Amendment................................... A-18
9.4 Waiver; Remedies............................................ A-18
9.5 Counterparts................................................ A-18
9.6 Governing Law............................................... A-18
9.7 Notices..................................................... A-18
9.8 Captions.................................................... A-19
9.9 No Third Party Beneficiary.................................. A-19
9.10 Successors and Assigns...................................... A-19
9.11 Certain Obligations......................................... A-19
9.12 Specific Performance........................................ A-20
9.13 Severability................................................ A-20
9.14 Jurisdiction................................................ A-20
SCHEDULE 3.1.............................................................. A-21
SCHEDULE 4.1.............................................................. A-22
</TABLE>
App. A-(ii)
<PAGE> 262
AGREEMENT AND PLAN OF DISTRIBUTION, dated as of , 1998
("Agreement"), between Insignia Financial Group, Inc., a Delaware corporation
(the "Company"), and Insignia/ESG Holdings, Inc., a Delaware corporation and an
indirect wholly owned subsidiary of the Company ("Holdings").
WHEREAS, the Company, Holdings, Apartment Investment and Management
Company, a Maryland corporation ("AIMCO"), and AIMCO Properties, L.P., a
Delaware limited partnership and a subsidiary of AIMCO ("AIMCO Properties"),
have entered into an Amended and Restated Agreement and Plan of Merger, dated as
of May 26, 1998 (the "Merger Agreement"), providing for the Merger (as defined
in the Merger Agreement) of the Company with and into AIMCO, with AIMCO as the
surviving corporation;
WHEREAS, the Boards of Directors of the Company and Holdings have approved
this Agreement, which is being entered into prior to the Effective Time (as
defined in Section 1.3 of the Merger Agreement), pursuant to which the
Distribution (as defined below) will be consummated;
WHEREAS, as soon as practicable after the Company Meeting (as hereinafter
defined), subject to the satisfaction or waiver of the conditions set forth in
Article VIII of this Agreement, the Company will distribute (the "Distribution")
to each holder of record of shares of Class A Common Stock, par value $.01 per
share, of the Company ("Company Common Stock"), a number of shares of Common
Stock, par value $.01 per share, of Holdings ("Holdings Common Stock") equal to
two-thirds of the number of shares of Company Common Stock held by such holder;
WHEREAS, the purpose of the Distribution is to allow the management of
Holdings and its subsidiaries to focus exclusively on the operation and growth
of the Holdings Business (as defined below), and to provide Holdings with
greater access to the capital markets to develop its commercial real estate
operations, to facilitate future acquisitions of other commercial real estate
operations and to make Holdings better able to attract and retain top quality
professionals in its commercial real estate operations, as well as to make
possible the Merger by divesting the Company of all businesses and operations
(other than the Retained Business (as defined below)) conducted by the Company
and its Subsidiaries (as defined below) which AIMCO is unwilling to acquire;
WHEREAS, the Company and Holdings wish to set forth and provide for certain
agreements between the Company and Holdings in consideration of the separation
of their ownership; and
WHEREAS, it is the intention of the parties to this Agreement that the
Distribution shall qualify as a transaction described in Section 355 of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. As used in this Agreement, the following terms shall have
the following respective meanings (capitalized terms used but not defined herein
shall have the respective meanings ascribed to them in the Merger Agreement):
"Additional Interests" shall have the meaning set forth in Section 5.9(c)
hereto.
"Affiliate" of any Person shall mean another Person that directly or
indirectly through one or more intermediaries, controls, is controlled by or is
under common control with, such first Person; provided, however, that for the
purposes of this Agreement from and after the Time of Distribution, no Retained
Company shall be deemed to be an Affiliate of any Holdings Company, and no
Holdings Company shall be deemed to be an Affiliate of any Retained Company. The
Affiliates of Holdings also include the Commercial Joint Venture Entities.
"Agreement" shall have the meaning set forth in the Preamble.
App. A-1
<PAGE> 263
"AIMCO" shall have the meaning set forth in the Recitals hereto.
"AIMCO Properties" shall have the meaning set forth in the Recitals hereto.
"Closing Date" shall have the meaning set forth in Section 3.1 of the
Merger Agreement.
"Code" shall have the meaning set forth in the Recitals hereto.
"Commercial Joint Venture Entities" shall mean the following entities:
Brickyard Investors, L.P., Brookhollow Associates, L.P., Courtyard Plaza
Associates, L.P., Glades Plaza, L.P., Hiawassee Oak Partners, L.P., Nashpike
Partners, L.P., Sleepy Lake Partners, L.P., Bingham Partners, L.P., Clayton
Investors Associates, LLC, Northpoint Partners, L.P., Mockingbird Associates,
L.P., 101 Marietta Street Associates, Fresh Meadows Development, LLC, W/9FIG
Realty, L.L.C., Dallas RPFIV Campbell Centre Associates Limited Partnership, St.
Louis RPFIV Gateway One Associates Limited Partnership, Santa Rosa L.L.C. and
any other entities owning commercial or non-residential real estate assets or
interests therein, or entities owning residential real estate assets related to
the New York Residential Business (as that term is defined in Section 4.1(i) of
the Merger Agreement) other than those in which a subsidiary of Insignia
Properties Trust, a Maryland real estate investment trust, serves as a general
partner, whether now existing or hereafter formed.
"Company" shall have the meaning set forth in the Preamble.
"Company 401(k) Plan" shall have the meaning set forth in Section 7.2(b)
hereof.
"Company Common Stock" shall have the meaning set forth in the Recitals
hereto.
"Company Disclosure Letter" shall mean that certain letter dated March 17,
1998 from the Company to AIMCO annexed to and deemed part of the Merger
Agreement.
"Company Flex Plan" shall have the meaning set forth in Section 7.2(c)
hereof.
"Company Indemnifiable Losses" shall have the meaning set forth in Section
6.3 hereof.
"Company Indemnitees" shall have the meaning set forth in Section 6.3
hereof.
"Company LTD Plan" shall have the meaning set forth in Section 7.2(c)
hereof.
"Company Meeting" shall mean the special meeting of Company stockholders at
which the stockholders will be asked to approve the Distribution and the Merger
Agreement.
"Company Restoration Plan" shall have the meaning set forth in Section
7.2(b) hereof.
"Company Stock Plans" shall mean the Insignia Financial Group, Inc. Amended
and Restated 1992 Stock Incentive Plan, as amended, and the Insignia Financial
Group, Inc. 1995 Non-Employee Director Stock Option Plan.
"Company VEBA" shall have the meaning set forth in Section 7.2(c) hereof.
"Company Welfare Plans" shall have the meaning set forth in Section 7.2(c)
hereof.
"Contingent Incentive Award" shall have the meaning set forth in the
Incentive Award Letters.
"Contract" shall mean any note, bond, mortgage, indenture, lease, contract,
agreement, obligation, understanding, commitment or other similar arrangement,
whether written or oral.
"Covered Person" shall have the meaning set forth in Section 2.1 of the
Merger Agreement.
"Credit Agreement" shall have the meaning set forth in Section 5.2 hereof.
"DGCL" shall mean the General Corporation Law of the State of Delaware.
"Distribution" shall have the meaning set forth in the Recitals hereto.
"Effective Time" shall have the meaning set forth in Section 1.3 of the
Merger Agreement.
"Employment Agreements" shall mean the agreements listed in Schedule
5.12(a) hereto.
App. A-2
<PAGE> 264
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Existing 401(k) Plan" shall have the meaning set forth in Section 7.2(b)
hereof.
"Existing LTD Plan" shall have the meaning set forth in Section 7.2(c)
hereof.
"Existing Restoration Plan" shall have the meaning set forth in Section
7.2(b) hereof.
"Existing Welfare Plans" shall have the meaning set forth in Section 7.2(c)
hereof.
"Flex Plan" shall have the meaning set forth in Section 7.2(c) hereof.
"Former Employees" shall have the meaning set forth in Section 7.12(a) of
the Merger Agreement.
"Holdings" shall have the meaning set forth in the Preamble.
"Holdings 40l(k) Plan" shall have the meaning set forth in Section 7.2(b)
hereof.
"Holdings Assets" shall have the meaning set forth in Section 4.1 hereof.
"Holdings Businesses" shall mean all of the businesses conducted at or at
any time prior to the Distribution by the Company or any of its Subsidiaries,
excluding the Retained Business.
"Holdings Common Stock" shall have the meaning set forth in the Recitals
hereto.
"Holdings Companies" shall mean Holdings and its Subsidiaries (determined
after giving effect to the transactions contemplated by Article IV of this
Agreement).
"Holdings Entities" shall have the meaning set forth in Section 4.1 hereof.
"Holdings Employees" shall mean all current and former employees of the
Company and its Subsidiaries other than the Retained Employees.
"Holdings Flex Plan" shall have the meaning set forth in Section 7.2(c)
hereof.
"Holdings Indemnifiable Losses" shall have the meaning set forth in Section
6.2 hereof.
"Holdings Indemnities" shall have the meaning set forth in Section 6.2
hereof.
"Holdings Liabilities" shall mean (i) all Liabilities or portions of
Liabilities arising primarily out of or in connection with the Holdings Assets
or the Holdings Businesses; (ii) all Liabilities under Contracts included in the
Holdings Assets, whether such Liabilities arise before, upon or after the
transactions contemplated by this Agreement and including any Liabilities under
such Contracts resulting from the consummation of the transactions contemplated
by this Agreement (including actions, claims or proceedings relating thereto);
(iii) all Liabilities of Holdings and its Subsidiaries pursuant to this
Agreement, the Merger Agreement, the Indemnification Agreement or any of the
Transaction Documents; and (iv) all Liabilities for payment of outstanding
drafts and checks of Holdings and its Subsidiaries to the extent attributable to
the Holdings Assets and the Holdings Businesses existing as of the Time of
Distribution.
"Holdings LTD Plan" shall have the meaning set forth in Section 7.2(c)
hereof.
"Holdings Restoration Plan" shall have the meaning set forth in Section
7.2(b) hereof.
"Holdings Vacation Obligation" shall have the meaning set forth in Section
7.2(a) hereof.
"Holdings VEBA" shall have the meaning set forth in Section 7.2(c) hereof.
"Holdings Welfare Plans" shall have the meaning set forth in Section 7.2(c)
hereof.
"Incentive Award Letters" shall have the meaning set forth in Section
5.9(b) hereof.
"Indemnifiable Losses" shall have the meaning set forth in Section 6.3
hereof.
"Indemnification Agreement" shall mean that certain Amended and Restated
Indemnification Agreement dated as of May 26, 1998 by and between AIMCO and
Holdings, as the same may be amended and supplemented from time to time.
App. A-3
<PAGE> 265
"Indemnifying Party" shall have the meaning set forth in Section 6.4
hereof.
"Indemnitee" shall have the meaning set forth in Section 6.4 hereof.
"Information" of a party shall mean any and all information that such party
or any of its Representatives furnish or have furnished to the receiving party
or any of its Representatives whether furnished orally or in writing or by any
other means or gathered by inspection and regardless of whether the same is
specifically marked or designated as "confidential" or "proprietary," together
with any and all notes, memoranda, analyses, compilations, studies or other
documents (whether in hard copy or electronic media) prepared by the receiving
party of any of its Representatives which contain or otherwise reflect such
Information, together with any and all copies, extracts or other reproductions
of any of the same; provided, however, that for the purposes hereof all
information relating to the Retained Companies and the Retained Business in the
possession of any Holdings Company at the Time of Distribution shall be deemed
to have been furnished by the Retained Companies and all information relating to
the Holdings Companies and the Holdings Businesses in the possession of any
Retained Company at the Time of Distribution shall be deemed to have been
furnished by the Holdings Companies; and further provided that the term
"Information" does not include information that:
(a) is or becomes generally available to the public through no
wrongful act of the receiving party or its Representatives;
(b) is or becomes available to the receiving party on a
non-confidential basis from a source other than the providing party or its
Representatives, provided that such source is not known by the receiving
party to be subject to a confidentiality agreement with the providing
party; or
(c) has been independently acquired or developed by the receiving
party without violation of any of the obligations of the receiving party or
its Representatives under this Agreement.
"IRS" shall mean the United States Internal Revenue Service.
"Lenders" shall have the meaning set forth in Section 5.2 hereof.
"Liabilities" shall mean any and all debts, liabilities, commitments and
obligations, whether fixed, contingent or absolute, matured or unmatured,
liquidated or unliquidated, accrued or not accrued, known or unknown, whenever
or however arising and whether or not the same would be required by generally
accepted accounting principles to be reflected in financial statements or
disclosed in the notes thereto.
"Merger" shall have the meaning set forth in the recitals to the Merger
Agreement.
"Merger Agreement" shall have the meaning set forth in the Recitals hereto.
"Participation Interests" shall mean the interests of Holdings in or with
respect to Proceeds from or arising out of any investment by the Company or any
Affiliates thereof in the Residential Joint Venture Entities listed below and in
the REMIC, as set forth below:
<TABLE>
<CAPTION>
ENTITY PARTICIPATION INTEREST
------ ----------------------
<S> <C>
REMIC...................................................... 30% of Proceeds
Southwest Associates, L.P.................................. 35% of Proceeds
Western Hills Associates, LLC.............................. 40% of Proceeds
Cobble Creek Associates LLC................................ 40% of Proceeds
Chimney Ridge Associates................................... 40% of Proceeds
Bennington Square Associates LP............................ 40% of Proceeds
Willow Park Associates..................................... 50% of Proceeds
Dallas Glen Associates, L.P................................ 50% of Proceeds
Watermans Crossing Associates, L.P......................... 50% of Proceeds
Louisville Apartments Limited Partnership.................. 50% of Proceeds
</TABLE>
App. A-4
<PAGE> 266
"Person" shall mean any natural person, corporation, general or limited
partnership, limited liability company, joint venture, trust, association or
entity of any kind.
"Proceeds" means the proceeds actually received by the Company or any of
its Affiliates derived from or arising out of its investment in (i) each
Residential Joint Venture Entity, and (ii) the REMIC, in each case after the
Company or such Affiliate has received 100% of its investment plus a return
thereon equal to 10% per annum.
"NYSE" shall mean The New York Stock Exchange, Inc.
"Record Date" shall mean the date designated by or pursuant to the
authorization of the Board of Directors of the Company for the purpose of
determining the stockholders of the Company entitled to participate in the
Distribution.
"REMIC" shall mean the obligations known as Structured Asset Securities
Corporation Trust I Collateralized Mortgage Obligation Series 1992-MI, Class D.
"Representatives" of a party shall mean such party's officers, directors,
employees, accountants, counsel, investment bankers, financial advisors,
consultants and other representatives.
"Residential Joint Venture Entities" shall mean the following partnerships
and limited liability companies: Southwest Associates L.P., Western Hills
Associates LLC, Cobble Creek Associates LLC, Chimney Ridge Associates,
Bennington Square Associates LP, Willow Park Associates, Dallas Glen Associates,
L.P., Watermans Crossing Associates, L.P., and Louisville Apartments Limited
Partnership.
"Retained Assets" shall mean the assets relating to the Company's existing
residential multifamily property management and ownership and partnership
administration businesses but excluding the entities and assets listed in
Schedule 4.1 hereto.
"Retained Business" shall mean the Company's existing residential
multifamily property management and ownership and partnership administration
businesses, including related assets and liabilities but excluding the entities
and assets listed in Schedule 4.1 hereto.
"Retained Companies" shall mean the Company and its Subsidiaries, other
than Holdings and its Subsidiaries.
"Retained Employees" shall mean those Persons who are employees of the
Retained Companies immediately after the Time of Distribution.
"Retained Liabilities" shall mean (i) all Liabilities or portions of
Liabilities arising primarily out of or in connection with the Retained Assets
or the Retained Business; (ii) all Liabilities under Contracts included in the
Retained Assets, whether such Liabilities arise before, upon or after the
transactions contemplated by this Agreement and including any Liabilities under
such Contracts resulting from the consummation of the transactions contemplated
by this Agreement (including actions, claims or proceedings relating thereto);
(iii) all Liabilities of the Company and its Subsidiaries (other than Holdings
and its Subsidiaries) pursuant to this Agreement, the Merger Agreement, the
Indemnification Agreement and the Transaction Documents; and (iv) all
Liabilities for the payment of outstanding drafts and checks of the Company and
its Subsidiaries to the extent attributable to the Retained Assets or the
Retained Business existing as of the Time of Distribution.
"SEC" shall mean the United States Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Subsidiary" shall mean, with respect to any Person, any corporation or
other organization, whether incorporated or unincorporated, of which (i) such
Person or any other Subsidiary of such Person is a general partner or (ii) at
least 50% of the securities or other interests having by their terms ordinary
voting power to elect a majority of the board of directors or others performing
similar functions with respect to such corporation or other organization or at
least 50% of the value of the outstanding equity is directly or indirectly owned
or controlled by such Person or by any one or more of its Subsidiaries, or by
such Person and one or
App. A-5
<PAGE> 267
more of its Subsidiaries. The Subsidiaries of Holdings include the Commercial
Joint Venture Entities but do not include the Residential Joint Venture
Entities.
"Taxes" shall mean any federal, state, county, local or foreign taxes,
charges, fees, levies or other assessments, including all net income, gross
income, sales and use, ad valorem, transfer, gains, profits, excise, franchise,
real and personal property, gross receipt, capital stock, share, production,
business and occupation, disability, employment, payroll, license, estimated,
stamp, custom duties, severance or withholding taxes or charges imposed by any
governmental entity, and includes any interest and penalties (civil or criminal)
on or additions to any such taxes.
"Tax Indemnifying Party" shall have the meaning set forth in Section 3.3(a)
hereof.
"Tax Indemnitee" shall have the meaning set forth in Section 3.3(a) hereof.
"Tax Return" shall means any report, return or other information required
to be supplied to a governmental entity with respect to Taxes.
"Time of Distribution" shall mean the time as of which the Distribution is
effective.
"Third Party Claim" shall have the meaning set forth in Section 6.5 hereof.
"Trade Marks" shall have the meaning set forth in Section 5.1(b) hereof.
"Transaction Documents" shall have the meaning set forth in Section 5.8
hereof.
"Transfer Agent" shall mean First Union National Bank, the transfer agent
for the Company Common Stock.
"VEBA" shall have the meaning set forth in Section 7.2(c) hereof.
ARTICLE II
THE DISTRIBUTION
2.1 Mechanics of the Distribution. The Distribution shall be effected by
the distribution, to each holder of record of shares of Company Common Stock as
of the Record Date, of certificates representing the number of shares of
Holdings Common Stock equal to two-thirds of the number of shares of Company
Common Stock held by such holder; provided, however, that no fractional shares
of Holdings Common Stock shall be issued or delivered. In the event there are
holders of Company Common Stock holding of record on the Record Date a number of
shares of Company Common Stock not wholly divisible by three, the Transfer Agent
shall distribute certificates representing shares of Holdings Common Stock to
such holders on the basis of the next number of shares of Company Common Stock
held below the actual number of shares held which is wholly divisible by three,
multiplied by two. The Transfer Agent shall aggregate all shares of Holdings
Common Stock that would be distributable but for the proviso to the first
sentence of this Section 2.1, shall sell such shares in the public market as
soon as practicable after the Time of Distribution and shall distribute the
proceeds of the sale of such shares pro rata among the holders of record of
Company Common Stock holding such numbers of shares of Company Common Stock not
wholly divisible by three.
2.2 Timing of the Distribution. The Board of Directors of the Company
shall formally declare the Distribution and shall authorize the Company to
effect the Distribution following the approval of the Distribution by the
stockholders of the Company and prior to the Closing Date, subject to the
satisfaction or waiver of the conditions set forth in Article VIII of this
Agreement, by delivery of certificates representing shares of Holdings Common
Stock to the Transfer Agent for delivery to the holders entitled thereto. The
Distribution shall be deemed to be effective upon notification by the Company to
the Transfer Agent that the Distribution has been effected and that the Transfer
Agent is authorized to proceed with the distribution of certificates
representing shares of Holdings Common Stock.
App. A-6
<PAGE> 268
ARTICLE III
TAX MATTERS
3.1 Assumption and Indemnification of Tax Liabilities. Except as provided
in the attached Schedule 3.1, and except as otherwise specifically provided in
the Merger Agreement or the Indemnification Agreement, the respective Tax
liabilities of the Company and its Subsidiaries (other than Holdings and its
Subsidiaries) and of Holdings and its Subsidiaries, whether arising before, at
or after the Time of Distribution, will continue to be the Tax liabilities of
each such party, and each party hereto agrees to save, indemnify, defend and
hold harmless the other, its Subsidiaries and each of their respective
directors, officers, employees, agents, successors and assigns from and against
all such Tax liabilities.
3.2 Failure of the Merger to Occur.
In the event the Merger does not occur, Holdings agrees to save, indemnify,
defend and hold harmless the Company and each of its Subsidiaries and their
successors and assigns from and against any Taxes that arise under Sections
355(e), 355(c)(2) and 361(c)(2) of the Code and corresponding state or local
income and franchise Taxes as a result or on account of (i) any plan (or series
of transactions) of Holdings pursuant to which one or more persons acquire,
directly or indirectly, stock representing a 50% or greater interest in Holdings
or (ii) any action of Holdings or any of its Subsidiaries after the Time of
Distribution that is the principal cause of the Distribution not qualifying as a
reorganization and distribution under Sections 368(a)(1)(D) and 355 of the Code.
3.3 Indemnification Procedures.
(a) Any claim for indemnification under this Article III shall be made by
written notice from the party seeking to be indemnified (the "Tax Indemnitee")
to the party from which indemnification is sought (the "Tax Indemnifying Party")
in the same manner as set forth in Section 5 of the Indemnification Agreement.
Except as otherwise provided in the Indemnification Agreement, if a Tax
Indemnitee becomes aware during an examination of a Tax Return that the tax
authority conducting the examination is considering asserting a Tax subject to
indemnification, the Tax Indemnitee will (i) promptly notify the Tax
Indemnifying Party of this fact, (ii) to the extent reasonably practicable,
segregate the issue from any other issues being examined, (iii) permit the Tax
Indemnifying Party to control the Tax examination insofar as it relates to that
issue and any administrative or judicial appeals relating to the issue
(including whether to settle the issue or to appeal from an adverse
determination with regard to the issue) and (iv) cooperate with the Tax
Indemnifying Party in all reasonable respects to establish that such Tax is not
due and payable.
(b) Upon a determination that a Tax Indemnifying Party is liable for a
payment of Taxes to a Tax Indemnitee, the Tax Indemnifying Party shall pay the
Tax Indemnitee such Taxes. Except as otherwise provided under the
Indemnification Agreement, such payment will be made on an after-Tax basis
promptly following the submission by the Tax Indemnitee of written evidence of
the payment of indemnified Tax.
(c) Except as otherwise provided in the Merger Agreement, the Company will
be responsible for the preparation and filing of all Tax Returns with respect to
all periods ending on or before the Time of Distribution and for the payment of
all Taxes shown on those Tax Returns to be due. Holdings and its Subsidiaries
will be responsible for the preparation and filing of all other Tax Returns
relating to them or their assets or the Holdings Businesses which are required
to be filed after the Time of Distribution and for the payment of all Taxes
shown on those Tax Returns to be due and all related estimated Taxes payable
after the Time of Distribution.
(d) Each of the Company and Holdings will, and will cause their respective
personnel to, cooperate fully with each other of them in connection with the
preparation and review of Tax Returns and in connection with any examinations of
any Tax Returns filed by either of them or their respective Subsidiaries.
App. A-7
<PAGE> 269
ARTICLE IV
TRANSFER OF ASSETS AND PAYMENT OF LIABILITIES
4.1 Transfer of Assets to Holdings. Prior to the Time of Distribution, the
Company shall take or cause to be taken all actions necessary to cause the
transfer, assignment, delivery and conveyance to Holdings of all of the
Company's and its Subsidiaries' right, title and interest in the Holdings
Entities and the Holdings Assets. "Holdings Entities" and "Holdings Assets"
mean, respectively, the entities and assets identified on Schedule 4.1 under the
headings "Holdings Entities" and "Holdings Assets."
4.2 Payment of Liabilities. Except as set forth in the Merger Agreement,
the Indemnification Agreement, and the Transaction Documents, from and after the
Time of Distribution, (i) Holdings shall, and shall use its reasonable best
efforts to cause its Subsidiaries to pay, perform and discharge in due course
all of the Holdings Liabilities for which such entity is liable, and (ii) the
Company shall, and shall use its reasonable best efforts to cause its
Subsidiaries, other than Subsidiaries that are not wholly owned Subsidiaries of
Holdings or one of its Affiliates to, pay, perform and discharge in due course
all of the Retained Liabilities for which such entity is liable.
ARTICLE V
OTHER AGREEMENTS
5.1 Use of "Insignia," "ESG," or "Insignia/ESG" Names.
(a) From and after the Time of Distribution, Holdings shall have all rights
in and use of the name "Insignia," "ESG," "Insignia/ESG" and all derivatives
thereof. Subject to the terms of this Agreement, no later than the later of (i)
90 days after the Time of Distribution or (ii) 90 days after the Closing Date,
but in no event later than December 31, 1998, the Company agrees (A) to cause
each of the Company and its Subsidiaries (other than Holdings and its
Subsidiaries) to change its name and all of its trade names, trademarks, service
marks and all derivatives thereof, to a name or names which does/do not include
the words "Insignia," "ESG" or "Insignia/ESG" and is/are not confusingly similar
to the words "Insignia," "ESG," "Insignia/ESG" or any other trademarks, service
marks, trade names or logos or all derivatives thereof used by the Holdings
Companies, (B) to cause the word "Insignia," "ESG," and "Insignia/ESG" and all
corporate names, trademarks, service marks, trade names and logos and all
derivatives thereof which are used in any way by the Holdings Companies to be
removed from all marketing, advertising and business materials, including
without limitation, telephone listings, signage, brochures and all other
property used by the Company or any Subsidiary of the Company, except that the
Company and its Subsidiaries may continue to use any remaining stationary,
business cards and other similar property which bears the word "Insignia" until
the stock thereof on hand at the Time of Distribution has been depleted and (C)
to use its reasonable best efforts to cause buildings which the Company or its
Subsidiaries own or in which the Company or its Subsidiaries rent space, to
change their names to names not including any reference to "Insignia," "ESG" or
"Insignia/ESG."
(b) Effective upon the Time of Distribution and continuing until the later
of (i) 90 days after the Time of Distribution or (ii) 90 days after the Closing
Date, but in no event later than December 31, 1998, and subject to the terms of
this Agreement, Holdings hereby grants to the Company, solely for the purpose of
complying with the terms of Section 5.1(a) hereof, a limited, non-exclusive,
royalty free license to use the name "Insignia" and the Holdings corporate name,
trade name, trademark, service mark and logo and all derivatives thereof
(collectively, the "Trade Marks") only in connection with the marketing and sale
of goods and/or residential property and asset management services which are
currently undertaken by the Company and each Subsidiary of the Company (other
than the Holdings Companies). All use of the Trade Marks by the Company shall
inure to the benefit of Holdings.
(c) The Trade Marks shall only be used in the same manner in which they are
currently used by the Company and each of its Subsidiaries. In the event that
the Trade Marks are used in a manner inconsistent
App. A-8
<PAGE> 270
with the terms of this sub-section, Holdings shall have the right to terminate
the limited license of Section 5.1(b) upon ten (10) calendar days' prior notice
to the Company.
5.2 Release of Holdings by the Company's Lenders. As soon as practicable
after the Time of Distribution, the Company shall use its reasonable best
efforts to cause the Company's Lenders (as defined below) to release Holdings
and its Subsidiaries from any and all obligations under the Credit Agreement (as
defined below) and all ancillary agreements and documents related thereto and to
release all related liens on the assets of Holdings and its Subsidiaries within
a reasonable time after the Distribution; provided, however, that at the
Effective Time, the Company or its successors in interest shall cause the
Lenders to release Holdings and its Subsidiaries from any and all obligations
under the Credit Agreement and all ancillary agreements and documents related
thereto and release all related liens on the assets of Holdings and its
Subsidiaries. The "Credit Agreement" shall mean that certain Amended and
Restated Credit Agreement, dated as of March 19, 1997, by and among the Company,
the lenders party thereto (the "Lenders"), First Union National Bank, as
administrative agent, and Lehman Commercial Paper Inc., as syndication agent, as
amended.
5.3 Books and Records. Prior to or as promptly as practicable after the
Time of Distribution, the Company shall deliver to Holdings all corporate books
and records of the Holdings Companies in the possession of the Retained
Companies and the relevant portions (or copies thereof) of all corporate books
and records of the Retained Companies relating directly and primarily to the
Holdings Companies, the Holdings Businesses or the Holdings Liabilities,
including, in each case, all agreements, litigation files and government
filings. From and after the Time of Distribution, all such books, records and
copies shall be the property of Holdings. The Company may retain copies of all
such corporate books and records. Prior to the Distribution, Holdings shall
deliver to the Company all corporate books and records of the Retained Companies
in the possession of any of the Holdings Companies and relevant portions (or
copies thereof) of all corporate books and records of the Holdings Companies
relating directly and primarily to the Retained Companies, the Retained Business
or the Retained Liabilities, including, in each case, all agreements, active
litigation files and government filings. From and after the Time of
Distribution, all such books, records and copies shall be the property of the
Company. Holdings may retain copies of all such corporate books and records.
5.4 Access to Information. Upon reasonable notice, each party shall, and
shall cause its Subsidiaries to, afford to Representatives of the other
reasonable access, during normal business hours throughout the period prior to
and following the Time of Distribution, to all of its properties, books,
contracts, commitments and records (including, but not limited to, Tax Returns)
and, during such period, each party shall, and shall cause its Subsidiaries to,
furnish promptly to the other (i) access to each report, schedule and other
document filed or received by it or any of its Subsidiaries pursuant to the
requirements of federal or state securities laws or filed with or sent to the
United States Securities and Exchange Commission or any other federal or state
regulatory agency or commission and (ii) access to all information concerning
themselves, their Subsidiaries, directors, officers and stockholders and such
other matters as may be reasonably requested by the other party in connection
with any filings, applications or approvals required or contemplated by this
Agreement or for any other reason related to the transactions contemplated by
this Agreement; provided, however, that the foregoing shall apply to Holdings
and the Holding Companies only with respect to information and access necessary
to or required by the Company in preparation of Tax Returns. Nothing in this
Section 5.4 shall require the parties to take any action or furnish any access
or information which would cause or could reasonably be expected to cause the
waiver of any applicable attorney client privilege. In addition, nothing herein
shall require the parties to provide information other than with respect to
itself and its Subsidiaries, or the conduct of their businesses.
5.5 Retention of Records. If any information relating to the businesses,
assets or liabilities of a Retained Company or a Holdings Company is retained by
a Holdings Company or Retained Company, respectively, each of the Company and
Holdings shall, and shall cause the other Retained Companies and Holdings
Companies, respectively, to retain all such information in the Retained
Companies' or Holdings Companies' possession or under its control until such
information is at least ten years old except that if, prior to the expiration of
such period, any Retained Company or Holdings Company wishes to destroy or
dispose of any such information that is at least three years old, prior to
destroying or disposing of any of such information,
App. A-9
<PAGE> 271
(a) the Company or Holdings, on behalf of the Retained Company or the Holdings
Company that is proposing to dispose of or destroy any such information, shall
provide no less than 45 days' prior written notice to the other party,
specifying the information proposed to be destroyed or disposed of, and (b) if,
prior to the scheduled date of such destruction or disposal, the other party
requests in writing that any of the information proposed to be destroyed or
disposed of be delivered to such other party, the Company or Holdings, as
applicable, promptly shall arrange for the delivery of the requested information
to a location specified by, and at the expense of, the requesting party.
5.6 Confidentiality.
(a) Each party hereto shall keep, and shall cause its Representatives to
keep, the other party's Information strictly confidential and will disclose such
Information only to such of its Representatives who need to know such
Information and who agree to be bound by this Section 5.6 and not to disclose
such Information to any other Person. Without the prior written consent of the
other party, neither party nor any of their respective Representatives shall
disclose the other party's Information to any Person or entity except as may be
required by law or judicial process and in accordance with this Section 5.6.
(b) In the event that either party or any of its Representatives receives a
request or is required by law or judicial process to disclose to a court or
other tribunal all or any part of the other party's Information, the receiving
party or its Representatives shall promptly notify the other party of the
request in writing, and consult with and assist the other party in seeking a
protective order or request for other appropriate remedy. In the event that such
protective order or other remedy is not obtained or the other party waives
compliance with the terms hereof, such receiving party or its Representatives,
as the case may be, shall disclose only that portion of the Information or facts
which, in the written opinion of the receiving party's outside counsel, is
legally required to be disclosed, and will exercise its respective reasonable
best efforts to assure that confidential treatment will be accorded such
Information or facts by the Persons or entities receiving the same. The
providing party will be given an opportunity to review the Information or facts
prior to disclosure.
5.7 Listing on NYSE. Holdings shall use its reasonable best efforts to
list the shares of Holdings Common Stock to be issued pursuant to the
Distribution on the NYSE.
5.8 Further Assurances. The parties agree that if, after the Time of
Distribution, a Holdings Company or a Retained Company holds assets which by the
terms hereof or of the Merger Agreement were intended to be assigned and
transferred to, or retained by, a Retained Company or a Holdings Company,
respectively, each of Holdings and the Company shall, and shall cause the other
Holdings Companies and Retained Companies, respectively, at their expense, to
take all commercially reasonable actions required promptly to assign and
transfer or cause to be assigned and transferred such assets to the applicable
Holdings Company or Retained Company, without the payment of additional
consideration, and the parties agree that the transferring Holdings Company or
Retained Company, as applicable, will hold such assets as agent for the sole
benefit of the transferee Retained Company or Holdings Company, as applicable,
and all income and risk of loss of the transferred assets to the Time of
Distribution shall be for the account of the intended owner. Each of the parties
hereto, at its own cost and expense, promptly shall, or shall cause its
Subsidiaries to, execute such documents (the "Transaction Documents") and take
such further actions as may be reasonably required or desirable to carry out the
provisions hereof and to consummate the transactions contemplated hereby. As
used herein, the term "Transaction Documents" includes, but is not limited to,
the Technical Services Agreement.
5.9 Treatment of Certain Participation Interests.
(a) From and after the Time of Distribution, the Company promptly shall pay
to Holdings that percentage of all Proceeds received by the Company or any of
its Affiliates, or their respective successors and assigns, from the respective
Residential Joint Venture Entities and the obligations known as the REMIC in
accordance with Holdings' applicable Participation Interest.
(b) Effective at the Time of Distribution and without further action by the
Company or Holdings, the Company hereby assigns to Holdings, and Holdings hereby
assumes, the Company's duties, obligations and liabilities arising from or
relating to the Incentive Award Letters (as defined below). The Company agrees
to
App. A-10
<PAGE> 272
use its reasonable best efforts to obtain the consent of the other parties to
the Incentive Award Letters to said assignments and assumptions and to the
release of the Company from its duties, obligations and liabilities arising from
or relating to the Incentive Award Letters. The "Incentive Award Letters" shall
mean all of the agreements pursuant to which the Company has granted to any
officer or employee of the Company any right to receive a portion of the
Proceeds or any member or partnership interest, including, but not limited to,
the letter agreements listed on Schedule 5.9(b) hereto.
(c) The Company agrees that in the event the Company acquires additional
membership interests or partnership units (the "Additional Interests") in any
Residential Joint Venture Entity after the Time of Distribution which, together
with interests or units owned by the Company at the Time of Distribution, would
constitute a majority of the interests or units of such Residential Joint
Venture Entity, the Company shall pay Holdings an amount equal to the amount
Holdings would have received if such Residential Joint Venture Entity had sold
all of its assets for an aggregate price equal to the per unit price paid by the
Company for the Additional Interests multiplied by the total number of issued
and outstanding membership interests or partnership units of such Residential
Joint Venture Entity.
5.10 Cooperation. The parties shall cooperate with each other in all
reasonable respects to ensure (a) that the Distribution and the assumption (to
the extent necessary) of the Retained Liabilities and of the Holdings
Liabilities are consummated in accordance with the terms hereof, (b) the
retention by the Company of the Retained Business, including, without
limitation, allocating rights and obligations under Contracts, if any, of the
Retained Companies or the Holdings Companies that relate to the Retained
Business, and (c) the retention by Holdings of the Holdings Businesses,
including, without limitation, allocating rights and obligations under
Contracts, if any, of the Holdings Companies or the Retained Companies that
relate to the Holdings Businesses.
5.11 Assumption of Certain Contracts by Holdings. At the Time of
Distribution, the Company will, and will cause its Subsidiaries (other than
Holdings and its Subsidiaries) to, assign to Holdings, and Holdings will assume,
all rights, liabilities and obligations attributable to (i) Holdings Employees
under their respective employment, consulting and severance agreements with the
Company, including, but not limited to, the Contracts listed in Schedule 5.11
hereto, and (ii) all other Contracts relating to the Holdings Businesses,
including, but not limited to, the Contracts listed in Schedule 5.11 hereto. The
Company will use its reasonable best efforts to obtain the consent of the other
parties to the aforementioned Contracts to the assignment to Holdings and to the
substitution of Holdings for the Company as a party thereto.
5.12 Payments With Respect to Consulting Agreements; Restricted Stock;
Stock Options.
(a) From and after the Time of Distribution, in the event that the Company
for any reason does not make a payment to a signatory to any of the employment
agreements listed in Schedule 5.12(a) hereto (the "Employment Agreements")
pursuant to an Employment Agreement, the Company shall immediately make such
payment to Holdings.
(b) From and after the Time of Distribution, in the event that the Company
receives any payment (whether principal or interest) on a loan made by the
Company pursuant to a Employment Agreement, the Company shall assign and
transfer such loan payment to Holdings within ten days of the receipt thereof.
(c) From and after the Time of Distribution, in the event the Company for
any reason does not cause the shares of restricted stock identified in Schedule
5.12(c) (the "Restricted Stock") to vest in the holder thereof at the times set
forth in the terms of grant of such Restricted Stock, the Company shall
immediately pay to Holdings in cash an amount equal to the fair market value of
the shares of Restricted Stock which did not so vest, determined as of the date
on which such shares of Restricted Stock were to vest as if they had so vested
and were freely transferable.
(d) From and after the Time of Distribution, if the employment of any
Covered Person (as defined in Section 2.1 of the Merger Agreement) should
terminate prior to the vesting of all options to purchase shares of Company
Common Stock held by such Covered Person, then the Company shall, promptly after
such termination, pay to either such Covered Person or Holdings an amount equal
to the "in the money" spread value of such remaining unvested options as of the
Time of Distribution.
App. A-11
<PAGE> 273
5.13 Conflicting Terms. The terms of this Agreement shall continue
unabridged at and after the Effective Time, except that at and after the
Effective Time, in the event that there are any conflicts between the terms of
this Agreement on the one hand and the terms of the Merger Agreement and the
Indemnification Agreement on the other hand, the terms of the Merger Agreement
and the Indemnification Agreement shall control with respect to such
inconsistent terms.
5.14 Performance of Services. Beginning at the Time of Distribution, (i)
the Company will provide, or cause one or more of its Subsidiaries to provide,
to Holdings or another member of the Holdings Companies computer services and
data processing for accounting and payroll functions at the Company's actual
direct cost through December 31, 1998 and on a month-to-month basis thereafter
pursuant to a Technical Services Agreement, dated as of June 29, 1998, by and
among the Company, Holdings and AIMCO, as amended (the "Technical Services
Agreement"); and (ii) Holdings will continue to provide, or cause one or more of
its Subsidiaries to continue provide, to the Company or one or more of its
Subsidiaries management services for certain properties owned by partnerships
whose general partners are Affiliates of the Company on substantially the same
terms and conditions as management agreements currently in effect.
ARTICLE VI
INDEMNIFICATION AND RELEASES
6.1 Mutual Release. Effective as of the Time of Distribution and except as
otherwise specifically set forth in this Agreement or the Transaction Documents,
the Merger Agreement or the Indemnification Agreement, each of the Company, on
the one hand, and Holdings, on the other hand, releases and forever discharges
the other and its affiliates, and its and their directors, officers, employees
and agents of and from all debts, demands, actions, causes of action, suits,
accounts, covenants, contracts, agreements, damages, and any and all claims,
demands and liabilities whatsoever of every name and nature, both in law and in
equity, against such other party or any of its assigns, which the releasing
party has or ever had, which arise out of or relate to events, circumstances or
actions taken by such other party prior to the Time of Distribution; provided,
however, that the foregoing general release shall not apply to this Agreement,
the Transaction Documents, the Merger Agreement or the Indemnification Agreement
or the transactions contemplated hereby or thereby and shall not affect either
party's right to enforce this Agreement or the Transaction Documents, the Merger
Agreement, the Indemnification Agreement or any other agreement contemplated
hereby or thereby in accordance with its terms. Each party understands and
agrees that, except as otherwise specifically provided herein or in the
Transaction Documents, the Merger Agreement or the Indemnification Agreement,
neither the other party nor any of its Subsidiaries is, in this Agreement or any
other agreement or document, representing or warranting to such party in any way
as to the assets, business or Liabilities transferred or assumed as contemplated
hereby or thereby or as to any consents or approvals required in connection with
the consummation of the transactions contemplated by this Agreement, the
Transaction Documents, the Merger Agreement or the Indemnification Agreement.
6.2 Indemnification by the Company. Except as otherwise expressly set
forth in the Merger Agreement, the Indemnification Agreement, and the
Transaction Documents, the Company shall indemnify, defend and hold harmless
Holdings and each of its Subsidiaries, and each of their respective directors,
officers, employees, agents and Affiliates, and each of the heirs, executors,
successors and assigns of any of the foregoing (the "Holdings Indemnities") from
and against the Retained Liabilities and any and all losses, Liabilities and
damages, including the costs and expenses of any and all actions, threatened
actions, demands, assessments, judgments, settlements and compromises relating
thereto and attorneys' fees and any and all expenses whatsoever reasonably
incurred in investigating, preparing or defending against any such actions or
threatened actions (collectively, "Holdings Indemnifiable Losses" and,
individually, a "Holdings Indemnifiable Loss") of the Holdings Indemnitees
arising out of or due to the failure or alleged failure of the Company or any of
its Subsidiaries to pay, perform or otherwise discharge in due course any of the
Retained Liabilities.
6.3 Indemnification by Holdings. Except as otherwise expressly set forth
in the Merger Agreement, the Indemnification Agreement and the Transaction
Documents, Holdings shall indemnify, defend and hold harmless the Company and
each of its Subsidiaries, and each of their directors, officers, employees,
agents and
App. A-12
<PAGE> 274
Affiliates and each of the heirs, executors, successors and assigns of any of
the foregoing (the "Company Indemnitees") from and against the Holdings
Liabilities and any and all losses, Liabilities and damages, including the costs
and expenses of any and all actions, threatened actions, demands, assessments,
judgments, settlements and compromises relating thereto and attorneys' fees and
any and all expenses whatsoever reasonably incurred in investigating, preparing
or defending against any such actions or threatened actions (collectively,
"Company Indemnifiable Losses" and, individually, a "Company Indemnifiable
Loss") of the Company Indemnitees arising out of or due to the failure or
alleged failure of Holdings or any of its Affiliates to pay, perform or
otherwise discharge in due course any of the Holdings Liabilities. The "Holdings
Indemnifiable Losses" and the "Company Indemnifiable Losses" are collectively
referred to as the "Indemnifiable Losses."
6.4 Insurance Proceeds; Tax Benefits; Mitigation. The amount which any
party (an "Indemnifying Party") is or may be required to pay to any other Person
(an "Indemnitee") pursuant to Sections 6.2 or 6.3 shall be reduced (including
retroactively) by (i) any insurance proceeds or other amounts actually recovered
by or on behalf of such Indemnitee in reduction of the related Indemnifiable
Loss and (ii) any Tax benefits realized or realizable by such Indemnitee based
on the present value thereof by reason of such loss and shall be increased by
any Tax liability incurred by such Indemnitee based on such indemnity payment.
If an Indemnitee shall have received the payment required by this Agreement from
an Indemnifying Party in respect of an Indemnifiable Loss and shall subsequently
actually receive insurance proceeds, Tax benefits or other amounts in respect of
such Indemnifiable Loss as specified above, then such Indemnitee shall pay to
such Indemnifying Party a sum equal to the amount of such insurance proceeds,
Tax benefits or other amounts actually received. The Indemnitee shall take all
reasonable steps to mitigate all Losses, including availing itself of any
defenses, limitations, rights of contribution, claims against third parties and
other rights at law (it being understood that any out-of-pocket costs paid to
third parties in connection with such mitigation shall constitute Losses), and
shall provide such evidence and documentation of the nature and extent of any
Loss as may be reasonably requested by the Indemnifying Party.
6.5 Procedure for Indemnification.
(a) If an Indemnitee shall receive notice or otherwise learn of the
assertion by a person (including any governmental entity) who is not a party to
this Agreement or to any of the Transaction Documents of any claim or of the
commencement by any such Person of any action (a "Third-Party Claim") with
respect to which an Indemnifying Party may be obligated to provide
indemnification pursuant to this Agreement, such Indemnitee shall give such
Indemnifying Party written notice thereof promptly after becoming aware of such
Third-Party Claim; provided, however, that the failure of any Indemnitee to give
notice as required by this Section 6.5 shall not relieve the Indemnifying Party
of its obligations under this Article VI, except to the extent that such
Indemnifying Party is prejudiced by such failure to give notice. Such notice
shall describe the Third-Party Claim in reasonable detail, and shall indicate
the amount (estimated if necessary) of the Indemnifiable Loss that has been or
may be sustained by such Indemnitee.
(b) An Indemnifying Party may elect to defend or to seek to settle or
compromise, at such Indemnifying Party's own expense and by such Indemnifying
Party's own counsel reasonably acceptable to the Indemnitee, any Third-Party
Claim, provided that the Indemnifying Party must confirm in writing that it
agrees that the Indemnitee is entitled to indemnification hereunder in respect
of such Third-Party Claim. Within 30 days of the receipt of notice from an
Indemnitee in accordance with Section 6.5(a) (or sooner, if the nature of such
Third-Party Claim so requires), the Indemnifying Party shall notify the
Indemnitee of its election whether to assume responsibility for such Third-Party
Claim (provided that if the Indemnifying Party does not so notify the Indemnitee
of its election within 30 days after receipt of such notice from the Indemnitee,
the Indemnifying Party shall be deemed to have elected not to assume
responsibility for such Third-Party Claim), and such Indemnitee shall cooperate
in the defense or settlement or compromise of such Third-Party Claim. After
notice from an Indemnifying Party to an Indemnitee of its election to assume
responsibility for a Third-Party Claim, such Indemnifying Party shall not be
liable to such Indemnitee under this Article VI for any legal or other expenses
(except expenses approved in advance by the Indemnifying Party) subsequently
incurred by such Indemnitee in connection with the defense thereof; provided,
however, that if the defendants in any such claim include both the Indemnifying
Party and one or more Indemnitees and in such Indemnitees'
App. A-13
<PAGE> 275
reasonable judgment there exists a conflict of interest between such Indemnitees
and the Indemnifying Party, such Indemnitees shall have the right to employ
separate counsel and in that event the reasonable fees and expenses of such
separate counsel (but not more than one separate counsel reasonably satisfactory
to the Indemnifying Party) shall be paid by such Indemnifying Party. If an
Indemnifying Party elects not to assume responsibility for a Third-Party Claim
(which election may be made only in the event of a good faith dispute that a
claim was inappropriately tendered under Section 6.2 or 6.3, as the case may be)
such Indemnitee may defend or (subject to the following sentence) seek to
compromise or settle such Third-Party Claim. Notwithstanding the foregoing, an
Indemnitee may not settle or compromise any Third-Party Claim without prior
written notice to the Indemnifying Party, which shall have the option within
fifteen days following the receipt of such notice (i) to disapprove the
settlement and assume all past and future responsibility for the claim,
including reimbursing the Indemnitee for prior expenditures in connection with
the claim, or (ii) to disapprove the settlement and continue to refrain from
participation in the defense of the claim, in which event the Indemnifying Party
shall have no further right to contest the amount or reasonableness of the
settlement if the Indemnitee elects to proceed therewith, or (iii) to approve
the amount of the settlement, reserving the Indemnifying Party's right to
contest the Indemnitee's right to indemnity, or (iv) to approve and agree to pay
the settlement. In the event the Indemnifying Party makes no response to such
written notice from the Indemnitee, the Indemnifying Party shall be deemed to
have elected option (ii).
(c) If an Indemnifying Party chooses to defend or to seek to compromise any
Third-Party Claim, the Indemnitee shall make available to such Indemnifying
Party any personnel and any books, records or other documents within its control
or which it otherwise has the ability to make available that are necessary or
appropriate for such defense.
(d) Notwithstanding anything else in this Section 6.5 to the contrary, an
Indemnifying Party shall not settle or compromise any Third-Party Claim unless
(i) such settlement or compromise contemplates as an unconditional term thereof
the giving by such claimant or plaintiff to the Indemnitee of a written release
from all liability in respect of such Third-Party Claim and (ii) such settlement
does not provide for any non-monetary relief by Indemnitee unless Indemnitee
consents thereto. In the event the Indemnitee shall notify the Indemnifying
Party in writing that such Indemnitee declines to accept any such settlement or
compromise, such Indemnitee may continue to contest such Third-Party Claim, free
of any participation by such Indemnifying Party, at such Indemnitee's sole
expense. In such event, the obligation of such Indemnifying Party to such
Indemnitee with respect to such Third-Party Claim shall be equal to (i) the
costs and expenses of such Indemnitee prior to the date such Indemnifying Party
notifies such Indemnitee of such offer of settlement or compromise (to the
extent such costs and expenses are otherwise indemnifiable hereunder) plus (ii)
the lesser of (A) the amount of any offer of settlement or compromise which such
Indemnitee declined to accept and (B) the actual out-of-pocket amount such
Indemnitee is obligated to pay subsequent to such date as a result of such
Indemnitee's continuing to pursue such Third-Party Claim.
(e) Any claim on account of an Indemnifiable Loss which does not result
from a Third-Party Claim shall be asserted by written notice given by the
Indemnitee to the applicable Indemnifying Party. Such Indemnifying Party shall
have a period of 30 days after the receipt of such notice within which to
respond thereto. If such Indemnifying Party does not respond within such 30-day
period, such Indemnifying Party shall be deemed to have refused to accept
responsibility to make payment. If such Indemnifying Party does not respond
within such 30-day period or rejects such claim in whole or in part, such
Indemnitee shall be free to pursue such remedies as may be available to such
party under applicable law or under this Agreement, the Merger Agreement or the
Indemnification Agreement.
(f) In addition to any adjustments required pursuant to Section 6.4, if the
amount of any Indemnifiable Loss shall, at any time subsequent to the payment
required by this Agreement, be reduced by recovery, settlement or otherwise, the
amount of such reduction, less any expenses incurred in connection therewith,
shall promptly be repaid by the Indemnitee to the Indemnifying Party.
(g) In the event of payment by an Indemnifying Party to any Indemnitee in
connection with any Third-Party Claim, such Indemnifying Party shall be
subrogated to and shall stand in the place of such Indemnitee
App. A-14
<PAGE> 276
as to any events or circumstances in respect of which such Indemnitee may have
any right or claim relating to such Third-Party Claim against any claimant or
plaintiff asserting such Third-Party Claim. Such Indemnitee shall cooperate with
such Indemnifying Party in a reasonable manner, and at the cost and expense of
such Indemnifying Party, in prosecuting any subrogated right or claim.
6.6 Remedies Cumulative. The remedies provided in this Article VI shall be
cumulative and shall not preclude assertion by any Indemnitee of any other
rights or the seeking of any and all other remedies against any Indemnifying
Party.
6.7 Survival of Indemnities. The obligations of each of Holdings and the
Company under this Article VI shall survive the sale or other transfer by it of
any assets or businesses or the assignment by it of any Liabilities, with
respect to any Indemnifiable Loss of the other related to such assets,
businesses or Liabilities.
6.8 Tax Matters. Notwithstanding anything to the contrary in this Article
VI, any claim for indemnification with respect to any Liabilities which are Tax
liabilities of the Company and Holdings shall be governed by the terms and
provisions of Article III hereof.
ARTICLE VII
EMPLOYEE MATTERS
7.1 Employees. Immediately prior to, and subject to, the Distribution, the
Company shall transfer to Holdings (or the Holdings Companies) the employees
whose employment relates to the Holdings Companies and Holdings Businesses, as
determined by the Company in its sole discretion, so that no such employee who
becomes employed by Holdings experiences any termination or other interruption
in employment. The employees who become employees of Holdings upon the
Distribution shall not be employees of the Company or any Subsidiary of the
Company at the Time of Distribution, except as otherwise agreed to in writing by
the parties. Effective as of the Time of Distribution, (a) Retained Employees
shall remain or become employees of the Retained Companies in the same
capacities as then held by such employees (or in such other capacities and upon
such terms and conditions as the Company shall determine in its sole discretion)
and (b) Holdings Employees shall remain or become employees of the Holdings
Companies in the same capacities as then held by such employee (or in such other
capacities and upon such terms and conditions as Holdings shall determine in its
sole discretion). Nothing contained in this Section 7.1 shall confer on any
Retained Employee or any Holdings Employee any right to continued employment
after the Time of Distribution, and such employees shall continue to be employed
"at-will." At and from the Time of Distribution, except as set forth in this
Article VII, Holdings shall assume all obligations relating to all employees,
including the Former Employees and employees of the Holdings Companies, arising
prior to or at the Time of Distribution or, if the Merger is consummated, prior
to or at the Effective Time, including all obligations or liabilities relating
to employee benefits, health insurance and severance, if any.
7.2 Employee Benefits. Without limiting the generality of Section 7.1
above:
(a) Accrued Vacation. The Company and Holdings agree that all accrued
vacation for Retained Employees on and after the Time of Distribution shall be
the Company's obligation; provided, however, that if a Retained Employee (other
than on-site employees) is terminated or quits prior to December 31, 1998 (or
December 31, 1999 if the Closing Date occurs in 1999) and such Retained Employee
(other than on-site employees) was entitled to accrued vacation relating to his
employment prior to the Effective Time (the "Holdings Vacation Obligation") at
the time of his departure and received a cash payment for such Holdings Vacation
Obligation, Holdings shall promptly reimburse the Company for such amount.
(b) 401(k) Plan and Restoration Plan. Immediately prior to, and subject to,
the Distribution, the Company shall cause a "spin-off" of the assets and
liabilities of the Company's 401(k) Retirement Plan (the "Existing 401(k) Plan")
resulting in the division of the Existing 401(k) Plan into two separate,
identical, component plans and trusts, in accordance with applicable law
(including, without limitation, Section 414(l) of the Code), covering,
respectively, (i) the Retained Employees (and their beneficiaries) (the "Company
401(k) Plan") and (ii) all other Existing 401(k) Plan participants (and their
beneficiaries) (the "Holdings
App. A-15
<PAGE> 277
40l(k)Plan"). Immediately prior to, and subject to, the Distribution, the
Company shall cause a "spin-off" of the assets and liabilities of the Company
401(k) Restoration Plan (the "Existing Restoration Plan") resulting in the
division of the Existing Restoration Plan into two separate, identical component
plans and trusts, covering, respectively, (i) the Retained Employees (and their
beneficiaries) (the "Company Restoration Plan") and (ii) all other Existing
Restoration Plan participants (and their beneficiaries) (the "Holdings
Restoration Plan"). Immediately prior to, and subject to, the Distribution, the
Company shall cause the Holdings 401(k) Plan and the Holdings Restoration Plan
to be transferred to Holdings but shall retain the Company 401(k) Plan and the
Company Restoration Plan. Prior to the Distribution, the Company shall draft the
appropriate documents and us its reasonable best efforts to take all actions
necessary, to the extent possible, to effectuate the intent of this Section
7.2(b).
(c) Welfare Plans. Except as otherwise provided herein, immediately prior
to, and subject to, the Distribution, the Company shall cause all Company
employee benefit plans that are employee welfare benefit plans, as defined in
Section 3(l) of ERISA (the "Existing Welfare Plans"), to be divided into
separate, identical component plans covering, respectively, (i) the Retained
Employees (and their beneficiaries) (the "Company Welfare Plans") and (ii) all
other Existing Welfare Plan participants, including without limitation,
participants (and their beneficiaries) who experienced a "qualifying event" for
purposes of the group health plan continuation coverage requirements of Section
4980 of the Code and Title I, Subtitle B of ERISA prior to the Closing Date
regardless of when an election for continuation coverage is made by the
participant (the "Holdings Welfare Plans"). Notwithstanding the foregoing, the
Company shall cause the Company Long Term Disability Plan (the "Existing LTD
Plan") to be divided into two separate, identical component plans covering,
respectively, (i) employees who work for the Company after the Distribution and
employees who were working in the United States based multifamily apartment
business of the Company and the Subsidiaries not set forth on Section 4.2(h) of
the Company Disclosure Letter at the time they became eligible for benefits
under the Existing LTD Plan (the "Company LTD Plan") and (ii) all other
participants in the Existing LTD Plan (the "Holdings LTD Plan"). Without
limiting the generality of the foregoing, immediately prior to, and subject to,
the Distribution, the Company shall cause a "spin-off" of the assets and
liabilities of each of the Company Voluntary Employees' Beneficiary Association
and the Company's existing Flexible Spending Plan (which contains premium,
dependent care and medical health reimbursement component parts) (respectively,
the "VEBA" and the "Flex Plan") resulting in the division of each of the VEBA
and the Flex Plan into separate, identical, component plans and trusts, in
accordance with applicable law, covering, respectively, (i) the Retained
Employees (and their beneficiaries) (respectively, the "Company VEBA" and
"Company Flex Plan") and (ii) all other participants (and their beneficiaries)
in the VEBA and the Flex Plan (respectively, the "Holdings VEBA" and the
"Holdings Flex Plan"). Immediately prior to and subject to, the Distribution,
the Company shall cause the Holdings Welfare Plans, Holdings LTD Plan, Holdings
VEBA and Holdings Flex Plan to be transferred to Holdings but shall retain the
Company Welfare Plans, Company LTD Plan, Company VEBA and Company Flex Plan.
Prior to the Distribution, the Company shall draft the appropriate documents and
use its reasonable best efforts to take all actions necessary, to the extent
possible, to effectuate the intent of this Section 7.2(c).
(d) Stock Plans. Immediately prior to, and subject to, the Distribution,
the Company shall cause Holdings to assume all options and awards of restricted
stock (whether vested or unvested) held under the Company Stock Plans by
employees of the Company who become employees of Holdings and convert such
options and awards of restricted stock into an option to purchase shares of
common stock of Holdings or an award of restricted shares of common stock of
Holdings, as applicable, as the Company deems appropriate to reflect the
Distribution. Prior to the Distribution, the Company shall draft the appropriate
documents and use its reasonable best efforts to take all actions necessary, to
the extent possible, to effectuate the intent of this Section 7.2(d).
(e) Continuation of Group Health Plan Coverage. Holdings and the Holdings
Companies shall be responsible for all obligations and liabilities relating to
or arising under the group health plan continuation coverage requirements of
Section 4980B of the Code and Title I, Subtitle B of ERISA for employees
employed by the Company prior to the Closing Date other than the Retained
Employees. Holdings and the Holdings Companies shall also be responsible for any
liabilities or obligations for severance obligations relating
App. A-16
<PAGE> 278
to employees of the Company employed by the Company prior to the Closing Date
other than the Retained Employees.
7.3 Other Liabilities and Obligations. Effective as of the Time of
Distribution, Holdings shall assume and be solely responsible for (i) all
liabilities and obligations related to the Holdings Employees and (ii) except as
specifically provided in this Article VII and except to the extent otherwise
provided in this Agreement, the Merger Agreement, the Indemnification Agreement
or the Transaction Documents, all liabilities and obligations related to the
Retained Employees that were incurred on or before the Time of Distribution.
Effective as of the Time of Distribution, the Company shall assume and be solely
responsible for (i) all liabilities and obligations related to the Retained
Employees incurred after the Time of Distribution, (ii) all holiday, vacation
and sick day benefits of the Retained Employees accrued as of the Time of
Distribution, except as otherwise provided for in this Article VII, and (iii)
all other liabilities, including, without limitation, for worker's compensation
and medical benefits. For purposes of this Section 7.3, a liability is
"incurred" on either the date the event giving rise to the liability occurs or,
if the liability is related to more than one event, the date the first event to
which the liability relates occurs. Notwithstanding the foregoing, deferred
directors' fees shall be the sole responsibility of Holdings.
7.4 Actions by Holdings. Any action required to be taken under this
Article VII may be taken by any member of the Holdings Companies.
ARTICLE VIII
CONDITIONS
The obligations of the Company and Holdings to consummate the Distribution
shall be subject to the fulfillment of each of the following conditions:
8.1 Stockholder Approval. The stockholders of the Company shall have
approved the Distribution.
8.2 Opinion of Tax Counsel. The Company shall have received an opinion of
Rogers & Wells LLP (or another recognized law firm acceptable to the recipient)
that, based upon certificates and letters acceptable to Rogers & Wells LLP (or
another nationally recognized law firm acceptable to the Company) dated as of
the Closing Date, the Distribution should qualify as a tax-deferred distribution
to the Company's stockholders (with customary exceptions, assumptions and
qualifications and based on customary representations).
8.3 Certain Transactions. The actions provided for in Section 4.1 shall
have been consummated in accordance with Section 4.1 in all material respects.
8.4 Adequate Surplus. The Boards of Directors of the Company and Holdings
shall be reasonably satisfied that, after giving effect to the Distribution, (i)
the Company will not be insolvent and will not have unreasonably small capital
with which to engage in its businesses and (ii) the Company's surplus will be
sufficient to permit, without violation of Section 170 of the DGCL, the
Distribution.
8.5 Release of Obligations. The Boards of Directors of the Company and
Holdings shall be reasonably satisfied that the obligations of Holdings and its
Subsidiaries under the Credit Agreement and the related liens on the assets of
Holdings and its Subsidiaries will be released within a reasonable time after
the Distribution.
8.6 Bank Consent. The Lenders under the Credit Agreement shall have
consented to the Distribution and the other transactions provided for herein on
terms acceptable to the Boards of Directors of the Company and Holdings.
ARTICLE IX
MISCELLANEOUS AND GENERAL
9.1 Termination. This Agreement may be terminated by the Company at any
time prior to the Time of Distribution.
App. A-17
<PAGE> 279
9.2 Effect of Termination. In the event of any termination of this
Agreement pursuant to Section 9.1, no party to this Agreement (or any of its
directors or officers) shall have any liability or further obligation to any
other party.
9.3 Modification or Amendment. The parties hereto may modify or amend this
Agreement by written agreement executed and delivered by authorized officers of
the respective parties.
9.4 Waiver; Remedies. The conditions to the Company's obligation to
consummate the Distribution are for the sole benefit of the Company and may be
waived in writing by the Company in whole or in part to the extent permitted by
applicable law. No delay on the part of any party hereto in exercising any
right, power or privilege hereunder will operate as a waiver thereof, nor will
any waiver on the part of any party hereto of any right, power or privilege
hereunder operate as a waiver of any other right, power or privilege hereunder,
nor will any single or partial exercise of any right, power or privilege
hereunder preclude any other or further exercise thereof or the exercise of any
other right, power or privilege hereunder. Unless otherwise provided, the rights
and remedies herein provided are cumulative and are not exclusive of any rights
or remedies which the parties may otherwise have at law or in equity.
9.5 Counterparts. For the convenience of the parties hereto, this
Agreement may be executed in separate counterparts, each such counterpart being
deemed to be an original instrument, and which counterparts shall together
constitute the same agreement.
9.6 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without reference to its
conflicts of law principles.
9.7 Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the other shall be in writing and shall be
deemed to have been duly given (i) on the date of delivery if delivered by
facsimile (upon confirmation of receipt) or personally, (ii) on the first
business day following the date of dispatch if delivered by Federal Express or
other next-day courier service, or (iii) on the third business day following the
date of mailing if delivered by registered or certified mail, return receipt
requested, postage prepaid. All notices hereunder shall be delivered as set
forth below, or pursuant to such other instructions as may be designated in
writing by the party to receive such notice:
If to the Company before the Effective Time:
Insignia Financial Group, Inc.
102 Woodmont Blvd.
Suite 400
Nashville, TN 37205
Attn: Frank Garrison
Telecopy: (615) 783-1021
Telephone: (615) 783-1099
with a copy (which shall not constitute notice) to:
Proskauer Rose LLP
1585 Broadway
New York, New York 10036-8299
Attn: Arnold S. Jacobs, Esq.
Telecopy: (212) 969-2900
Telephone: (212) 969-3210
App. A-18
<PAGE> 280
If to the Company on or after the Effective Time, to the above address for
the Company (but not to Proskauer Rose LLP) and to:
Apartment Investment and Management Company
1873 South Bellaire Street, 17th Floor
Denver, Colorado 80222
Attn: Peter K. Kompaniez
Telecopy: (303) 757-8735
Telephone: (303) 757-8101
with a copy (which shall not constitute notice) to:
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue
Los Angeles, CA 90071
Attn: Thomas C. Janson, Esq.
Telecopy: (213) 687-5221
Telephone: (213) 687-5600
If to Insignia/ESG Holdings, Inc., to:
Insignia/ESG Holdings, Inc.
200 Park Avenue
New York, New York 10166
Attn: Adam B. Gilbert, Esq.
Telecopy: (212) 984-6655
Telephone: (212) 984-6644
with a copy (which shall not constitute notice) to:
Proskauer Rose LLP
1585 Broadway
New York, New York 10036-8299
Attn: Arnold S. Jacobs, Esq.
Telecopy: (212) 969-2900
Telephone: (212) 969-3210
9.8 Captions. All Article, Section and paragraph captions herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
9.9 No Third Party Beneficiary. This Agreement is for the purpose of
defining the respective rights and obligations of the parties hereto and is not
for the benefit of any employee, creditor or other third party, except as may be
expressly set forth herein.
9.10 Successors and Assigns. No party to this Agreement shall convey,
assign or otherwise transfer any of its rights or obligations under this
Agreement without the express written consent of the other party hereto in its
sole and absolute discretion. Any such conveyance, assignment or transfer
without the express written consent of the other party shall be void ab initio.
No assignment of this Agreement or any rights hereunder shall relieve the
assigning party of its obligations hereunder. Any successor by merger to a party
to this Agreement shall be substituted for such party as a party to this
Agreement, and all obligations, duties and liabilities of the substituted party
under this Agreement shall continue in full force and effect as obligations,
duties and liabilities of the substituting party, enforceable against the
substituting party as a principal, as though no substitution had been made.
9.11 Certain Obligations. Whenever this Agreement requires any of the
Subsidiaries of any party to take any action, this Agreement will be deemed to
include an undertaking on the part of such party to cause such Subsidiary to
take such action.
App. A-19
<PAGE> 281
9.12 Specific Performance. In the event of any actual or threatened
default in, or breach of, any of the terms, conditions and provisions of this
Agreement, the party or parties who are or are to be thereby aggrieved shall
have the right of specific performance and injunctive relief giving effect to
its or their rights under this Agreement, in addition to any and all other
rights and remedies at law or in equity, and all such rights and remedies shall
be cumulative. The parties agree that the remedies at law for any breach or
threatened breach, including monetary damages, are inadequate compensation for
any loss and that any defense in any action for specific performance that a
remedy at law would be adequate is waived.
9.13 Severability. If any provision of this Agreement or the application
thereof to any Person or circumstance is determined by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining provisions
hereof, or the application of such provision to Persons or circumstances other
than those as to which it has been held invalid or unenforceable, shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated thereby, so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner adverse to any
party. Upon any such determination, the parties shall negotiate in good faith in
an effort to agree upon a suitable and equitable substitute provision to effect
the original intent of the parties.
9.14 Jurisdiction. Each of the Company and Holdings hereby (i) consents to
be subject to the jurisdiction of the United States District Court for the
Southern District of New York and the jurisdiction of the courts of the State of
New York in any suit, action or proceeding seeking to enforce any provision of,
or based in any matter arising out of or in connection with, this Agreement or
the transaction contemplated hereby, (ii) agrees that it will not attempt to
deny or defeat such personal jurisdiction by motion or other request for leave
from any such court, (iii) agrees that it will not bring any action relating to
this Agreement or the transactions contemplated hereby in any court other than
the United States District Court for the Southern District of New York or the
courts of the State of New York, (iv) irrevocably waives (x) any objection that
it may have or hereafter have to the changing of venue of any such suit, action
or proceeding in such court and (y) any claim that any such suit, action or
proceeding in any such court has been brought in an inconvenient forum, and (v)
irrevocably consents to the service of any and all process in any such suit,
action or proceeding by the delivery of such process to such party at the
address and in the manner provided in Section 9.7 hereof.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the date first above
written.
INSIGNIA FINANCIAL GROUP, INC.
By:
------------------------------------
Name: Andrew L. Farkas
Title: Chairman, President and
Chief Executive Officer
INSIGNIA/ESG HOLDINGS, INC.
By:
------------------------------------
Name: Stephen B. Siegel
Title: President
App. A-20
<PAGE> 282
SCHEDULE 3.1
Except as otherwise specifically required under the Merger Agreement or the
Indemnification Agreement or as set forth in Section 3.1 of the Agreement to
which this Schedule is annexed, the parties agree to unconditionally assume,
pay, satisfy and discharge the Tax liabilities set forth herein:
Federal Tax Liabilities:
The Company shall be liable for all federal Taxes for periods ending on or
before the Time of Distribution. From and after the Time of Distribution, the
Company shall pay and be liable for all federal income Taxes of it and its
Subsidiaries, and Holdings shall pay and be liable for all federal income Taxes
of it and its Subsidiaries.
State and Local Income or Franchise Tax Liabilities:
The Company shall be liable for all state and local income and franchise
Taxes that relate to any taxable period that ends on or before the Time of
Distribution. For taxable periods that begin on or before the Time of
Distribution and end after the Time of Distribution and for any subsequent
taxable periods, the Company shall pay and be liable for all state and local
income or franchise Taxes of the Company and its Subsidiaries (excluding
Holdings and its Subsidiaries) and Holdings shall pay and be liable for all
state and local income and franchise Taxes of Holdings and its Subsidiaries
(except to the extent of estimated taxes paid on or before the Time of
Distribution and applied to such Taxes).
App. A-21
<PAGE> 283
SCHEDULE 4.1
1. HOLDINGS ENTITIES:
Richard Ellis Group Limited, and all of its subsidiaries
Metropolitan Opportunity Partners, Inc.
Metropolitan Opportunity Partners I, LLC
Insignia RO, Inc. and any subsidiaries thereof
Realty One, Inc.
First Ohio Escrow Corporation, Inc.
First Ohio Mortgage Corporation, Inc.
Corporate Relocation Management, Inc.
Reliance Relocation, Inc.
Insignia EC Corporation
Insignia (UK) Holdings Limited
Compagnia di Amministraziona a Gestioni Immobiliare SPA
S.I.A. Inc.
Insignia Capital Advisors, Inc. (formerly Insignia Mortgage & Investment Co.)*
Insignia Arrow, Inc.
Insignia Residential Group, Inc. (formerly IMS-NY, Inc.) and the following
subsidiaries thereof (all of which are part of the New York Residential
Business)
Kreisel Company, Inc.
Soren Management, Inc.
Insignia Construction Management Services New York, Inc.
Douglas Elliman-Gibbon & Ives, Inc.
Insignia Commercial Investments Group, Inc. and any subsidiaries thereof
Brookhollow Associates, LP
Falcon Gate, Inc.
Velocity One, Inc.
Courtyard Plaza Associates, LP
ICIG 101 Marietta LLC
Lennar Marietta Holdings, Inc.
101 Marietta Street Associates LP
ICIG Airport Technology, LLC
Tech Air Corp.
The Shoppes at Rivergate
Brickyard Investors, LP
ICIG Directives LLC
Sleepy Lake Partners LP
Glades Plaza LP
ICIG Oakhill Directives, LLC
Hiawassee Oaks Partners LP
ICIG Mockingbird LLC
Mockingbird Associates LP
Blackacre Mockingbird, LLC
ICIG Holdings LLC
Missouri Associates LLC
Westport Plaza Associates LLC
- ---------------
* Denotes those entities or their assets that are used in and/or relate to the
multi-family business of the
Company or a Subsidiary of the Company (other than Company's New York
Residential Business), but
which will nonetheless become entities or assets of Holdings.
App. A-22
<PAGE> 284
Barnes Morris, Pardoe & Foster Realty Associates, Inc.
Barnes, Morris, Pardoe & Foster Management Services, LLC
Insignia Rooney Management, Inc.
Insignia Commercial Group West, Inc.
O'Donnell Property Services, Inc.
Insignia/Edward S. Gordon Co. Inc.
ESG Operating Co., Inc.
Insignia/Edward S. Gordon Co., Inc. of Long Island LLC
Rostenberg-Doern Management Corporation
Insignia Commercial Group of Alabama, Inc.
Insignia Commercial Group of California, Inc.
Insignia Commercial Group of Colorado, Inc.
Insignia Commercial Group of Texas, Inc.
Frain, Camins & Swartchild Incorporated
Construction Interiors, Inc.
FC & S Management Company
Goldie Wolfe & Company
Insignia/ESG, Inc.
Insignia Commercial Group, Inc.
IPCG, Inc.
Insignia Retail Group, Inc.
Property Consulting Services, Inc.
Forum Properties, Inc.
Insignia Commercial Management, Inc.
Insignia Transport, Inc.
ICIG Bingham LLC
Bingham Partners, LP
Great American Tower LLC
Scottsdale Property Two LLC
Bingham Property Four LLC
Bingham Property Five LLC
A 50% interest in Market Ventures LLC**
Liquidity Assistance LLC ( except for the class A shares of Angeles Mortgage
Investment Trust)*
RJN Corporation*
IFSE Holdings LLC*
MAP VII Acquisition Corporation*
Metropolitan Acquisition VII LLC*
FMG Acquisition I LLC*
Beattie Place LLC*
Walton Street Capital Acquisition Co., II LLC*
Insignia Development Directives, Inc.
All Commercial Joint Venture Entities
- ---------------
* Denotes those entities or their assets that are used in and/or relate to the
multi-family business of the
Company or a Subsidiary of the Company (other than Company's New York
Residential Business), but
which will nonetheless become entities or assets of Holdings.
App. A-23
<PAGE> 285
2. HOLDINGS ASSETS:
Interests in Development Property
Rights of the Company under any consulting agreement with Balcor*
All rights to the name "Insignia," "Insignia Financial Group, Inc.,"
"Insignia/ESG, Inc." and any derivatives thereof, including trademarks, service
marks, trade names, copyrights, and all related intellectual property*
All rights to the symbol "FFO" on the NYSE*
All assets used in connection with the Insignia division known as Insignia
Financial Services, including, but not limited to, the Legal Department, the
Investment Banking Department, the Securitization Department and the
Co-Investment Group, except to the extent they relate to Retained Employees.*
All assets located at offices where, as of the Effective Time, Holdings has
become or a Holdings entity becomes financially obligated with respect to real
property lease obligations*
All personalty and intellectual property principally utilized by Company
employees who do not become Retained Employees, whether or not employed by
Holdings, including Andrew Farkas, James Aston, Ronald Uretta and Frank
Garrison*
Rights to be assigned by the Company to Holdings arising under
confidentiality, standstill or similar agreements with respect to Holdings or
other Holdings Entities, whether or not Holdings is a party thereto*
Rights to be assigned by the Company to Holdings arising under or the
ability to enforce all employment or similar agreements with respect to Holdings
or other Holdings Entities, whether or not Holdings is a party thereto*
Rights to be assigned by the Company to Holdings arising under or the
ability to enforce all non-competition or similar agreements with respect to
Holdings or other Holdings Entities, whether or not Holdings is a party thereto*
Interests in and rights with respect to OnCor International
"Time Share" or cooperative interest in aircraft generally referred to as
"NetJet'
Investment in Class B Shares of First Winthrop Corp. (subject to the
provisions of Article 7 of the Agreement)*
All of the following in the name of the Company or any subsidiary in which
the Company directly or indirectly owns 80% or more of the equity interest (but
specifically excluding the interest of IPT, IPLP, the IPT GP Entities and any of
the Investment Limited Partnerships, or partnerships owning the Controlled
Properties):
- bank accounts, cash, deposits or cash equivalents*
- earnest money deposits*
- insurance policies in the name of the Company or Subsidiaries of the
Company, including refunds of premiums attributable to periods before the
Effective Time**
- utility deposits, deposits for office leases or similar deposits*
- tax refunds*
- account receivables and notes, except advances made by a general partner
to a limited partnership*
- ---------------
* Denotes those entities or their assets that are used in and/or relate to the
multi-family business of the
Company or a Subsidiary of the Company (other than Company's New York
Residential Business), but
which will nonetheless become entities or assets of Holdings.
App. A-24
<PAGE> 286
- prepaid expenses*
- pre-paid country club dues*
- rights to reimbursements*
Rights to be assigned by the Company to Holdings under indemnification or
similar agreements or provisions in any document in favor of the Company or
Company Subsidiaries*.
Any Assets and related rights and any other assets not currently used in
the residential property management business (but specifically including all
assets used in the New York Residential Business)
Any asset or loan or other obligation pertaining to the Holdings Entities
or the Holdings Assets held directly or indirectly by Insignia Capital
Corporation or any of its subsidiaries (other than the REMIC, inter-company
receivables relating to the multi-family business other than the New York
Residential Business, and IPT stock)*
The interests of the Company, or any of its Subsidiaries including, but not
limited to, Insignia Capital Corporation, in all notes and other obligations
related to Investors First Staged Equity, LP acquired on December 31, 1997 and
generally consisting of an assignment of rights under: Residual Proceeds
Agreement dated July 1, 1993 between VMS Apartment Portfolio Associates II and
the Federal Deposit Insurance Corporation; Residual Proceeds Security Agreement
of even date between Investors First Stage Equity LP and VMS Apartment Portfolio
Associates, Ltd. and the Federal Deposit Insurance Corporation ("FDIC"); Secured
Promissory Note dated September 6, 1984 between VMS Apartment Portfolio
Associates II in the original principal amount of $5,530,961 secured by the
property known as Richardson Highlands situated in the County of Marin in the
State of California; Restated Note dated as of July 1, 1993 between VMS
Apartment Portfolio Associates II and the FDIC in the principal amount of
$8,126,181; Residual Proceeds Agreement dated July 1, 1993 between VMS Apartment
Portfolio Associates III; Secured Promissory Note dated December 6, 1984 in the
original principal amount of $6,196,868; and Restated Note dated as of July 1,
1993 in the principal amount of $8,417,039 executed by VMS Apartments Portfolio
Associates III (collectively, the "IFSE Obligations")*.
All partnership and member interests in the Commercial Joint Venture
Entities.
Memberships in the Commerce Club with respect to employees which do not
become Retained Employees.
Insignia Jacques-Miller, L.P., a Subsidiary of IPT, holds certain Note
Participation Interests with respect to obligations from Northgate, Limited,
River Hill Limited, Chelsea Place, L.P., Eastgreen, Limited, and Lafayette
Square, which shall be treated as follows: These Note Participation Interests
are subject to the right of the Company's Investment Banking Division to receive
an incentive fee equal to 33% of the actual proceeds collected with respect to
such Note Participation Interests. In addition, the Company is obligated to pay
out of such 33% incentive fee, certain incentives to individuals/employees of
the Company. These rights to incentive fees/payments are collectively referred
to as the "Note Participation Incentive Fees" and any amounts thereof related to
collections under the notes underlying the Note Participation Interests which
are collected before Closing are included in the Holdings Assets. Any amounts of
the Note Participation Incentive Fees related to collections under the notes
underlying the same following Closing are not Holdings assets.
All Participation Interests.
- ---------------
* Denotes those entities or their assets that are used in and/or relate to the
multi-family business of the
Company or a Subsidiary of the Company (other than Company's New York
Residential Business), but
which will nonetheless become entities or assets of Holdings.
App. A-25
<PAGE> 287
The Company shall specifically receive the following assets:
- all preferred vendor contracts with HSF, Incorporated.
- the main frame computer in Greenville, S.C., and all software used
exclusively in the multi-family business (other than the New York
Residential Business).
To the extent that any assets of the Company that are not included in
Holdings Assets are assets that were heretofore used by Holdings or any
subsidiary and are necessary for the operation of Holdings' business. Holdings
and the Company shall enter into an agreement reasonably acceptable to each
other with respect to the shared use of such assets.
App. A-26
<PAGE> 288
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Amendment No. 2 to this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized.
INSIGNIA/ESG HOLDINGS, INC.
By: /s/ RONALD URETTA
----------------------------------
Ronald Uretta
Chief Operating Officer
Date: August 7, 1998
<PAGE> 289
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Amended and Restated Agreement and Plan of Merger by and
among Apartment Investment and Management Company, AIMCO
Properties, L.P., Insignia Financial Group, Inc. and
Insignia/ESG Holdings, Inc., dated as of May 26, 1998
(incorporated by reference to Exhibit 2.1 to the
registration statement on Form S-4 (the "Form S-4") filed by
Apartment Investment and Management Company on August 4,
1998)
2.2 Form of Agreement and Plan of Distribution by and between
Insignia Financial Group, Inc. and Insignia/ESG Holdings,
Inc. dated as of , 1998 (incorporated by
reference to Appendix A to the Information Statement
included in this registration statement on Form 10 filed by
Insignia/ESG Holdings, Inc. on August 4 , 1998 (the "Form
10"))
*3.1 Certificate of Incorporation of Insignia/ESG Holdings, Inc.
*3.2 By-laws of Insignia/ESG Holdings, Inc.
10.1 Asset and Stock Purchase Agreement, dated as of June 17,
1996, among Insignia Financial Group, Inc., Insignia Buyer
Corporation, Edward S. Gordon Company Incorporated, Edward
S. Gordon Company of New Jersey, Inc. and Edward S. Gordon
(incorporated herein by reference to Exhibit 10.15 of Form
10-K of Insignia Financial Group, Inc., dated March 24,
1998)
10.2 Stock Purchase Agreement, dated March 19, 1997, by and among
Insignia Commercial Group, Inc., Insignia Financial Group,
Inc., Kirkland B. Armour, Scott J. Brandwein, Harvey B.
Camins, James L. Deiter, Lyan Homewood Fender, Ronald T.
Frain, Jay Hinshaw, Thomas E. Moxley, Robert B. Rosen, James
H. Swartchild, Jr., David Tropp, Gregg F. Witt, Frain,
Camins & Swartchild Incorporated, FC&S Management Company
and Construction Interiors, Incorporated (incorporated
herein by reference to Exhibit 10.22 to Form 10-K of
Insignia Financial Group, Inc. filed March 24, 1998)
10.3 Stock Purchase Agreement, dated as of September 18, 1997, by
and among Insignia Financial Group, Inc., Insignia RO, Inc.,
Joseph T. Aveni, Vincent T. Aveni, James C. Miller, Richard
A. Golbach, Joseph T. Aveni as Trustee of the Joseph T.
Aveni Declaration of Trust dated April 25, 1988, as amended
on August 10, 1995, Vincent T. Aveni as Trustee of the
Vincent T. Aveni Declaration of Trust dated February 11,
1988, as restated on September 14, 1995, Joseph T. Aveni as
Trustee of the Vincent T. Aveni Declaration Trust, dated
July 13, 1994 and Vincent T. Aveni as Trustee of the Joseph
T. Aveni Declaration Trust, dated July 13, 1994
(incorporated herein by reference to Exhibit 10.27 to Form
10-K of Insignia Financial Group, Inc. filed March 24, 1998)
*10.4 Deed of Warranty & Indemnity by and among Insignia Financial
Group, Inc. and each of the Shareholders of Richard Ellis
Group Limited dated February 25, 1998
10.5 Amended and Restated Indemnification Agreement by and
between AIMCO and Insignia/ESG Holdings, Inc. dated as of
May 26, 1998 (incorporated by reference to Exhibit 2.2 to
the Form S-4)
*10.6 Form of Second Amended and Restated Employment Agreement,
dated as of July 31, 1998, by and between Insignia/ESG
Holdings, Inc., Insignia/ESG, Inc. and Stephen B. Siegel
*10.7 Form of Employment Agreement by and between Insignia/ESG
Holdings, Inc. and Ronald Uretta, dated as of August 3, 1998
</TABLE>
<PAGE> 290
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.8 Employment Agreement, dated as of June 17, 1996, by and
among Insignia Financial Group, Inc., Insignia Buyer
Corporation and Edward S. Gordon (incorporated by reference
to Exhibit 10.16 to Form 10-K of Insignia Financial Group,
Inc. dated March 24, 1998)
10.9 Amendment No. 1 to Employment Agreement, dated April 1,
1997, by and among Insignia Financial Group, Inc.,
Insignia/Edward S. Gordon Co., Inc. and Edward S. Gordon
(incorporated by reference to Exhibit 10.24 to Form 10-K of
Insignia Financial Group, Inc. dated March 24, 1998)
10.10 Assignment, Assumption, Consent and Release Agreement by and
among Insignia Financial Group, Inc., Insignia/ESG Holdings,
Inc. and Edward S. Gordon, dated as of July 1, 1998 (Exhibit
A thereto is omitted because it is the same document as
Exhibit 10.7 to this Form 10)
*10.11 Form of Employment Agreement by and between Insignia/ESG
Holdings, Inc. and Andrew L. Farkas dated as of August 3,
1998
*10.12 Form of Employment Agreement by and between Insignia/ESG
Holdings, Inc. and Frank M. Garrison, dated as of August 3,
1998.
*10.13 Form of Employment Agreement by and between Insignia/ESG
Holdings, Inc. and James A. Aston, dated as of August 3,
1998.
*10.14 Insignia/ESG Holdings, Inc. 1998 Stock Incentive Plan
*10.15 Insignia/ESG Holdings, Inc. 1998 Supplemental Stock Purchase
and Loan Program Under the Insignia/ESG Holdings, Inc. 1998
Stock Incentive Plan
*10.16 Insignia/ESG Holdings, Inc. Executive Performance Incentive
Plan
*10.17 Insignia/ESG Holdings, Inc. 1998 Employee Stock Purchase
Plan
*10.18 Form of Indemnification Agreement to be entered into
separately by and between Insignia/ESG Holdings, Inc. and
each of the directors and executive officers listed on the
schedule annexed thereto
*10.19 Technical Services Agreement, dated as of June 29, 1998, by
and among Insignia Financial Group, Inc., Insignia/ESG
Holdings, Inc. and Apartment Investment and Management
Company
*10.20 Amendment No. 1 to Technical Services Agreement, dated as of
July 28, 1998, 1998, by and among Insignia Financial Group,
Inc., Insignia/ESG Holdings, Inc. and Apartment Investment
and Management Company
*21.1 Subsidiaries of Insignia/ESG Holdings, Inc.
*27.1 Financial Data Schedule for the year ended December 31, 1997
and for the three months ended March 31, 1998 (for SEC use
only)
</TABLE>
- ---------------
* Previously Filed
