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 September 30, 1997
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 September 30, 1997, there were outstanding 29,093,057 shares of Class A
Common Stock.
<PAGE>
INSIGNIA FINANCIAL GROUP, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
INDEX
Page No.
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 1997 and 1996 2
Condensed Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Cash Flow
for the nine months ended September 30, 1997 and 1996 4
Notes to Condensed Consolidated Financial Statements 5 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 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 FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Fee based services $96,855 $62,924 $246,131 $140,117
Interest 1,489 606 3,230 2,193
Other 47 457 328 1,597
Apartment property revenues 1,712 1,898 4,941 5,297
------- ------ ------- -------
100,103 65,885 254,630 149,204
------- ------ ------- -------
Costs and expenses
Fee based services 79,155 51,055 197,921 106,570
Administrative 4,393 1,974 8,633 5,681
Apartment property 820 994 2,336 2,838
Interest 1,531 4,309 4,729 10,244
Apartment property interest 370 965 1,114 1,698
Depreciation and amortization 7,740 6,708 23,044 16,189
Apartment property depreciation 245 276 725 769
Release Fee 5,000 -- 5,000 --
--------- ---------- --------- ------------
99,254 66,281 243,502 143,989
-------- ------ ------- -------
Equity earnings - limited partnership interests 2,254 732 5,890 3,072
Minority interest in consolidated subsidiaries (2,854) 71 (9,139) (190)
-------- ---------- -------- --------
Income before income taxes 249 407 7,879 8,097
Provision for income taxes 100 155 3,152 3,077
--------- --------- --------- ---------
Net income $ 149 $ 252 $ 4,727 $ 5,020
========= ========= ======== =========
Net income per share $.01 $.01 $.15 $.15
=== === === ===
Weighted average common shares
outstanding and dilutive common
stock equivalents 32,261,714 33,205,030 32,422,548 31,107,789
========== ========== ========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
b) Balance Sheet
INSIGNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited) (Note)
<S> <C> <C>
Assets
Cash and cash equivalents $ 89,427 $ 54,614
Receivables 73,657 46,040
Property and equipment 15,170 12,083
Investments in real estate limited partnerships and other securities 150,395 150,863
Apartment property 21,556 22,125
Property management contracts 118,035 122,915
Costs in excess of net assets of acquired businesses 81,744 75,627
Other assets 18,784 8,135
-------- ---------
Total assets $568,768 $492,402
======= =======
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable $ 8,767 $ 1,711
Commissions payable 30,841 18,736
Accrued and sundry liabilities 50,893 40,741
Notes payable 39,117 49,840
Non-recourse mortgage note payable 19,300 19,300
-------- --------
Total liabilities 148,918 130,328
------- -------
Company-obligated mandatorily redeemable convertible preferred securities of a
subsidiary trust holding solely debt securities of
the Company 143,993 144,169
Minority interest in consolidated subsidiaries 52,778 --
Stockholders' Equity:
Common stock, class A, par value $.01 per share - authorized 100,000,000
shares, issued and outstanding 29,093,057 (1997)
and 28,857,097 (1996) shares, 106,400 shares held in treasury (1997) 291 289
Additional paid-in capital 191,464 189,657
Retained earnings 31,324 27,959
-------- --------
Total stockholders' equity 223,079 217,905
------- -------
Total liabilities and stockholders' equity $568,768 $492,402
======= =======
<FN>
NOTE: The Balance Sheet at December 31, 1996 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>
<PAGE>
c) Statement of Cash Flow
INSIGNIA FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
<S> <C> <C>
Operating activities
Net income $ 4,727 $ 5,020
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 23,044 16,189
Apartment property depreciation 725 769
Equity in earnings of partnerships (5,890) (3,072)
Minority interest in consolidated subsidiaries 9,139 190
Changes in operating assets and liabilities:
Accounts receivable (21,567) (12,166)
Other assets (5,837) (1,503)
Accrued compensation and payroll taxes 10,941 631
Accounts payable and accrued expenses (5,345) (485)
Commissions payable 11,384 8,655
------ -------
Net cash provided by operating activities 21,321 14,228
------ ------
Investing activities
Increase in restricted cash -- 5,640
Additions to property and equipment, net (4,894) (4,518)
Payments made for acquisition of management contracts
and acquired businesses (10,584) (102,609)
Proceeds from Balcor dispositions 6,194 --
Purchase of real estate limited partnership interests (25,113) (67,840)
Investment in international business, net of acquired cash 1,842 --
Distributions from partnerships 31,604 6,805
Advances made under note agreements (15,013) (2,535)
Organization costs on formation of IPT (2,743) --
Investment in apartment property, net of acquired cash -- (7,789)
Collections on notes receivable 2,665 15,272
------- --------
Net cash used in investing activities (16,042) (157,574)
------- --------
Financing activities
Proceeds from issuance of common stock of IPT 52,427 --
Payments on notes payable (12,648) (1,802)
Payments on non-recourse mortgage notes -- (16,997)
Proceeds from refinancing of non-recourse mortgage note -- 19,300
Payments of dividends on trust based convertible preferred securities (7,502) --
Purchase of treasury stock (2,063) --
Payment of preferred stock dividend -- (281)
Proceeds from exercise of stock options 2,152 2,058
Proceeds from notes payable -- 152,816
Distributions made to minority interests (1,571) (432)
Debt and stock issuance costs (1,261) (1,031)
------ ------
Net cash provided by investing activities 29,534 153,631
------ -------
Increase in cash and cash equivalents 34,813 10,285
Cash and cash equivalents at beginning of period 54,614 49,846
------ ------
Cash and cash equivalents at end of period $89,427 $60,131
====== ======
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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 services company specializing in the ownership and operation of
securitized real estate assets throughout the United States. As a full
service real estate management organization, Insignia performs property
management, asset management, investor services, partnership accounting,
real estate investment banking and real estate brokerage services for
various types of property owners.
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 three and nine month periods ended
September 30, 1997 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1997. 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, 1996.
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.
Fully diluted earnings per share is not presented since the effect of
dilution is less than 3%. See Exhibit 11 for the calculations of primary
and fully diluted earnings per share and the applicable adjustments to net
income.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("FAS 128"), Earnings Per Share.
FAS 128, which is required to be adopted on December 31, 1997, will change
the method currently used to compute earnings per share. Under the new
requirements, the current primary earnings per share will be replaced by
basic earnings per share, which excludes all dilutive common stock
equivalents. The impact is expected to result in no change in earnings per
share for the three month periods ended September 30, 1997 and 1996, and
result in an increase in earnings per share of $.02 for the nine month
periods ended September 30, 1997 and 1996. The impact of FAS 128 on the
calculation of fully diluted earnings per share for these periods is not
expected to be material.
4. The following is a summary of the Company's material contingencies as
of September 30, 1997:
1996 Tender Offer Litigation
In May 1996, Walton Street Capital Acquisition II, MLLC ("Walton Street"),
together with certain Insignia affiliates, commenced tender offers for
limited partner interests in ten real estate limited partnerships
syndicated by The Balcor Company ("Balcor"). In May 1996, certain persons
claiming to be holders of limited partner interests commenced a lawsuit
entitled Chipain, Tom, v. Walton Street Capital Acquisition II, LLC,. 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, contained allegations that the tender offers
were inadequate and coercive based, in part, upon information allegedly
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 Street, 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 Street.
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.,
contained substantially the same allegations as the Chipain complaints and
asserted additionally that the tender offers violated 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.
On August 16, 1996 Insignia moved to dismiss the amended and consolidated
class and derivative action complaint. The motion was heard by the court on
September 27, 1996 at which time the court granted leave to the plaintiff
to (i) withdraw its pending complaint and (ii) serve a second amended and
consolidated class and derivative action complaint. On October 8, 1996
plaintiffs filed a second amended and consolidated class and derivative
action complaint which added claims of alleged antitrust injury and unjust
enrichment. On October 25, 1996 Insignia moved to dismiss the second
amended and consolidated class action complaint. That motion was heard by
the court in December 1996. On December 18, 1996 the court issued a
decision granting Insignia's motion to dismiss. By order dated January 7,
1997 the court dismissed the second amended and consolidated class action
complaint with prejudice. Plaintiffs filed a notice of appeal in the Dee
action on February 14, 1997.
United States Department of Housing and Urban Development Settlement
The Company understands that the United States Department of Housing and
Urban Development ("HUD") has filed a civil lawsuit against one of the
third party, unaffiliated owners of affordable housing to which the Company
provides management services. The complaint alleges that the owner,
Associated Financial Corporation ("AFC") of Los Angeles, California, whose
chairman is A. Bruce Rozet, had improperly received monies from 17
properties managed by the Company over a period of approximately six years.
The allegations include statutory violations which could, if proven, give
rise to double and treble damages as well as civil penalties for false
filings. The Company was not named as a defendant in the suit. The Company
has no ownership interest in any of the properties or partnerships that are
the subject of the complaint and is not affiliated with AFC. The Company
has managed approximately 75 properties (approximately 8,600 units) for AFC
since 1991 when the Company succeeded to the existing management contract
portfolio as part of its acquisition of substantially all of the assets of
U.S. Shelter Corporation. The Company believes that it earns approximately
$1.6 million per year in EBITDA from the management of the entire portfolio
of AFC properties. HUD has stated that the payments to AFC from 1990 -
April 1995 at issue aggregate nearly $5 million.
Although no legal action was initiated against Insignia, on August 14,
1997, the Company reached an agreement with HUD to resolve certain matters
in connection with the conduct raised in the complaint against AFC.
Insignia has not admitted to any liability or wrongdoing in the matter, and
it has affirmatively stated that it relied on the advice of legal counsel
that the contractual agreements were proper. Under the terms of the
agreement, Insignia has remitted $5 million to HUD, and HUD has provided
Insignia with a complete release of potential claims HUD may have asserted
in connection with the AFC transaction. HUD and the Company further agreed
that should there be any issues on any other properties managed by
Insignia, they would pursue resolution of such issues through a private
mediation process. Although the Company believes it acted properly in these
transactions, it agreed to resolve the matter expeditiously to avoid
potential complex, costly and disruptive litigation. By resolving the
matter quickly, Insignia believes that it has maintained its competitive
position as a leader in the market for HUD management services. As a result
of the agreement, Insignia recorded a one-time charge of $5 million
(pre-tax) for its third quarter ended September 30, 1997.
1997 Tender Offer Litigation
In August 1997, an Insignia subsidiary (the "Purchaser"), commenced tender
offers for limited partner interests in six real estate limited
partnerships in which various Insignia affiliates act as general partner
(the "Tender Partnerships"). On September 5, 1997, a partnership claiming
to be a holder of limited partnership units in one of the Tender
Partnerships, filed a complaint with respect to a putative class action in
the Court of Chancery in the State of Delaware in and for New Castle County
(the "City Partnerships complaint") challenging the actions of the
defendants (including Insignia and certain Insignia affiliates) in
connection with the tender offers. The City Partnerships complaint alleges
that, among other things, the defendants have intentionally mismanaged the
Tender Partnerships and coerced the limited partners into selling their
units pursuant to the tender offers for substantially lower prices than the
units are worth. The plaintiffs also allege that Insignia breached an
alleged duty to provide an independent analysis of the fair market value of
the limited partnership units, failed to appoint a disinterested committee
to review the tender offer and did not adequately consider other
alternatives available to the limited partners.
On September 8, 1997, persons claiming to be holders of limited partnership
units in the Tender Partnerships filed a complaint with respect to a
putative class action and derivative suit in the Superior Court for the
State of California for the County of San Mateo (the "Kline complaint")
challenging the actions of the defendants (including Insignia, an Insignia
officer and director, certain Insignia affiliates and the Tender
Partnerships) in connection with the tender offers. The Kline complaint
alleges that, among other things, the defendants have intentionally
mismanaged the Tender Partnerships and that, as a result of the tender
offers, the Purchaser will acquire effective voting control over the Tender
Partnerships at substantially lower prices, than the units are worth. On
September 24, 1997, the court denied the plaintiffs' application for a
temporary restraining order and plaintiffs' request for preliminary
injunctive relief preventing the completion of the tender offers.
On September 10, 1997, persons claiming to be holders of limited
partnership units in the Tender Partnerships filed a complaint with respect
to a putative class action and derivative suit in the Superior Court for
the State of California for the County of Alameda (the "Heller complaint")
challenging the actions of the defendants (including Insignia, certain
Insignia affiliates and the Tender Partnerships) in connection with the
tender offers. The Heller complaint alleges that, among other things, the
defendants have intentionally mismanaged the Tender Partnerships and that,
as a result of the tender offers, the Purchaser will acquire effective
voting control of the Tender Partnerships at substantially lower prices
than the units are worth. The Plaintiffs also allege that Insignia breached
an alleged duty to retain an independent advisor to consider alternatives
to the tender offers.
The Company believes that the allegations contained in the City
Partnerships complaint, Kline and Heller complaints are without merit and
intends to vigorously contest each of those complaints.
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 contingencies will be resolved
without material loss to the Company or its subsidiaries.
5. Acquisitions
The Company completed the acquisition of six property management and
brokerage companies during the nine month period ending September 30, 1997.
These acquisitions include the following: Rostenberg-Doern, Inc.; HMB
Property Services, Inc.; Frain, Camins & Swartchild, Inc.; The Related
Group of Florida; Radius Retail Advisors; and Forum Properties, Inc. The
aggregate purchase price paid for these businesses was approximately $24.9
million consisting of $18.2 million in management contract rights, $6.5
million of costs in excess of assets acquired, and $193,000 for purchased
capital items. The acquisitions were paid from cash on hand of
approximately $10.2 million, notes issued of $8.5 million and assumed
liabilities of $6.2 million. Assuming certain qualified revenue
requirements are met, collective contingent payments of up to approximately
$5.8 million could be paid to the sellers of these acquired businesses.
In addition, the Company expanded internationally with the purchase of 60%
of the stock in Compagnia di Amministrazione e Gestioni Immobiliare S.p.A.
("CAGISA"), one of the leading privately held property management companies
in Italy. The total purchase price paid for this interest was $2.6 million
with potential for an additional $500,000 in deferred payments after one
year based on certain revenue requirements. The remaining 40% of the stock
will be retained by the seller subject to an option in favor of the
Company. CAGISA, founded in 1939, currently manages approximately 10,000
units of multifamily residential housing, primarily in Rome and Milan.
<PAGE>
6. Amended and Restated Credit Agreement.
In the first quarter of 1997, the Company completed an amendment to its
revolving credit facility, increasing the credit limit from $200 million to
$275 million. The amended revolving credit facility involves a syndicate of
15 national and international financial institutions. At September 30,
1997, the Company had $33 million outstanding under the credit facility.
Subsequent to September 30, 1997, $96 million was drawn on the facility to
fund acquisition activity, increasing the outstanding amount to $129
million.
7. Trust Based Convertible Preferred Securities
In November 1996, Insignia Financing I, a Delaware trust and a wholly owned
subsidiary of the Company (the "Trust"), issued and sold 2,990,000 shares
of Trust Based Convertible Preferred Securities (the "Securities") with an
aggregate liquidation amount of $149.5 million, sold pursuant to exemptions
under the Securities Act of 1933, as amended, and the rules thereunder. All
of the outstanding common securities of the Trust are owned by the Company.
The sole asset of the Trust is the $154.1 million principal amount of 6.5%
convertible subordinated debentures of the Company due September 30, 2016.
The Company has certain obligations relating to the Securities which amount
to a full and unconditional guarantee of the Trust's obligations under the
Securities. The debentures issued and the common securities purchased by
the Company are eliminated in the balance sheet. The Securities bear
interest at the rate of 6.5% per annum, with quarterly distributions
payable in arrears. The Company has the option to defer interest payments
from time to time, not to exceed 20 consecutive quarters. The Company has
made distributions of approximately $7.5 million for the nine months ended
September 30, 1997, which are reflected in minority interest in the
consolidated statement of income. The Securities are convertible into the
Company's Class A Common Stock at $26.50 per share beginning 60 days after
the Securities first issuance date through September 30, 2016, or upon the
Company's option to redeem the Securities after November 1, 1999. The
Securities are structured such that the distributions are tax deductible to
the Company.
8. Other Matters
Stock Repricing and Related Amendments
On April 18, 1997, the Company approved the repricing of certain employee
stock options issued over the prior year. The 274,900 options involved were
issued primarily to new employees joining the Company through acquisitions,
and no options issued to members of senior management were subject to
repricing. The Company believes that this repricing is important to its
employee retention and incentive programs. The repriced options have an
exercise price of $17.50 per share over the five year vesting period,
compared to a weighted average exercise price of $23.65 prior to repricing.
On April 30, 1997, the Company approved amendments to the Certificate of
Incorporation, as amended, authorizing 50,000,000 additional shares of Class
A Common Stock, par value $0.01 per share, and to the 1992 Stock Incentive
Plan increasing the aggregate number of shares of Common Stock authorized
from 4,666,666 to 5,250,000.
Private Placement
During the second quarter of 1997, Insignia Properties Trust ("IPT"), a
controlled and majority owned REIT affiliate of the Company, received
commitments for the purchase of $52 million in common stock of IPT through a
private placement offering. At September 30, 1997, all commitments have been
collected and are reflected in minority interest on the consolidated balance
sheet. Subsequent to September 30, 1997, an additional $10 million was
received from a private placement in an unrelated transaction.
Purchase of limited partnership interests
On June 17, 1997, the Company completed, for $15.5 million in cash, the
purchase of limited partnership interests in partnerships controlled by IPT.
Certain of those interests, aggregating approximately $12.6 million, were
contributed to IPT, effective June 30, 1997, for common stock of IPT. IPT
holds an option on the remaining $2.9 million.
<PAGE>
Business Combination
On July 21, 1997, Angeles Mortgage Investment Trust ("AMIT") and IPT
announced the execution of definitive agreements to effect a non-taxable
merger of the two entities. The resulting combined entity would be owned
approximately 70% by the Company.
AMIT, which trades on the American Stock Exchange, is in the business of
originating, acquiring and servicing its own loan portfolio, which is
primarily secured by real estate properties. AMIT currently holds 25 assets
which are comprised of loans and real estate with an aggregate net asset
value of approximately $43 million.
Stock Repurchase
The Board of Directors of the Company approved the repurchase of outstanding
common stock of the Company in amounts up to $50 million. On July 18, 1997,
the Company obtained the approval of its requisite lenders to amend its
revolving credit facility to permit such repurchases. The amount of
repurchases which could be completed within the existing financial covenants
of the credit facility is approximately $40 million. At September 30, 1997,
106,400 shares of common stock aggregating approximately $2.1 million has
been repurchased.
9. During the nine months ended September 30, 1997, the Company had the
following changes in the equity accounts:
a) Exercise of 251,271 stock options and 143,600 warrants representing
342,360 shares of Class A Common Stock at exercise prices ranging from
$1.88 to $13.69 per share. The exercise of 93,600 warrants, through a
cashless exchange, resulted in the issuance of 41,089 shares.
b) Net income of $4,727,000 for the nine months ended September 30, 1997.
c) Accrued compensation of $358,000 relating to restricted stock awards.
d) Repurchase of 106,400 shares of Class A Common Stock through treasury
stock transactions aggregating approximately $2.1 million, or $19.39 per
share. These repurchases resulted in a total charge of approximately $1.4
million to retained earnings.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
The Company posted strong results for the three and nine month periods
ended September 30, 1997. The Company uses Net EBITDA as a primary indicator of
financial performance and Net EBITDA increased 7% to $10.7 million for the
quarter and 30% to $40.9 million for the nine months, in comparison to 1996. Net
EBITDA, excluding the $5 million one-time payment ("Release Fee") to the United
States Department of Housing and Urban Development ("HUD"), would have increased
57% to $15.7 million for the quarter and 46% to $45.9 million for the nine
months, in comparison to 1996. Net EBITDA is defined as earnings before
interest, taxes, depreciation and amortization ("EBITDA") combined with funds
from operations ("FFO") less interest expense and earnings allocable to
preferred securities. Additionally, EBITDA for the service company decreased 10%
to $9.8 million and increased 20% to $38.1 million for the three and nine months
ended September 30, 1997 while total FFO increased 46% for the three and nine
months to $4.9 million and $15 million, respectively.
During the nine months ended September 30, 1997, the Company completed
seven business acquisitions, including expansion internationally through the
purchase of 60% of the stock in CAGISA, a leading property management company in
Italy. Other acquisitions completed include Rostenberg Doern Company, Inc., HMB
Property Services, Inc., Frain, Camins & Swartchild, Inc., The Related Group of
Florida, Radius Retail Advisors, and Forum Properties, Inc. The businesses,
including CAGISA, were acquired for an aggregate purchase price of approximately
$27.5 million with $12.8 million paid from cash on hand, $8.5 million in notes
payable and assumed liabilities of $6.2 million. These acquisitions in aggregate
increased the Company's commercial portfolio by approximately 14.4 million
square feet and the residential portfolio by more than 20,000 units, bringing
the Company totals to 2,500 properties, 275,000 residential units and 150
million commercial square feet managed at September 30, 1997.
Cash and cash equivalents at September 30, 1997 increased 64% or $34.8
million over December 31, 1996. The increased cash holdings are primarily due to
the collection of $52 million by Insignia Properties Trust ("IPT"), a controlled
affiliate of the Company, from a private placement offering, in conjunction with
the receipt of $31.6 million in distributions from partnerships in which the
Company holds limited partnership interests (through IPT, co-investments and
other limited partnership interests). Cash was reduced by $25.1 million paid for
additional limited partnership interests, $10.2 million paid for acquisitions
and $12.6 million paid on outstanding notes.
Receivables increased 60% from $46 million at December 31, 1996 to $73.7
million at September 30, 1997. The increase is primarily due to increased
leasing activity transactions. Such receivables are to be collected at future
dates as defined in the terms of the individual brokerage agreements.
Property and equipment increased 26% from $12.1 million at December 31,
1996 to $15.2 million at September 30, 1997. This change is substantially due to
expenditures incurred for computer equipment and software in connection with the
implementation of a change in the Company's computer platform.
FFO attributable to real estate investments increased 46% for the three
month period from $3.3 million to $4.9 million and 46% for the nine month period
from $10.3 million to $15 million. FFO attributable to IPT for the three and
nine month periods increased 29% to $4.2 million and $12.8 million compared to
1996. FFO from co-investments for the three and nine month periods increased
512% to $728,000 and 503% to $2.3 million compared to 1996. The significant
increases in FFO attributable to co-investments is due primarily to the heavy
investment activity in 1997 resulting in fourteen co-investments ventures at
September 30, 1997 in comparison to one for the same periods of 1996.
The Company's investments in real estate limited partnerships and other
securities decreased less than 1% from $150.9 million at December 31, 1996 to
$150.4 million at September 30, 1997. Contributing to the decrease is the
receipt of $31.6 million in distributions from the partnerships in which the
Company holds limited partnership interests (through IPT, co-investments and
other limited partnership interests), net of additional purchases of $25.1
million in limited partnership interests and $5.9 million in equity earnings
recognized for the nine months ended September 30, 1997.
Management contracts decreased 4% from $122.9 million at December 31, 1996
to $118 million at September 30, 1997. Acquisition activity for the nine months
ended September 30, 1997 resulted in approximately $18.2 million in additional
management contract bases. These acquisition purchases are offset by
approximately $17.4 million in amortization expense coupled with collections of
approximately $6.2 million in disposition fees from the sale of real estate in
limited partnerships syndicated by The Balcor Company ("Balcor").
Costs in excess of net assets of acquired businesses increased 8% from
$75.6 million at December 31, 1996 to $81.7 million at September 30, 1997. This
increase is primarily due to acquisition activity for the nine months ended
September 30, 1997.
Other assets at September 30, 1997 increased 131% or $10.6 million over
December 31, 1996. This increase is primarily due to 1) organization costs of
approximately $1.6 million incurred in the formation of Insignia Properties
Trust ("IPT"), 2) costs of approximately $1.4 million incurred in connection
with the proposed merger with AMIT, 3) acquired assets of approximately $1.2
million through the purchase of CAGISA, and 4) the capitalization of certain
costs, in the amount of approximately $3 million, in connection with the
implementation of a change in the Company's computer platform.
Accounts payable increased 412% from $1.7 million at December 31, 1996 to
$8.8 million at September 30, 1997. Contributing to this increase is
approximately $5 million in payables acquired through the purchase of CAGISA in
combination with substantial increases in operations in the commercial segment.
Commissions payable at September 30, 1997 increased 65% or $12.1 million
over December 31, 1996. Consistent with the change in receivables, this increase
is primarily due to increased leasing activity transactions which are to be paid
when related commissions receivable are collected at future dates.
Notes payable decreased $10.7 million or 22% at September 30, 1997 compared
to December 31, 1996. This decrease is primarily due to the second quarter
payment of $10 million on the outstanding balance of the revolving credit
facility.
Accrued and sundry liabilities increased 25% from $40.7 million at December
31, 1996 to $50.9 million at September 30, 1997. The change primarily relates to
the increase in incentive accruals of approximately $8.3 million and an increase
in payroll taxes and other accrued compensation of $2.6 million compared to
December 31, 1996.
Results of Operations
For the three and nine month periods ended September 30, 1997, the Company
showed strong results in all major components of operational activity due
primarily to continued acquisition activity over the past twelve months. Net
EBITDA increased 7% and 30% for three and nine month periods of 1997 in
comparison to the prior year. Net EBITDA per common share increased 10% to $.33
for the three months and 25% to $1.26 for the nine months. Financial expenses,
including interest and trust based preferred dividends decreased 7% from $4.3
million to $4.0 million for the three month period and increased 15% from $10.4
million to $12.2 million for the nine month period. Net EBITDA, excluding the $5
million one-time Release Fee, would have increased 57% and 46% for the three and
nine month periods of 1997 in comparison to the prior year. Net EBITDA per
common share, excluding the $5 million Release Fee, would have increased 63% to
$.49 and 40% to $1.42 for the three and nine months.
Total revenue increased $34.2 million, a 52% increase over 1996, for the
three months and $105.4 million, a 71% increase over 1996, for the nine months.
Fee based service revenue increased 54% to $96.9 million and 76% to $246.1
million for the three and nine months of 1997 over 1996. The increase in both
periods was primarily due to the Edward S. Gordon Company, Incorporated and
Paragon Group acquisitions, which occurred on June 30, 1996, and a number of
smaller acquisitions throughout 1997. In addition to the growth from
acquisitions, the net impact of new business management assignments resulted in
break-even and net gains of 9,600 apartment units and net gains of 7.8 million
and 21.7 million square feet for the three and nine month periods ending
September 30, 1997. The results of such new assignments showed net losses of
3,200 and net gains of 3,100 apartment units and net gains of 2.5 million and
5.6 million square feet for the three and nine month periods of 1996.
Interest income increased 146% to $1.5 million and 47% to $3.2 million for
the three and nine months ended September 30, 1997, in comparison to the prior
year. These increases are primarily due to higher average interest bearing cash
balances.
Apartment property revenue decreased 10% to $1.7 million for the three
month period and 7% to $4.9 million for the nine month period ended September
30, 1997. These decreases result from the sale of a property subsequent to the
first quarter of 1996, leaving one remaining asset which contributes to this
type of revenue.
Fee based service expense increased 55% to $79.2 million and 86% to $197.9
million for the three and nine months of 1997 over 1996. Consistent with fee
based service revenue, fee based service expense for both periods increased
significantly in the commercial segment as a direct result of the commercial
acquisitions occurring over the past twelve months. The financial services
segment showed an increase in fee based service expense of 62% to $3.8 million
and 46% to $8.3 million for the three and nine month periods ended September 30,
1997. These increases are attributable to increased co-investment and
acquisition activity in 1997.
Administrative expenses increased 123% or $2.4 million and 52% or $3
million for the three and nine month periods of 1997 compared to 1996. The
increase is due primarily to approximately $1.3 million in one time legal
expenses related to the Release Fee and increased operational expansion since
June 30, 1996.
Interest expense decreased 64% or $2.8 million and 54% or $5.5 million for
the three and nine month periods of 1997 compared to 1996. The decrease is
directly attributable to the reduction in borrowings from $185.2 million at
September 30, 1996 to $39.1 million at September 30, 1997 as a result of the
issuance of the trust based convertible preferred securities in November 1996.
Depreciation and amortization increased 15% to $7.7 million and 42% to $23
million for the three and nine months ended September 30, 1997. This increase is
consistent with the growth of the Company over the past twelve months
attributable to acquisitions. These acquisitions have resulted in significant
purchases of amortizable assets resulting in a corresponding increase in
amortization expense.
Equity earnings increased 208% to $2.3 million for the three month period
and increased 92% to $5.9 million for the nine month period ended September 30,
1997, as compared to 1996. These increases are attributable to: 1) equity
earnings from investments in co-investment partnerships (no comparable
investments existed in 1996); 2) the pro-rata ownership of National Properties
Investors partnerships in 1996 due to the purchase of NPI in the first quarter
of 1996 compared to full ownership in 1997; and 3) the improved results of the
IPT controlled partnerships as discussed in the Financial Condition section on
FFO above.
Minority interest in consolidated subsidiaries increased to $2.9 million
and $9.1 million for the three and nine month periods ended September 30, 1997
as compared to 1996. Minority interest as of September 30, 1997, consists of
dividends paid of $7.5 million on trust based convertible preferred securities,
$416,000 of minority equity in the earnings of Insignia Properties Trust, and
$1.2 million in charges resulting from distributions made by a majority owned
subsidiary to the holders of minority equity interests (which resulted in
negative equity by the minority owner). Generally accepted accounting principles
requires such charges to be taken by the majority owner on the presumption that
the negative equity of the minority owner on a historical book value basis
cannot be recovered by the majority owner.
The income tax provision decreased 35% to $100,000 and 2% to $3.2 million
for the three and nine month periods of 1997 compared to 1996. These
fluctuations are due primarily to reductions in income before taxes 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
state tax rates where these acquisitions occurred.
Primarily as a result of the foregoing, net income decreased 41% to $149,000
and 6% to $4.7 million for the three and nine month periods ended September 30,
1997 as compared to 1996.
<PAGE>
Liquidity and Capital Resources
The Company has several sources available for capital, primarily cash
generated from operations, distributions from IPT and co-investment
partnerships, and available credit under the $275 million revolving credit
facility. At September 30, 1997, a total of $33 million was outstanding under
this facility. As a result of the Company's ability to generate cash from
operations, and such additional sources, the cash balances grew from $54.6
million at December 31, 1996 to $89.4 million at September 30, 1997. The Company
uses Net EBITDA as an indicator of its working capital generated from
operations. Net EBITDA increased 7% from $10 million to $10.7 million for the
three months and 30% from $31.5 million to $40.9 million for the nine months
ended September 30, 1997. Excluding the one-time Release Fee of $5 million, Net
EBITDA would have increased 57% to $15.7 million, and 46% to $45.9 million for
the three and nine months ended September 30, 1997. The following chart
specifically identifies the sources of Net EBITDA and how the numbers are
derived for each period.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Fee based services revenues $96,855 $62,924 $246,131 $140,117
Interest 1,489 606 3,230 2,193
Other 47 457 328 1,597
-------- --------- --------- ---------
98,391 63,987 249,689 143,907
Fee based services expenses 79,155 51,055 197,921 106,570
Administrative and other 4,393 1,974 8,633 5,681
Release Fee 5,000 -- 5,000 --
------- ---------- --------- ------------
EBITDA - service company 9,843 10,958 38,135 31,656
------- ------ -------- --------
FFO
Insignia Properties Trust 4,176 3,230 12,751 9,898
Co-investments and other 728 119 2,292 380
-------- ------- --------- ----------
Total FFO 4,904 3,349 15,043 10,278
------- ------- -------- --------
Combined EBITDA and FFO 14,747 14,307 53,178 41,934
====== ====== ======== ========
Interest expense (1,531) (4,309) (4,729) (10,244)
Trust based preferred dividends (2,501) -- (7,502) (199)
------- ---------- --------- ----------
Net EBITDA $10,715 $ 9,998 $ 40,947 $ 31,491
====== ======= ======== ========
</TABLE>
With the working capital generated through the operations of the Company
and the availability under the revolving credit facility, the Company feels its
capital resources are adequate. The Company's funding needs are reassessed as
acquisitions are identified and pursued.
Subsequent Events
Acquisition of Realty One, Inc.
On October 13, 1997, the Company acquired the outstanding stock of Realty
One, Inc. and affiliated companies ("Realty One"). Realty One, a full-service
residential broker headquartered in Cleveland, is the tenth largest residential
real estate brokerage firm in the nation. The total purchase price was
approximately $39 million, of which $35 million was paid in cash and the
remainder through the issuance of common stock in the Company. The cash portion
of the purchase was financed by borrowings under the Company's revolving credit
facility.
Acquisition of First Winthrop Corporation
On October 28, 1997, the Company announced the acquisition of 100% of the
Class B stock of First Winthrop Corporation ("FWC") and a general partnership
interest in Winthrop Financial Associates ("WFA"). This acquisition gives the
Company the right to direct the activities of partnerships owning 47 apartment
properties comprising approximately 16,500 residential apartment units. In
addition, the Company also acquired limited partnership interests in certain of
these partnerships which own 29 properties comprising approximately 12,000
units. The combined purchase price was approximately $69 million, which is
entirely payable in cash obtained from borrowings under the Company's revolving
credit facility.
Acquisition of Barnes, Morris, Pardoe & Foster
On October 30, 1997, the Company announced a definitive agreement to
purchase Barnes, Morris, Pardoe & Foster, one of the leading commercial real
estate services firms in the Washington, D.C. area. The purchase price has not
been finalized.
Other
Certain items discussed in this quarterly report may constitute
forward-looking statements within the meaning of the Private 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 the Company to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. Such forward-looking statements speak only as of the
date of this quarterly report. The Company 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 the Company's 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 4 in Notes to Condensed Consolidated Financial Statements, Part I, Item
1, of Form 10-Q for September 30, 1997 for the details on outstanding issues.
Also, see Registrants' Annual Report on Form 10-K for the year ended December
31, 1996.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
11. Statement Re: Computation of earnings per share.
b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended
September 30, 1997:
1. Form 8-K dated July 21, 1997 and filed August 1, 1997 disclosing
Registrants' announcement of definitive agreements between AMIT
and IPT to effect a non-taxable merger of the two entities.
2. Form 8-K dated August 14, 1997 and filed August 28, 1997
disclosing Registrants' agreement with the United States
Department of Housing and Urban Development ("HUD") to resolve
certain matters concerning services provided to HUD - supported
affordable housing projects.
3. Form 8-K dated August 15, 1997 and filed August 28, 1997
disclosing Registrants' announcement to commence the repurchase of
its shares of Class A Common Stock on the open market.
4. Form 8-K dated September 17, 1997 and filed September 29, 1997
disclosing Registrants' international expansion of its operations
through the purchase of 60% of the stock of CAGISA ("Compagnia di
Amministrazione e Gestioni Immobiliare S.p.A.")..
<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 FINANCIAL GROUP, 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
EXHIBIT 11 - Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(Thousands of Dollars, except share data)
<S> <C> <C> <C> <C>
Primary
Average common shares outstanding 29,138 28,752 29,071 27,517
Net effect of dilutive stock options and
warrants based on the treasury stock method
using average market price 3,124 4,453 3,352 3,591
------- ------- ------- -------
Total 32,262 33,205 32,423 31,108
====== ====== ====== ======
Net income $ 149 $ 252 $ 4,727 $ 5,020
Preferred dividends -- -- -- (199)
---------- ---------- ---------- --------
Adjusted net income $ 149 $ 252 $ 4,727 $ 4,821
======== ======== ======= =======
Per share amount $.01 $.01 $.15 $.15
=== === === ===
Fully Diluted
Average common shares outstanding 29,138 28,752 29,071 27,517
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 3,397 4,578 3,449 3,859
------- ------- ------- ------
Total 32,535 33,330 32,520 31,376
====== ====== ====== ======
Net income $ 149 $ 252 $ 4,727 $ 5,020
Preferred dividends -- -- -- (199)
---------- ---------- ---------- --------
Adjusted net income $ 149 $ 252 $ 4,727 $ 4,821
======== ======== ======= =======
Per share amount $.01 $.01 $.15 $.15
=== === === ===
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Insignia Financial Group, Inc. September 30, 1997 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> 9-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 89,427
<SECURITIES> 0
<RECEIVABLES> 73,657
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 15,170
<DEPRECIATION> 0
<TOTAL-ASSETS> 568,768
<CURRENT-LIABILITIES> 0
<BONDS> 58,417
143,993
0
<COMMON> 291
<OTHER-SE> 222,788
<TOTAL-LIABILITY-AND-EQUITY> 568,768
<SALES> 0
<TOTAL-REVENUES> 254,630
<CGS> 0
<TOTAL-COSTS> 197,921
<OTHER-EXPENSES> 39,738
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,843
<INCOME-PRETAX> 7,879
<INCOME-TAX> 3,152
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,727
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
