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UNITED STATES
SECURITIES AND EXCHANGE COMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
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Commission File Number 1-14373
INSIGNIA/ESG HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 56-2084290
(State of Incorporation) (I.R.S. Employer Identification No.)
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)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X .
At September 15, 1998, the Registrant had 21,395,718 shares of Common Stock
outstanding.
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<PAGE>
INSIGNIA/ESG HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Combined Financial Statements (unaudited)................
Condensed Combined Statements of Income for the
Three and Six Months Ended June, 30, 1998 and 1997 ...... 2
Condensed Combined Balance Sheets
as of June 30, 1998 and December 31, 1997............... 3
Condensed Combined Statements of Cash Flows
for the Six Months Ended June 30, 1998 and 1997......... 4
Notes to Condensed Combined Financial Statements............ 5-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 11-14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................... 15
Item 6. Exhibits and Reports on Form 8-K.......................... 15
SIGNATURES ............................................................. 16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
a) Income Statement
INSIGNIA/ESG HOLDINGS, INC.
CONDENSED COMBINED STATEMENTS OF INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Revenues
<S> <C> <C> <C> <C>
Real estate services $124,128 $59,814 $226,639 $103,974
Interest 783 130 1,065 130
Other 87 -- 95 --
124,998 59,944 227,799 104,104
Costs and expenses
Real estate services 110,280 51,169 200,310 89,038
Overhead allocations from Insignia 1,782 1,650 3,528 2,943
Interest 324 -- 706 --
Depreciation and amortization 5,739 3,855 10,923 7,123
118,125 56,674 215,467 99,104
6,873 3,270 12,332 5,000
Equity earnings (loss) (382) 100 (858) 157
Minority interests 113 -- 146 --
Income before income taxes 6,604 3,370 11,620 5,157
Provision for income taxes 2,972 1,347 5,229 2,062
Net income $ 3,632 $ 2,023 $ 6,391 $ 3,095
<FN>
See Notes to Condensed Combined Financial Statements.
</FN>
</TABLE>
<PAGE>
b) Balance Sheet
INSIGNIA/ESG HOLDINGS, INC.
CONDENSED COMBINED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited) (Note)
Assets
<S> <C> <C>
Cash and cash equivalents $ 21,470 $ 9,250
Receivables 112,331 89,662
Mortgage loans held for sale 14,287 11,991
Real estate interests 40,142 19,454
Property and equipment 16,364 11,235
Property management contracts 44,506 48,614
Costs in excess of net assets of
acquired businesses 225,555 138,019
Other assets 11,281 6,269
Total assets $485,936 $334,494
Liabilities and Investment and Net
Advances from Insignia
Liabilities:
Accounts payable $ 12,723 $ 9,673
Commissions payable 54,467 51,285
Accrued and sundry liabilities 56,400 43,811
Notes payable 32,427 20,891
156,017 125,660
Minority interests 268 390
Investment and net advances from
Insignia 329,651 208,444
------- -------
Total liabilities and investment
and net advances from Insignia $485,936 $334,494
======== ========
<FN>
NOTE: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.
See Notes to Condensed Combined Financial Statements.
</FN>
</TABLE>
<PAGE>
c) Statement of Cash Flows
INSIGNIA/ESG HOLDINGS, INC.
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
Operating Activities
<S> <C> <C>
Net income $ 6,391 $ 3,095
Adjustments to reconcile net income
to net cash
Provided by operations:
Depreciation and amortization 10,923 7,123
Equity loss (earnings) 858 (157)
Minority interests (146) --
Foreign currency translation 9 --
Changes in operating assets and
liabilities:
Receivables (254) (9,653)
Other assets (2,611) (1,968)
Accounts payable and accrued
expenses (8,934) 67
Commissions payable 516 8,201
361 3,613
Net cash provided by operating
activities 6,752 6,708
Investing activities
Net additions to property and equipment (5,258) (2,092)
Payments made for acquisition of businesses (51,600) (6,941)
Net increase in mortgage loans held for sale (2,296) --
Proceeds from Balcor property dispositions 196 1,160
Investments in real estate (21,282) (1,984)
Distributions from real estate investments 587 1,472
Advances made under note agreements (2,080) (2,265)
Collections on notes receivable 1,262 752
Net cash used in investing activities (80,471) ( 9,898)
Financing activities
Payments on notes payable (662) --
Proceeds from notes payable 1,660 --
Investment and net advances from Insignia 84,941 8,930
Net cash provided by financing activities 85,939 8,930
Increase in cash and cash equivalents 12,220 5,740
Cash and cash equivalents at beginning of period 9,250 44
Cash and cash equivalents at end of period $21,470 $ 5,784
<FN>
See Notes to Condensed Combined Financial Statements.
</FN>
</TABLE>
<PAGE>
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------------
1. Merger and Distribution
On March 17, 1998, Insignia Financial Group, Inc. ("Insignia") entered into
an Agreement and Plan of Merger (as subsequently amended and restated as of
May 26, 1998, the ("Merger Agreement") with Apartment Investment and
Management Company, a Maryland corporation ("AIMCO"), and AIMCO Properties,
L.P., a Delaware limited partnership, pursuant to which the Company will
merge with and into AIMCO, with AIMCO as the survivor (the "Merger"). The
Merger was approved by the stockholders of Insignia on September 14, 1998
at a Special Meeting of Stockholders.
Prior to the Merger, Insignia will spin off certain of its businesses
through a pro rata distribution (the "Distribution") 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"). Holdings consists of
Insignia/ESG, Inc. ("Insignia/ESG"), Holdings' commercial real estate
services unit, throughout the U.S., and including Richard Ellis Group
Limited ("Richard Ellis") in the United Kingdom, Insignia RE GmbH in
Germany, and the 60% owned Insignia/CAGISA in Italy; Insignia Residential
Group, Inc., a New York based cooperative and condominium management
company; Realty One, Inc., a full service residential real estate brokerage
firm headquartered in Cleveland, Ohio; and other select holdings
(collectively, the "Holdings Businesses"). Following the Merger, Holdings"
will change its name to "Insignia Financial Group, Inc."
Most of Insignia's existing liabilities, other than those directly relating
to the Holdings Businesses, remain with Insignia post 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.
Insignia will effect the Distribution of the Holdings Businesses by
distributing to each record holder of Insignia Common Stock as of September
15, 1998 (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. It is
currently anticipated that the Distribution will be effected on September
21, 1998. The Holdings Common Stock has been approved for listing on the
NYSE under the symbol "IEG."
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
Holdings Common Stock granted under the Holdings 1998 Stock Incentive Plan.
2. Business of Holdings
The Holdings Businesses comprise a fully integrated real estate services
company with operations throughout the United States, the United Kingdom,
Italy and Germany. Holdings provides property management, leasing, tenant
representation, investment sales, asset management, investor services,
consulting, brokerage, development and investment banking services to
owners and users of real estate. In addition, Holdings has substantial
ownership of real estate, primarily investments in partnerships, through
co-investments with institutional partners and property held for
development.
3. Basis of Presentation
These financial statements present the combined financial position, results
of operations and cash flows of the Insignia entities to be spun-off into
Holdings as if Holdings were 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 Holdings Businesses
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 Holdings Businesses 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, real estate services and administrative
expenses, capital expenditures and other cash requirements of the Holdings
Businesses were paid by Insignia and charged directly or allocated to these
entities. The real estate services and administrative expenses, which
included, among other things, investment banking, information technology,
legal, finance, accounting, and facilities, were allocated to Holdings.
These allocations were approximately $3.5 million and $2.9 million for the
six months of 1998 and 1997, respectively. The allocations were based upon
detailed analysis of the operations of Insignia using various methods,
including acquisition activities, employee headcount and estimated
management time devoted to the operations of the Holdings Businesses.
Certain assets and liabilities related to the operations of the Holdings
Businesses are managed and controlled by Insignia on a centralized basis.
Such assets and liabilities have been allocated to Holdings 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.
The accompanying financial statements of Holdings reflect periods during
which its businesses operated as wholly-owned subsidiaries or divisions of
Insignia, and therefore, did not have outstanding shares of capital stock.
As such, actual earnings per share data is not considered to provide
meaningful information about the results of operations of Holdings.
4. Pro Forma Earnings Per Share
Pro forma earnings per share data is presented for the six month periods
ended June 30, 1998 and 1997, as Holdings was not publicly held during
these periods. These per share amounts have been determined based on the
weighted average common shares of Insignia Common Stock, effected for the
two-thirds Distribution. Assumed conversions represent options and warrants
to be assumed by Holdings based on the market value of Insignia Common
Stock for the periods presented, effected for the two-thirds Distribution.
These pro forma results reflect the consummation of the Distribution and
accordingly do not include the pro forma operations of acquired businesses.
The results may not be indicative of the actual results that may have
occurred if Holdings had been operating on a stand-alone basis for the
periods presented.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
(Thousands,except share data)
Basic
<S> <C> <C>
Average common shares outstanding 20,874 19,769
Assumed conversions -- --
Total 20,874 19,769
Net income $ 6,391 $ 3,095
------- -------
Per share amounts - basic $ .31 $ .16
====== ======
Diluted
Average common shares outstanding 20,874 19,769
Assumed conversions 1,142 729
----- ---
Total 22,016 20,498
====== ======
Net income $ 6,391 $ 3,095
------- -------
Per share amounts - diluted $ .29 $ .15
====== ======
</TABLE>
5. Reclassifications
Certain amounts have been reclassified to conform with the current
presentation. These reclassifications have no effect on net income for any
period presented.
6. 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 Form 10-Q
and 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 and six month periods end June 30, 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 in the exhibits to Form 10 of
Holdings filed on August 5, 1998.
7. Financial Accounting Standards
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income ("Statement 130"). Statement 130 establishes
new rules for the reporting and display of comprehensive income and its
components. Statement 130 requires unrealized gains or losses on
available-for-sale securities and foreign currency translation adjustments,
reported separately in shareholders' equity, to be included in other
comprehensive income. Holdings adopted Statement 130 as of January 1, 1998.
The impact of this adoption on net income and shareholders' equity of
Holdings for all periods presented was immaterial.
In 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 retroactively in 1998. Management has not completed
its review of Statement 131, but does not anticipate that the adoption of
this statement will have a significant effect on how Holdings reports
segment disclosures. Holdings currently operates in principally two
business segments, commercial and residential services.
In 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5"),
which is effective for financial statements for fiscal years beginning
after December 15, 1998. SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Initial application should
be reported as the cumulative effect of a change in accounting principle
and expensed in the first quarter in the year of adoption. At June 30,
1998, Holdings had no amounts capitalized as organizational costs that
would be affected by the requirements of SOP 98-5.
8. The following is a summary of Holdings' material contingencies as of June
30, 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, 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 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 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 and a motion to strike the complaint. In
lieu of responding to defendants' demurrer and motion, plaintiffs filed an
amended complaint. Insignia believes the suit to be without merit and
intends to defend the suit vigorously.
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 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.
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 business of Insignia being acquired
by AIMCO 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.
In addition, Holdings will indemnify AIMCO for taxes resulting from the
consummation of the Distribution 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 Distribution which is greater than a specified per
share amount to be determined prior to the Distribution.
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.
9. Acquisitions
Richard Ellis Group Limited
In February 1998, the shareholders of 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
total purchase price was approximately $82.9 million, of which $14.7
million is contingent on the future performance of Richard Ellis. The
transaction was completed on February 26, 1998. Insignia funded the
acquisition from borrowings on its revolving credit facility, issuing
617,371 shares of Class A Common Stock of Insignia ("Insignia Class A
Common Stock"), and assuming existing stock options which will enable
Richard Ellis employees to purchase 853,741 shares of Insignia Class A
Common Stock. The acquisition was accounted for as a purchase.
Hotel Partners
On May 11, 1998, Insignia announced that it had acquired Hotel Partners
("Hotel Partners"), an international brokerage firm focused exclusively on
the hospitality segment of the real estate industry. The total purchase
price is approximately $14.2 million with $7.0 million paid in cash at
closing and potential additional consideration contingent upon the
performance of such unit over a five-year period. Hotel Partners, based in
Chicago, also has offices in New York, London, Frankfurt, Tokyo, Singapore,
Hong Kong, Los Angeles, Dallas, Miami, Atlanta, Honolulu and Boston. The
acquisition was accounted for as a purchase.
Jackson Cross Company
On June 15, 1998, Insignia completed the acquisition of Jackson Cross
Company ("Jackson Cross"), a prominent commercial real estate service firm
with operations primarily in the greater Philadelphia area. The total
purchase consideration paid by Insignia for Jackson Cross was approximately
$9.1 million, consisting of $8.6 million paid in cash and $500,000 in
guaranteed deferred payments. Additional payments of up to $5.4 million are
contingent on the future performance of Jackson Cross. The acquisition was
accounted for as a purchase.
Other Information
Pro Forma results of operations for the six months ended June 30, 1998 and
1997, assuming consummation of the Distribution and the acquisition of
Richard Ellis (1998), Realty One (1997) and Barnes, Morris, Pardoe & Foster
(1997) as of January 1, 1997, is as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
---- ----
<S> <C> <C>
Revenues $238,031 $197,597
Net Income 6,489 6,196
===== =====
Per share amounts -
assuming dilution $ .29 $ .30
======== ========
</TABLE>
10. Warrant Distribution
In connection with the Distribution, Insignia anticipates distributing to
record holders of the 6.5% Convertible Preferred Securities ("Preferred
Securities") of Insignia Financing I, a subsidiary of Insignia, on the
Distribution Record Date 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 and will
have an exercise price of 120% of the market value 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.
Insignia purchased the warrants from Holdings on September 14, 1998 for
approximately $8.5 million, which represents the estimated aggregate fair
market value of the warrants. The 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.
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.
Under the terms of the Merger Agreement with AIMCO, the Preferred
Securities would become an obligation of AIMCO and would become convertible
into AIMCO securities, as Insignia Financing I would become a subsidiary of
AIMCO. Pursuant to the trust indenture governing the Preferred Securities,
prescribed adjustments to the conversion price of the Preferred Securities
would occur both as a result of the Distribution and as a result of the
Merger.
11. During the six months ended June 30, 1998, Holdings had the following
changes in the equity accounts:
a) Investment and net advances from Insignia totaling $114,816,000.
b) Net income of $6,391,000 for the six months ended June 30, 1998.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------------------------------------------------------------------------------
of Operations
-------------
Holdings has three principal business units - commercial real estate
services, residential real estate services and real estate ownership. The
commercial real estate services business is comprised of Insignia/ESG's United
States operations, Richard Ellis in the United Kingdom, Insignia RE GmbH in
Germany and Insignia/CAGISA in Italy. The residential services business is
comprised of a single-family home brokerage business (Realty One) and a
cooperative and condominium apartment services business (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, the opening of
Insignia RE GmbH in Germany, 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. The financial statements of Richard Ellis have been translated
using the following exchange rates: $1.6672 for the balance sheet as of June 30,
1998 and $1.6594 for the statement of income for the six months ended June 30,
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 period, in
the case of the statement of income.
Revenue from tenant representation, investment sales, debt/equity
placements and property leasing, which is a substantial majority of Holdings'
revenue, is 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 significant portion 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 select businesses. 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 or in the future.
Financial Condition
Total assets increased by approximately $151.4 million from December 31,
1997 to $485.9 million at June 30, 1998. The primary source of this increase was
acquisitions, including Richard Ellis, Hotel Partners and Jackson Cross, which
added $87 million to cost in excess of net assets of acquired businesses. Real
estate interests increased by $20.7 million. This increase represents the
continued investment in co-investment ventures and development property.
Additionally, receivables increased by approximately $22.7 million primarily
representing receivables of acquired entities and strong brokerage operations of
Insignia/ESG and Realty One.
Liabilities increased by approximately $30.4 million from December 31, 1997
to $156.0 million at June 30, 1998. This increase reflects the issuance of debt
and assumed liabilities with respect to the Richard Ellis transaction at the
time of its acquisition coupled with the impact of brokerage operations as
described above. The remainder of the asset growth was financed with equity,
including net advances from Insignia resulting from the payment of Richard Ellis
purchase price and retained earnings.
Results of Operations
Holdings posted increases in revenues and net income of 109% to $125
million and 80% to $3.6 million, respectively, for the second quarter of 1998
compared to the second quarter of 1997. The increases for the first half were
119% to $227.8 million and 106% to $6.4 million, respectively. These high growth
percentages are attributable primarily to acquisitions, the largest of which
were Richard Ellis in February 1998 and Realty One in October 1997, and
favorable real estate markets in the United States and United Kingdom.
Holdings uses Net EBITDA as a primary indicator of its financial
performance. Net EBITDA represents earnings before interest, taxes, depreciation
and amortization from its service businesses ("EBITDA") plus funds from
operations from real estate ownership ("FFO") minus financing costs, consisting
of interest expense on debt. FFO excludes gains on property sales and FFO
attributable to minority interests.
Net EBITDA increased by 83% to $13.3 million for the second quarter of 1998
and by 96% to $24.4 million for the first half of 1998. Increases were achieved
by each of Holding's three business units - commercial services, residential
services and real estate ownership. A discussion of the major factors impacting
these business units follows.
Commercial Services
The commercial services business, which consists of Insignia/ESG in the
United States, Richard Ellis in the United Kingdom, and Insignia/CAGISA in
Italy, produced revenue increases of 64% to $88 million for the second quarter
of 1998 and 81% to $166.1 million for the first half of 1998. The commercial
growth was derived from both acquisitions and gains in revenues from existing
domestic offices. The Richard Ellis acquisition accounted for a 28% revenue
increase for the second quarter of 1998 and a 24% revenue increase for the first
half of 1998. The remainder of the increase is attributable to domestic
acquisitions, additions to commission producing staff and continued favorable
real estate markets.
Residential Services
The residential services business, which consists of Realty One and
Insignia Residential Group, produced revenue increases of 490% to $36.2 million
for the second quarter of 1998 and 393% to $60.5 million for the first half of
1998. The residential growth essentially can be attributed to the October 1997
acquisition of Realty One, which derives substantially all of its revenues from
the brokerage of single family residential real estate. In addition, Realty
One's business is traditionally seasonal, although the seasonality appears to
have been tempered somewhat in 1998 by the mild winter in Northern Ohio together
with nationwide strength in the home sales sector. Realty One's revenues were
$29.3 million for the second quarter of 1998 and $47.5 million for the first
half of 1998.
Real Estate Ownership
Holding's FFO from real estate ownership increased 288% for the second
quarter of 1998 to $606,000 and 212% to $972,000 for the first half of 1998.
These increases were achieved primarily as a result of the continued strategy of
purchasing minority equity interests in selected real estate assets in
partnership with institutional clients as well as operating income growth from
existing co-investment properties. The co-investment program, which controls
properties valued at more than $575 million in aggregate, was commenced in late
1996 and continues to contribute substantially to the real estate ownership
positions of Holdings.
Equity earnings from real estate ownership reflected losses of $382,000 and
$858,000 for the quarter and first half of 1998. The loss is directly
attributable to substantial losses of Fresh Meadows, a 35% owned apartment
property, acquired in December 1997. Holdings' share of the loss, which is
substantially a result of non-cash depreciation charges in accordance with
generally accepted accounting principles, was approximately $1.2 million for the
first half of 1998. The difference between real estate FFO and equity earnings
consists of depreciation and gains on sale of property.
Financing Costs
Interest expense, attributable entirely to the existing debt of Richard
Ellis and Realty One at the respective acquisition dates, was $324,000 for the
second quarter of 1998 and $706,000 for the first half of 1998.
Other Expenses Impacting Net Income
The discussion of Net EBITDA above excludes depreciation and amortization
and income taxes. Depreciation and amortization increased 49% to $5.7 million
for the second quarter of 1998 and 53% to $10.9 million for the first half of
1998. Most of the increase relates to amortization of cost in excess of net
assets of acquired businesses, notably Richard Ellis and Realty One.
Income taxes increased both as a result of higher income and effective tax
rates in 1998.
Liquidity and Capital Resources
- -------------------------------
Holding's liquidity and capital resources consist of cash on hand and cash
provided by operations. Net EBITDA less income taxes is used to measure the
working capital provided from operations. Operations by this measure produced
approximately $19.1 million for the first half of 1998. Holdings believes that
its cash from operating activities are more than adequate to meet its working
capital and capital replacement needs. However, it is important to note that
periods of revenue growth in the leasing sector of commercial property services
result in some portion of working capital from operations being used to carry
greater receivables. In addition, cash from operations is normally lower in the
first half of each year as a result of annual incentive payments with respect to
1997 and the seasonality of Realty One.
Holdings expects to procure a $150 million revolving credit facility as
soon as possible after the Distribution for future working capital and
acquisition needs. However, negotiations in this process have not been completed
and no assurance can be given that Holdings will in fact obtain an acceptable
credit facility in that amount or any other 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.
Capital expenditure requirements are not normally extensive, consisting of
periodic computer, furniture and fixture replacements. Most capital expenditures
are typically incurred in connection with acquisitions or other personnel
additions. Capital expenditures in the first half of 1998 of $5.3 million
consisted primarily of costs incurred in the implementation of a new generation
of computer systems for the property management business, computer equipment
purchases of Realty One, and software costs allocated from Insignia.
Over the second half of 1998 and into 1999, Holdings anticipates incurring
capital expenditures significantly in excess of the normal needs of the
business. Holdings has plans to implement a similar new generation of computer
systems for the cooperative and condominium management business, complete the
relocation of that business within the Midtown area of Manhattan, relocate and
expand in Chicago and Atlanta and purchase a new generations of computer systems
for the international commercial property services businesses, both for the
United States and the United Kingdom. Realty One also expects to commence a
program to substantially upgrade its broker productivity and target marketing
systems. The aggregate cost of these planned upgrades is approximately $16
million, which Holdings expects to pay from operating cash flows and cash on
hand at the time of the Distribution.
Year 2000
- ---------
In earlier years, certain computer programs were written using two digits
rather than four to define the applicable years. These programs were written
without consideration of the impact of the approaching change in the century and
may experience problems handling dates beyond 1999 ("Year 2000"). These problems
could potentially result in the failure of computer applications and the
creation of erroneous results. In the event that necessary modifications and
conversions are not completed and resolved in a timely fashion by Holdings and
significant third parties with which Holdings conducts business, the Year 2000
issue could have a material adverse impact on the operations and financial
condition of Holdings in the future.
Holdings has completed an assessment on the impact of the Year 2000 issue,
including the anticipated impact on information technology ("IT") and non-IT
systems. Holdings has determined that it will be required to modify or replace
portions of its existing software and computer systems, so that they will
function properly with respect to dates in the year 2000 and beyond. Holdings
believes that with current ongoing changes to its computer platform, coupled
with the purchase of new generations of computer systems and software
conversions, the Year 2000 issue will not pose significant operational problems.
Holdings anticipates all ongoing projects to be completed in early 1999, which
is prior to any anticipated impact on its operating systems. The total
incremental cost of Year 2000 compliance is expected to range from $1.5 million
to $2 million, of which approximately $330,000 has been incurred as of August
31, 1998.
Other
- -----
Certain information contained in this quarterly report, and documents
incorporated by reference herein, may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act") and as such may involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Holdings to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. Such
information includes, without limitation, statements regarding the results of
litigation, the results of the Distribution and Merger, the effects of Year 2000
issues, Holdings" future financial performance and estimated capital
expenditures. Actual results will be effected by a variety of risks and factors,
including, without limitation, national and local economic conditions, real
estate risks and financing risks. Such forward-looking statements speak only as
of the date of this quarterly report. Holdings expressly disclaims any
obligation or undertaking to release publicly any updates of revisions to any
forward-looking statements contained herein to reflect any change in Holdings'
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
See Note 8 in Notes to Condensed Combined Financial Statements, Part I,
Item 1, of Form 10-Q for June 30, 1998 for the details on outstanding issues.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
a) Exhibits
27. Financial Data Schedule for June 30, 1998.
b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
INSIGNIA/ESG, INC.
by: /s/Andrew L. Farkas
--------------------------------------------------------
Andrew L. Farkas
Chairman and Chief Executive Officer
by: /s/James A. Aston
----------------------------------------------------------
James A. Aston
Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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