UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended June 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from........to........
Commission file number 0-19066
INSIGNIA FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3591193
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Insignia Financial Plaza, P.O. Box 1089 29602
Greenville, South Carolina (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (864) 239-1000
---------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
As of June 30, 1996, there were outstanding 28,677,904 shares of Class A Common
Stock.
<PAGE>
INSIGNIA FINANCIAL GROUP, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 1996
INDEX
Page No.
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income
for the three and six months ended June 30, 1996 and 1995 2
Condensed Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Cash Flow
for the six months ended June 30, 1996 and 1995 4
Notes to Condensed Consolidated Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 13
PART II OTHER INFORMATION:
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Reports on Form 8-K 14
SIGNATURES 15
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Information
a) Income Statement
<TABLE>
<CAPTION>
INSIGNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, except share and per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Fee based services $40,350 $28,087 $77,187 $53,996
Interest 669 535 1,588 985
Other 558 524 1,145 726
Apartment property revenues 1,521 -- 3,399 --
----- -----
43,098 29,146 83,319 55,707
------ ------ ------ ------
Costs and expenses
Fee based services 27,721 18,831 54,273 36,187
Administrative and vendor services 2,645 2,378 4,950 4,066
Apartment property expenses 816 -- 1,844 --
Termination of employment agreement -- 1,000 -- 1,000
Interest 3,031 1,573 5,935 2,754
Apartment property interest 325 -- 732 --
Depreciation and amortization 4,893 3,156 9,481 6,144
Apartment property depreciation 224 -- 493 --
--- ---
39,655 26,938 77,708 50,151
------ ------ ------ ------
Equity earnings - limited partnership interests 887 1,216 2,341 1,678
Minority interests in consolidated subsidiaries (60) (168) (262) (110)
--- ---- ---- ----
Income before income taxes 4,270 3,256 7,690 7,124
Provision for income taxes 1,622 1,303 2,922 2,850
----- ----- ----- -----
Net income $ 2,648 $ 1,953 $ 4,768 $ 4,274
======== ======= ======== ========
Earnings per common share $.08 $.08 $.15 $.17
==== ==== ==== ====
Weighted average common shares
outstanding and dilutive common
stock equivalents 31,238,659 21,621,300 30,023,895 21,300,898
========== ========== ========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
2
<PAGE>
b) Balance Sheet
<TABLE>
<CAPTION>
INSIGNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
June 30, December 31,
1996 1995
(Unaudited) (Note)
----------- ------
<S> <C> <C>
Assets
Cash and cash equivalents $ 57,366 $ 49,846
Restricted cash 7,607 6,282
Receivables 19,101 26,445
Property and equipment 10,204 7,700
Real estate limited partnership interests 127,266 60,473
Property management contracts 142,704 88,816
Apartment properties 25,309 --
Costs in excess of net assets of acquired businesses 76,946 3,169
Other assets 7,217 2,678
----- -----
Total assets $473,720 $245,409
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable $ 2,491 $ 1,497
Accrued and sundry liabilities 27,158 24,469
Deferred taxes 13,661 1,752
Non-recourse mortgage notes payable 17,832 --
Acquisitions payable 73,924 --
Notes payable 123,556 32,996
Subordinated convertible note payable -- 10,000
------
Total liabilities 258,622 70,714
------- ------
Redeemable convertible preferred stock -- 15,000
Minority interests in consolidated subsidiaries 2,690 2,682
Stockholders' Equity:
Common stock, class A, par value $.01 per share - authorized
50,000,000 shares, issued and outstanding 28,677,904 (1996)
and 25,877,666 (1995) shares 287 259
Additional paid-in capital 187,958 137,160
Retained earnings 24,163 19,594
------ ------
Total stockholders' equity 212,408 157,013
------- -------
Total liabilities and stockholders' equity $473,720 $245,409
======== ========
<FN>
NOTE:The Balance Sheet at December 31, 1995 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 Consolidated Financial Statements.
</FN>
</TABLE>
3
<PAGE>
c) Statement of Cash Flow
<TABLE>
<CAPTION>
INSIGNIA FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Thousands of Dollars)
(Unaudited)
Six Months Ended
June 30,
---------------
1996 1995
---- -----
<S> <C> <C>
Operating activities
Net income $ 4,768 $ 4,274
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 9,481 6,144
Apartment property depreciation 493 --
Equity in earnings of partnerships (2,341) (1,678)
Minority interest in net losses of consolidated subsidiaries 262 110
Changes in operating assets and liabilities:
Accounts receivable (1,053) 1,034
Other assets (947) (27)
Accrued compensation (2,171) (3,973)
Accounts payable and accrued expenses 4,289 921
----- ---
Net cash provided by operating activities 12,781 6,805
------ -----
Investing activities
Acquisition of real estate limited partnership interests (69,771) (19,956)
Payments made for acquisition of management contracts and
acquired businesses (32,230) (6,444)
Investment in apartment properties, net of acquired cash (7,789) --
Limited partnership distributions 5,317 2,995
Collections on notes receivable 15,087 1,567
Additions to property and equipment, net (2,773) (1,081)
Advances made under note agreements (1,689) (109)
Increase in restricted cash (1,325) (4)
------ --
Net cash used in investing activities (95,173) (23,032)
------- -------
Financing activities
Payments on notes payable (1,074) (43,578)
Payments on non-recourse mortgage notes (274) --
Proceeds from notes payable 90,816 39,910
Proceeds from issuance of preferred stock -- 15,000
Investment made by minority interests -- 2,651
Distribution from joint ventures (16) --
Proceeds from exercise of stock options 1,305 768
Debt and stock issuance costs (132) (658)
Payment of preferred stock dividends (281) (510)
Distributions made to minority interests (432) (100)
---- ----
Net cash provided by investing activities 89,912 13,483
------ ------
Increase (decrease) in cash and cash equivalents 7,520 (2,744)
Cash and cash equivalents at beginning of period 49,846 36,596
------ ------
Cash and cash equivalents at end of period $57,366 $33,852
======= =======
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Insignia Financial Group, Inc. ("the Company" or "Insignia") is a Delaware
corporation incorporated in July 1990. The Company is a fully integrated
real estate service organization performing property management, asset
management, investor services, partnership administration, and real estate
investment banking services for various ownership entities. The Company has
consolidated all accounts of significant subsidiaries and reflected the
appropriate minority interest.
2. The accompanying unaudited condensed consolidated 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 six month period ended June 30, 1996 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1996. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1995.
3. The calculation of earnings per common share is based on the weighted
average number of shares of common stock outstanding during the year and
common stock equivalents of dilutive common stock options and warrants. See
Exhibit 11 for the calculations of primary and fully diluted earnings per
share and the applicable adjustments to net income.
4. The following is a summary of the Company's material contingencies as of
June 30, 1996:
Gillett Family Trust, et al., v. Insignia Financial Group, Inc., et al. In
April 1995, six wholly-owned subsidiaries of Insignia (the "Affiliated
Purchasers") commenced tender offers for limited partner interests in six
partnerships: Shelter Properties I Limited Partnership; Shelter Properties
II Limited Partnership; Shelter Properties III Limited Partnership; Shelter
Properties IV Limited Partnership; Shelter Properties V Limited
Partnership; and Shelter Properties VI Limited Partnership (collectively,
the "Shelter Properties Partnerships"). In May 1995, in the United States
District Court for the District of South Carolina, certain limited partners
of the Shelter Properties Partnerships commenced a lawsuit, on behalf of
themselves, on behalf of a putative class of plaintiffs, and derivatively
on behalf of the Shelter Properties Partnerships, challenging the actions
taken by defendants (including Insignia, the Affiliated Purchasers and
certain officers of Insignia) in the management of the Shelter Properties
Partnerships and in connection with the tender offers and certain other
matters.
On September 27, 1995, the parties entered into a stipulation to settle the
matter. The principal terms of the stipulation require supplemental
payments to tendering limited partners aggregating approximately $6 million
to be paid by the Affiliated Purchasers (which amount has been accrued as
additional purchase price, with payment to follow court approval); waiver
by the Shelter Properties Partnerships' general partners of any right to
certain proceeds from a sale or refinancing of the Shelter Properties
Partnerships' properties; some restrictions on Insignia's ability to vote
the limited partner interests it acquired; payment of $1.25 million for
plaintiffs' attorney fees and expenses in the litigation (which amount is
divided among the various partnerships and acquiring entities); and general
releases of all the defendants. On June 24, 1996, after notice to the class
and a hearing on the fairness and adequacy of notice and the terms of the
settlement, the court orally approved the settlement. Plaintiffs' counsel
has not yet submitted a formal written order for approval by the court. If
no appeal is taken within 30 days after the court enters a written approval
order, the settlement will become effective. No class member appeared at
the hearing to oppose the settlement and thus it appears that an appeal is
unlikely. While approximately 60 unit holders opted out of the settlement,
no more than 1% of the unit holders in any one of the Shelter Properties
Partnerships opted out.
William Wallace, et al. v. Devon Associates, et al. On February 15, 1996,
Devon Associates, a New York general partnership, commenced tender offers
for limited partner interests in two limited partnerships, Growth Hotel
Investors and Growth Hotel Investors II (the "Growth Partnerships").
Insignia controls the managing general partner of the Growth Partnerships
and also indirectly owns approximately 8% of Devon Associates.
5
On February 21, 1996, certain persons claiming to own limited partner
interests in the Growth Partnerships filed a class action and derivative
suit in the Supreme Court for the State of New York and the County of New
York on behalf of themselves, on behalf of a putative class of plaintiffs,
and derivatively on behalf of the Growth Partnerships. The defendants are
Devon Associates, the general partners of Devon Associates, an affiliate of
one of the general partners of Devon Associates, Insignia, and the general
partners of the Growth Partnerships.
The complaint contains allegations that, among other things, (i) the
defendants breached certain fiduciary duties to the plaintiffs by, among
other things, making tender offers without first shopping the Growth
Partnerships or considering other alternatives to maximize the value to the
limited partners, such as liquidating the properties underlying the Growth
Partnerships; (ii) the defendants breached their fiduciary duties to the
plaintiffs by, among other things, making the tender offers at an
inadequate price; and (iii) the offers to purchase and other documents
disseminated in relation to the tender offers were false and misleading.
The complaint seeks compensatory damages, an injunction blocking the tender
offers, and a Court order directing the defendants to cure certain alleged
breaches of fiduciary duties.
A second class action and derivative suit, similar in all material respects
to the Wallace litigation, was filed on February 28, 1996 in the Superior
Court for the State of California (the "California Court"). Styled R&S
Asset Partners, et al. v. Devon Associates, et al., this complaint raises
the same claims as are found in the New York lawsuit.
On April 23, 1996, the parties to the foregoing two Devon Associates class
action and derivative suits entered into a stipulation settling both
actions. The principal terms of the settlement agreement require the
managing general partner of the Growth Partnerships to (i) take such
actions as are reasonably necessary and consistent with its fiduciary
duties to solicit offers for the purchase of the assets of the Growth
Partnerships which maximize the value of the Growth Partnerships' limited
partnerships units; (ii) deal fairly and in good faith with persons or
entities expressing an interest in making a bona fide offer to purchase the
Growth Partnerships' assets; (iii) consistent with its fiduciary duties,
provide all bona fide offerors with access to the Growth Partnerships'
books and records for purposes of due diligence, (iv) allow plaintiffs'
counsel to comment upon the offering process; (v) make available to
plaintiffs' counsel materials and correspondence sent and received in
connection with the offering process; and (vi) distribute supplemental
disclosure materials concerning the existence of an offer to purchase the
Growth Partnerships' properties. On July 18, 1996, a hearing seeking
judicial approval of the settlement was held in California (in connection
with the R & S Asset Partners action described above). The settlement was
approved, with the issue of legal fees being deferred until after the sale
of the properties underlying the Growth Partnerships. Both the Wallace and
R & S Asset Partners actions will be discontinued with prejudice.
Chipain, Tom, et al., v. Walton Street Capital Acquisition II, LLC, et al.
In May 1996, Walton Street Capital Acquisition II, LLC ("Walton Street")
with certain Insignia affiliates, commenced tender offers for limited
partnership interests in ten real estate limited partnerships syndicated by
The Balcor Company. In May 1996, certain persons claiming to be holders of
limited partner interests commenced a lawsuit in the Circuit Court of Cook
County, Illinois, County Department, Chancery Division, on behalf of
themselves, on behalf of a putative class of plaintiffs, and, as amended,
derivatively on behalf of the Balcor-syndicated partnerships, challenging
the actions of the defendants (including Insignia, an Insignia officer and
certain affiliates, Walton Street and the general partners of the
Balcor-syndicated partnerships) in connection with the tender offers and
certain other matters.
The complaint, as amended, contains allegations that the tender offers were
inadequate and coercive based, in part, upon information obtained by
Insignia in violation of its fiduciary duties. Defendants promptly moved to
dismiss the complaint and on June 5, 1996, the court dismissed the
complaint as to Insignia and Walton, with leave to replead. On June 11,
1996, plaintiffs filed an amended class and derivative action complaint,
repeating the same allegations as in their initial complaint, and recasting
some as derivative, rather than direct class claims. Defendants moved to
dismiss the amended complaint and on June 18, 1996, the court again
dismissed plaintiffs' amended complaint as to Insignia and Walton.
6
<PAGE>
On June 14, 1996, a second class and derivative suit, similar in material
respects to the Chipain litigation, was filed in the Circuit Court of Cook
County, Illinois, County Department, Chancery Division. That complaint,
entitled Sandra Dee v. Walton Street Capital Acquisition II, LLC, et al.,
contains substantially the same allegations as the Chipain complaints and
asserts additionally that the tender offers violate certain state
securities and consumer statutes. Pursuant to the court's orders
consolidating the Chipain and Dee complaints with another action which does
not name Insignia, a new amended and consolidated class and derivative
action complaint was filed on July 25, 1996. The plaintiffs in the Chipain
action are not parties to this latest complaint, which Insignia intends to
move to dismiss.
The Company 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 lawsuits will be resolved
without material loss to the Company or its subsidiaries.
5. Other matters
In November of 1994, the Company acquired substantially all of the assets
(consisting primarily of management contracts) of Allegiance Realty Group,
Inc., a wholly-owned subsidiary of The Balcor Company ("Balcor"). As of
June 30, 1996, the Company managed approximately 217 properties, comprising
approximately 40,300 units of multifamily residential housing and 11.3
million square feet of commercial space, associated with that acquisition
(59 of the properties, comprising approximately 2,000 units of multifamily
residential housing and 5.15 million square feet of commercial space, are
not controlled by Balcor).
During the first quarter Balcor announced its intention to sell some of its
properties. In connection with the potential sales of such properties,
Balcor has entered into agreements with the Company to provide additional
services (the "Advisory Agreements"), including collection of data, the
preparation of materials for potential purchasers, and assistance with
regard to transition plans. The Advisory Agreements have an initial term of
one year with fees ranging from .75% to 1.25% of the sale price of a
property if and when sold (the "Advisory Fees"), regardless of whether or
not the purchaser retains the Company to continue to manage the property.
If all sales were consummated for the properties that Balcor is marketing,
$11.8 million in annual revenues would be lost while $11.5 million in
advisory fees would be collected. The remaining basis would be
approximately $10.5 million with a revenue stream of $11.7 million. To
date, 17 properties comprising 5,600 units producing $1.8 million in annual
management fees have been sold, with receipt of $1.8 million in advisory
fees. There are sales pending on an additional 13 properties comprising
3,900 units which generate approximately $1.4 million in management
revenues for advisory fees of $1.5 million. The completed and pending sales
are included in the totals mentioned above. Management believes that the
unamortized purchase price relating to properties managed for Balcor
properly reflects the asset value and that no impairment exists.
In July 1996, the Company decided that its mortgage banking relationship
with the Prudential Insurance Company of America, pursuant to which a
subsidiary of the Company, Insignia Mortgage and Investment Company, Inc.
("IMIC"), provides real estate loan brokerage services through Prudential's
small loan program known as PRUEXPRESS, was no longer consistent with the
business strategy and objectives of the Company. The PRUEXPRESS program
effectively precludes IMIC from offering mortgage products competitive with
PRUEXPRESS and thus effectively precludes IMIC from entering into other
correspondent relationships with other mortgage lenders. This product
limitation, combined with a geographic restriction requiring IMIC to limit
its PRUEXPRESS mortgage brokerage activity and the lack of the opportunity
to provide loan servicing in connection with the PRUEXPRESS loans placed by
IMIC, places significant limitations on IMIC's ability to generate
consistent and predictable revenue levels or to achieve any significant
revenue growth from this activity. In 1995, this activity generated just
under $2.0 million in gross revenue and nominal, if any, EBITDA
contribution taking into account other costs associated with the activity.
Accordingly, the Company determined that it was advisable to discontinue
the program and focus its efforts on its more productive lines of business.
The cessation of the program will result in the elimination of six IMIC
branch offices and the personnel associated therewith. The elimination of
revenues from this activity coupled with the elimination of certain
7
associated expenses is expected to have an immaterial net effect on the
Company's financial performance.
The Company remains in the business of securitizing real estate debt
through its investment banking group. Securitized loan transactions in the
last four years total in excess of $700 million, $170.8 million of which
was in 1995 and $78.5 million to date in 1996. This group also has the
capacity to meet the Company's real estate financing needs with respect to
its own portfolio of owned and managed assets. The Company may in the
future explore other mortgage origination, brokerage and/or servicing
opportunities which are more consistent with its business strategy.
Furthermore, IMIC will remain in the profitable real estate brokerage
business and anticipates that the brokerage segment of IMIC will, in fact,
be more profitable due to the elimination of certain overhead costs no
longer necessary.
6. Acquisitions of National Property Investors, Inc. and Edward S. Gordon
Company, Inc.
As discussed in the Company's Annual Report on Form 10-K, the Company
acquired substantially all of the assets of National Property Investors,
Inc. ("NPI"), its property management affiliates and certain of its limited
partner interests in real estate limited partnerships for an aggregate
purchase price of approximately $116 million. In addition, the Company
acquired substantially all of the assets of the Edward S. Gordon Company,
Inc. for approximately $74 million. The pro forma unaudited results of
operations for the six months ended June 30, 1996 and June 30, 1995
assuming consummation of the purchases as of January 1, 1995 are as
follows:
Six Months Ended
June 30,
--------------
1996 1995
---- ----
(000's omitted, except per share data)
Revenues $131,802 $115,290
Net Income 5,239 3,013
===== =====
Earnings per common share $0.16 $0.11
===== =====
7. During the first six months of 1996, the Company had the following changes
in the equity accounts:
a) Exercise of 163,744 stock options and 17,700 warrants representing
181,444 shares of Class A Common Stock at exercise prices ranging from
$1.88 to $13.00 per share.
b) Conversion of preferred stock and a subordinated convertible note to
1,509,062 and 1,117,732 shares, respectively, of Class A Common Stock.
c) Net income of $4,768,000 for the six months ended June 30, 1996.
d) Preferred dividends of $199,000.
e) Additional paid-in capital of $24,450,000 resulting from the issuance
of options in connection with the acquisition of the Edward S. Gordon
Company, Inc.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Insignia is a Company with a vision for capitalizing on opportunity and
maximizing stockholder value. As a result of this visionary attitude, the
Company has completed three highly strategic acquisitions in the past six
months; posted 66% growth in earnings before interest, taxes, depreciation, and
amortization ("EBITDA") combined with funds from operations ("FFO") over the six
months ended June 30, 1995; and increased assets by 93% from December 31, 1995.
The first major acquisition completed in 1996 was the acquisition of National
Property Investors, Inc. ("NPI") in January 1996. Upon completion, the Company
acquired approximately $13.5 million in cash, $43 million in management
contracts, and $74 million in limited partnership interests. The acquisition was
for approximately $116 million in cash (less the subordinated participation with
PaineWebber of approximately $14 million), most of which was provided by
proceeds from a draw of $88 million on the $200 million revolving credit
facility. The number of units managed increased by approximately 32,000 bringing
the total units managed as of June 30, 1996 to approximately 295,000.
In addition to the stable revenues produced from the acquired management
contract rights, the NPI acquisition was consistent with Insignia's strategy of
expanding the multifamily universe of residents to whom goods and services can
be offered through Compleat Resource Group, Inc. ("CRG"), the Company's newly
formed, wholly-owned subsidiary that has entered into strategic alliances with
HFS Incorporated ("HFS") and GE Capital-ResCom.
In addition to the increased management and preferred vendor services
opportunities created by the NPI acquisition, this acquisition was strategic in
adding to Insignia's existing base of general and limited partner interests in
real estate limited partnerships. As a result, a significant percentage of the
limited partnership interests in 14 public real estate limited partnerships held
by NPI were acquired, as well as the general partner interests of 28 public
limited partnerships and 83 private limited partnerships.
The Company's unconsolidated investment in limited partnership interests now
totals $135.5 million with the acquisition of limited partner interests obtained
in the NPI acquisition as well as through private sales and tender offers.
Insignia realized $3.6 million and $7.0 million as its proportionate share of
FFO from its partnership investments for the second quarter and six months of
1996, respectively, a 159% and 214% increase over FFO of $1.4 million and $2.2
million for the same periods of 1995, respectively. The increase was
attributable to the acquisition of additional limited partnership investments as
well as improved property operations. Restating 1995 property results to reflect
the same ownership percentage in the same limited partnerships owning the same
properties as were in 1996 results would have shown a 9% or $294,000 increase
over the FFO generated in the second quarter of 1995. This increase occurred
despite the fact that $10.6 million in capital proceeds were distributed from
these partnerships to Insignia, of which $700,000 was derived from the two asset
sales, $9.5 million was derived from the proceeds of the December 1995
refinancing and $400,000 was derived from a reduction in the cash working
capital held by the partnerships at the time the interests were acquired by
Insignia.
For properties included in both periods, revenues increased by 4.7% and
operating expenses increased by 1.4%, resulting in a net operating income
increase of 8.2% to $8,532,000 for the quarter. This was reduced by the major
maintenance expenses (incurred to improve the appeal of the properties)
increasing from $151,000 in the second quarter of last year to $707,000 this
year, causing property operations to increase only by 1.2%. The major
maintenance expenses represent primarily landscaping, exterior painting and
kitchen and bathroom remodeling. A high level of such expenses is expected to
continue throughout 1996 in order to position the properties for above average
revenue growth. Net interest expense decreased by $238,000 compared to last
year, reflecting both the refinancing of higher rate debt in December 1995 and
continued principal amortization of debt.
The Company closed two acquisitions effective June 30, 1996, both affecting the
commercial operations of the business. The first acquisition was of the capital
stock of Paragon Property Group Services, Inc., the commercial property services
operation ("Paragon Commercial") of Paragon Group, Inc., for consideration of
approximately $18.5 million in cash, with adjustments possible up to an
9
additional $4 million over time if certain revenue targets are met. The
acquisition of Paragon Commercial added approximately 24 million square feet of
office, retail and industrial space to Insignia's existing base of 61.2 million
square feet. Strategically, the addition of this portfolio with the existing
commercial portfolio will create a presence in major metropolitan areas of the
Western, Central, and Eastern regions of the country. Of particular importance
is the depth of knowledge and transactional expertise that the executive
management team of Paragon Commercial possesses in the areas of acquisition,
disposition, management, leasing and development of commercial real estate,
necessary to the building of a national commercial business with the ability to
cross-sell services and products.
In addition to the Paragon Commercial acquisition, the Company consummated the
Edward S. Gordon Company, Inc. ("ESG") acquisition effective June 30, 1996. The
purchase price for substantially all of the assets of ESG was approximately $74
million, paid approximately $50 million in cash and $24 million in the
assumption of existing stock options. ESG adds approximately 25 million square
feet of managed commercial space located primarily in the New York metropolitan
area, bringing the Company's total to approximately 108.8 million square feet.
Strategically, this acquisition was pursued to enhance and broaden the exposure
and capabilities of the commercial division through its experience and knowledge
in the transactional area of the business and corporate consulting services; to
develop a national apartment report for Insignia's residential property
management divisions utilizing the ESG consulting group which has been the
publisher of the ESG Midtown and Downtown Office Reports since 1972; and lastly,
to promote awareness of and strengthen Insignia's presence in the New York
markets through the combination of operations of the condominium management
businesses of Douglas Elliman - Gibbons & Ives and Kreisel Company, Inc. ("DEK")
(operating under the name of Insignia Management Services - New York, Inc.) with
the commercial leasing and property management businesses of ESG.
The Paragon Commercial and ESG acquisitions were accounted for as purchases
based on preliminary valuations and will be adjusted as amounts are finalized.
The condensed consolidated balance sheet for the Company reflects both the
Paragon Commercial and ESG acquisitions as of June 30, 1996. The primary assets
acquired were management contract rights and goodwill with bases adjustments for
deferred taxes as a result of differences in tax and book bases between the
sellers and Insignia. Also, included in equity was the "in the money" portion of
the options assumed in the ESG acquisition.
In addition to the acquisition activity, the Company focused on building
internal value through the continued roll-out of the preferred vendor programs
that CRG, the newly formed marketing company, was offering through the alliances
with HFS and GE Capital-ResCom. While CRG has minimal asset value reflected on
the balance sheet (primarily due to the nature of the business being a service
business), the Company has expensed $845,000 and $1.2 million in start up costs
for the three and six month periods in 1996, respectively, in this endeavor. CRG
is still in the start-up phase with more advancements being made in testing
markets, pilot programs, and sales training so that success with the initial
units signed up will be ensured and add to the validity of the programs
available to the property owners and residents/tenants.
During the quarter ended June 30, 1996, both the subordinated convertible note
and the preferred stock were converted into common stock of approximately 1.1
million and 1.5 million shares, respectively.
10
<PAGE>
Results of Operations
Combined EBITDA and FFO for the three and six months ended June 30, 1996
increased 78% and 66% to $14.8 million and $27.6 million from $8.3 million and
$16.7 million for the three and six months ended June 30, 1995 respectively. The
primary reasons for such growth were the margins generated by increased third
party servicing and the acquisitions consummated in the last 12 months, as well
as the additional investments in the limited partner interests.
Fee based services revenues increased 44% and 43% for the three and six months
of 1996 over 1995. Most of the increase for both periods (46% and 50%) was in
the property and asset management division due to the consummated acquisitions
of O'Donnell Property Services, Inc. ("OPSI"), DEK, NPI and a number of smaller
purchases. These acquisitions added approximately 24 million square feet of
commercial space, as well as approximately 55,000 co-operative and condominium
units and 32,000 residential multifamily units to the management portfolios. In
addition to the acquisitions, third party servicing has grown, net of losses, by
approximately 20,000 units since June 30, 1995. As previously mentioned, neither
the Paragon Commercial or the ESG acquisition were included in the results of
operations for the three and six months ended June 30, 1996.
The financial services group is primarily transactional in nature and,
consequently, its operations can vary significantly from period to period as
transactions close. Revenues from this group increased 18% for the quarter and
decreased 21% for the six months ended June 30, 1996.
Interest income increased 25% and 61% over the quarter and six months ended June
30, 1995 primarily due to higher average interest earning cash balances and
higher interest rates.
Other income increased 6% and 58% for the three and six months ended June 30,
1996 over the same periods in 1995. The primary factor for the increase was the
growth in the amounts received from an agency that serves as an insurance broker
for various partnerships managed by the Company.
Fee based services expenses increased 47% and 50% for the three and six months
ended June 30, 1996, almost all of which was in the property and asset
management division (52% and 57%). As mentioned above, the consummated
acquisitions impacted the fee based services expenses. The margins narrowed
somewhat as the operations from the co-op and condo management business, which
have a smaller margin compared to the traditional residential multifamily
property management operations. Also, the commercial margins narrowed this
quarter due to due diligence expenses and transition planning expenses
associated with the Paragon Commercial and ESG acquisitions, as well as the
variances caused by timing of transactional revenues.
Fee based services expenses associated with the financial services group
increased 12% for the quarter and remained constant for the six months. Since
this group is transactional in nature, results often vary from period to period.
Administrative and vendor services expenses increased 11% and 22% for the three
and six months ended June 30, 1996 primarily from the increased start-up
expenses associated with CRG. Expenses of $845,000 and $1.2 million have been
incurred for the respective periods of 1996, accounting for all of the increase
in this area.
During 1995, a one-time charge for $1.0 million was incurred as a result of
terminating a contractual arrangement with a senior executive/director. Both the
Company and the employee agreed to the termination. No such expenses were
incurred during the first six months of 1996.
Interest expense increased 119% and 116% for the three and six months ended June
30, 1996 over the same periods ended June 30, 1995, as a result of the debt
balances increasing from $73.4 million at June 30, 1995 to $123.6 million at
June 30, 1996, and increasing interest rates.
With the acquisition of limited partner interests in excess of 50% in two
limited partnerships, the Company now consolidates the results of these two
limited partnerships. The categories entitled apartment property revenues,
apartment property expenses, apartment property interest and depreciation relate
solely to the operations of the properties owned by the partnerships. The
percentage not owned by the Company is recorded in minority interests.
11
Depreciation and amortization increased 55% and 54% for the three and six months
ended June 30, 1996 over June 30, 1995 as a result of the amortization of the
acquired property management contracts and the additions to property and
equipment.
As a result of the foregoing, net income increased 36% and 12% for the three and
six months ended June 30, 1996 compared to the three and six months ended June
30, 1995. Earnings per share was $.08 for both second quarters ended 1996 and
1995, while earnings per share for the six months ended 1996 decreased slightly
to $.15 per share compared to $.17 for 1995. See Exhibit 11 for detailed
calculations for each of the respective periods.
12
<PAGE>
Liquidity and Capital Resources
The Company has several sources available for capital, primarily cash generated
from operations, distributions from partnerships, and some available credit
under the $200 million revolving credit facility. As a result of its ability to
generate cash, and such additional sources, the cash balances grew from $33.9
million at June 30, 1995 to $57.4 million at June 30, 1996. The Company uses
combined EBITDA and FFO as an indicator of its working capital generated from
operations. Combined EBITDA and FFO increased 78% and 66% for the three and six
months from $8.3 million and $16.7 million for 1995 to $14.8 million and $27.6
million for 1996. The following chart specifically identifies the sources of the
combined EBITDA and FFO and how the numbers are derived for each period.
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Fee based services revenues $40,350 $28,087 $77,187 $53,996
Interest 669 535 1,588 985
Other 558 524 1,145 726
--- --- ----- ---
$41,577 $29,146 $79,920 $55,707
Fee based services expenses 27,721 18,831 54,273 36,187
Termination of agreement -- 1,000 -- 1,000
Administrative and other 2,645 2,378 4,950 4,066
----- ----- ----- -----
EBITDA - service company $11,211 $ 6,937 $20,697 $14,454
FFO
Concap 1,047 1,222 2,042 2,059
Shelter 635 156 1,339 156
DGP 26 -- 46 --
NPI 1,248 -- 2,334 --
Century 609 -- 1,191 --
Combined EBITDA and FFO $14,776 $ 8,315 $27,649 $16,669
======= ======== ======= =======
In addition to internally generated cash, the Company has a $200 million
revolving credit facility available for acquisitions and working capital needs,
of which $178 million was committed as of June 30, 1996. With the working
capital generated through the operations of the Company and the available
balances on the revolving credit facility, the Company feels its capital
resources are adequate. The funding needs are reassessed and additional sources
of capital evaluated as acquisitions are identified and pursued.
The Company is also currently engaged in active evaluation of a change in
the manner in which its real estate partnership interests are held and financed.
The Company's objective is to raise external capital through a real estate
ownership entity for the continued acquisition of real estate interests and to
replace some of Insignia's capital currently deployed in its real estate
investments. There can be no assurance that the Company will achieve the results
sought.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 4 in Notes to Condensed Consolidated Financial Statements, Part I, Item
1, of Form 10-Q for June 30, 1996 for the details on outstanding issues. Also,
see Registrant's Annual Report on Form 10-K for the year ended December 31,
1995.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on May 23, 1996, at
10:00 a.m., Eastern time, to vote on the following items:
1. The approval of the 1995 Non-Employee Director Stock Option Plan.
For 21,050,039 (87.6% of shares present)
Against 459,966
Abstain 6,726
Withhold authority 2,518,103
24,034,834
2. Election of eight (8) directors, all of which were elected.
Number of % of
Name Shares Approving Votes Cast
Andrew L. Farkas 24,021,965 99.9
John F. Jacques 24,021,907 99.9
Robert J. Denison 24,021,995 99.9
Robin L. Farkas 24,021,764 99.9
Merrill M. Halpern 24,021,933 99.9
Robert G. Koen 24,021,960 99.9
Michael I. Lipstein 24,021,937 99.9
Buck Mickel 24,021,847 99.9
3. The approval of amendments to the Insignia 1992 Stock Incentive Plan
and award of warrants to key employees.
For 18,058,355 (75.1% of shares present)
Against 2,306,456
Abstain 1,180,354
Withhold authority 2,489,669
---------
24,034,834
==========
4. The approval of a modification to the Annual Bonus Plan for the Chief
Executive Officer.
For 23,778,904 (99.0% of votes cast)
Against 248,385
-------
24,027,289
==========
Abstain 7,545
5. The ratification of the selection of Ernst & Young, LLP as independent
auditors of the accounts of the Company for the year 1996.
For 24,031,191 (99.9% of votes cast)
Against 2,653
-----
24,033,844
==========
Abstain 990
There were no other matters brought to a vote before the security holders.
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed in the second quarter of fiscal year 1996.
14
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 FINANCIAL GROUP, INC.
by: /s/ Andrew L. Farkas
---------------------------
Andrew L. Farkas
Chairman and Chief Executive Officer
by: /s/ Ronald Uretta
------------------------
Ronald Uretta
Chief Financial Officer and Treasurer
August 9, 1996
15
EXHIBIT 11 - Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Primary
Average common shares outstanding 27,853 20,410 26,893 20,288
Net effect of dilutive stock options and warrants
based on the treasury stock method using
average market price 3,386 1,211 3,131 1,013
Total 31,239 21,621 30,024 21,301
Net income $ 2,648 $ 1,953 $ 4,768 $ 4,274
Preferred dividends 91 327 199 592
Adjusted net income $ 2,557 $ 1,626 $ 4,569 $ 3,682
Earnings per common share $ .08 $ .08 $ .15 $ .17
Fully Diluted
Average common shares outstanding 27,853 20,410 26,893 20,288
Net effect of dilutive stock options and warrants
based on the treasury stock method using
the greater of the average market price or the
ending market price 3,612 1,432 3,473 1,254
Total 31,465 21,842 30,366 21,542
Net income $ 2,648 $ 1,953 $ 4,768 $ 4,274
Preferred dividends 91 327 199 592
Adjusted net income $ 2,557 $ 1,626 $ 4,569 $ 3,682
Earnings per common share $ .08 $ .07 $ .15 $ .17
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Insignia Financial Group, Inc. June 30, 1996 Form 10-Q and is qualified
in its entirety by reference to such 10-Q filing.
</LEGEND>
<CIK> 0000870480
<NAME> Insignia Financial Group, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 57,366
<SECURITIES> 0
<RECEIVABLES> 19,101
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 10,204
<DEPRECIATION> 0
<TOTAL-ASSETS> 473,720
<CURRENT-LIABILITIES> 0
<BONDS> 141,388
0
0
<COMMON> 287
<OTHER-SE> 212,121
<TOTAL-LIABILITY-AND-EQUITY> 473,720
<SALES> 0
<TOTAL-REVENUES> 83,319
<CGS> 0
<TOTAL-COSTS> 54,273
<OTHER-EXPENSES> 16,768
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,667
<INCOME-PRETAX> 7,690
<INCOME-TAX> 2,922
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,768
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
